How to beat the largest crisis of recent times
The pandemic caused by the new coronavirus imposed isolation on billions of people and virtually paralyzed the global economy. The business challenges are immense and unprecedented. What should companies do to survive this crisis?July-September | 2020
Until the English captain James Cook moored his ship in Australia in 1770, people at the time were sure that all the swans were white. The discovery of the bird in Australian territory broke a belief that, as we now know, was supported by rather fragile premises. After all, the absence of evidence cannot be confused with evidence of absence. More than two centuries later, investor Nassim Nicholas Taleb used history to name “black swan” the events that, from time to time, plague the world and that, in common, are unpredictable and with impactful results in the business environment.
The effects of the Covid-19 pandemic can already be classified as one of the biggest “black swans” in the last hundred years. Several sectors have reduced or suspended their productions – and the reflexes are still far from being accurately measured.
In late March, the International Monetary Fund (IMF) declared that the world was in a recession. In Brazil, in June, the IMF and the World Bank projected a drop of around 8% for 2020; the global average, according to these same sources, would tend to be 5.2%. This spiral of value destruction can bankrupt thousands of businesses – small and large. The situation imposes an immense challenge on managers. How to run a company in the midst of what could become one of the worst crises of capitalism?
Mundo Corporativo spoke with executives from six companies, of different sizes and sectors, to show how they are dealing with the challenge of protecting their businesses and their people. In common, they all created groups to project the impacts of the pandemic and adapt their operations to the new scenario, adopted a very strong cash flow management and created mechanisms to protect their employees.
Fastening the seat belts
“At a time when many companies find themselves without revenue, we must focus on business survival” says Luís Vasco, partner at Deloitte’s Financial Advisory area. And, for that, it is essential to preserve cash. Among the recommended actions are analyzing all expenses in detail – and cutting back everything possible – renegotiating terms with creditors and suppliers and, if necessary, seeking credit lines with banks. If it is not possible to obtain new revenues, they should at least look for tax credits.
According to Vasco, who leads Deloitte’s In-Court Restructuring and Reorganization practice, a mistake by managers is not being clear about the gravity of the situation and postponing decision-making, in the vain hope that the situation will not prove to be so severe. “It is common not to see the breadth of reality as it presents itself” says the Deloitte partner. “The right thing is to make a cash projection of at least 90 days, with daily updates, and to act in a timely manner.”
At a time like today, the thought must be focused on business survival., Luís Vasco, Deloitte's Corporate Restructuring leader.
Understanding the seriousness of the situation and making the decisions that the moment requires was the attitude adopted by the events and entertainment agency Dream Factory. The company was forced to postpone two of its biggest events, the Rio Montreux Jazz Festival and the Rio Marathon, to the second half of the year, and saw all the events for the third parties being canceled, such as the Brazilian Olympic Committee (COB) party that would mark the one hundred days for the Tokyo Olympics. “Until July, we’ve had no revenue” says Claudio Romano, president of Dream Factory.
Faced with this scarcity scenario, the company created a plan to reduce expenses by 30%. This includes a 20% cut in the salaries of their 120 employees, including partners, and renegotiating payments with suppliers. “We will pay everyone, but we are looking for discounts.”
The crisis led managers to shelve expansion projects. This is the case of the natural food chain OakBerry Açaí, which, in just over three years, opened 220 stores in several countries. “The crisis breaks a virtuous cycle of growth, but now the concern is not with profit”, says Georgios Frangulis, one of the brand’s founders. The focus is on the brand continuity and the approximately 160 franchisees. “We suspended the collection of royalties and advertising funds and made our legal staff available to help stores negotiate rents” explains Frangulis, who negotiates a credit line to support franchisees, should the situation persist even longer.
Covid-19 proves that companies need to be prepared for all scenarios – even for the most catastrophic. Even though no one can predict exactly what will happen, it is possible – encouraged, even – to create a governance structure to map potential risks and plan crisis response actions, which can be of financial, regulatory, operational, strategy or cybernetic origin.
A 2019 Deloitte study with 165 executives from companies operating in Brazil showed that three quarters of organizations have a formalized risk management policy, which represents 26 percentage points more than in the survey conducted in 2017. However, only 26% of them are in the most advanced stages, that is, they have an integrated and consistent risk management that is aligned with strategic objectives.
When crises happen, the actions muts be coordinated and centralized. The absence of a crisis management committee, with pre-defined roles, further amplifies the problems., Anselmo Bonservizzi, Deloitte's Corporate Restructuring leader.
Aliança Navegação e Logística Hamburg Süd Company has a business continuity management, which identifies risks and determines the actions to be taken in the event of an incident. “Our program assesses several types of risk that can affect our business and has helped us for this moment in which we live”, says CEO, Julian Thomas. As good as the plan is, the challenges are great. “The world is still trying to adapt to this new scenario and no one can pinpoint the magnitude of the problems.”
Revisiting the principles
Situations like the Covid-19 pandemic cause stress and can lead managers to seek solutions in the wrong places, when, in fact, they may find them internally – revisiting the organization’s values and principles. According to Bonservizzi, this reinforces the company’s culture and unifies everyone in favor of the same objective – saving the organization. “It is in times of crisis that core values must be put into practice” says the Deloitte partner.
This was the line of action chosen by the manufacturer of elevators and moving walkways Atlas Schindler. The multinational, which has been in Brazil since 1918, values people as one of its five principles. The company is proud of the average tenure of its employees, which reaches 10 and a half years. When the crisis management committee met to discuss the progress of Covid-19, the first decisions made were aimed at protecting its employees.
“In the short term, our concern was to keep people safe and healthy” says Carlos Augusto Junior, Director of People and Communication at Atlas Schindler. The first measures were guaranteeing the supply of gloves and masks to employees, granting vacations to employees in the risk group, intensifying hygiene at the factory located in Londrina (PR), and adapting the service protocol for technicians, in order to prevent the contagion risk. An example: after the implementation of these measures, the executives contacted the 150 technicians responsible for the maintenance of the customers’ elevators to check if they felt safer and, in the end, thanked them for the work done. “In doing so, we show we value our professionals and, as a consequence, we are able to maintain our most essential services.” This is an example of how to put the purpose into practice.
Preparing to resume
Companies that were capitalized and prepared for the crisis not only should suffer less but would be able to strengthen themselves in this scenario. Shares buybacks, in the case of publicly traded companies, is a way of taking advantage of the drop in asset prices – in addition to sending a message of confidence in the business itself. Another is to expand market share by buying competitors. Some companies, both in Brazil and worldwide, are doing this right now.
Managers must also consider that this crisis will pass – and companies need to be prepared for the resumption. While the fashion retailer Cia Hering adjusted cash to deal with the period when stores are closed, it also planned improvements to take advantage of the post-crisis growth. “We are working with a projection of business resumption in the second half of the year” explains Rafael Bossolani, Investor Relations officer at Cia. Hering. The company is investing in processes to make the production chain more agile – from product creation, through production until it reaches the store.
The challenge becomes more important because, depending on when stabilization comes, consumers may be looking for winter or summer collections – and stores need to be ready for that. “The post-pandemic will be an important period and we are adapting our value proposition and business model.” As former General Electric CEO Jack Welch said, “management is dealing with the short term while developing plans for the long term.”
Motivated people and managed risks
Interview with Ana Karina Dias Bortoni, president of BMG bank
Mundo Corporativo – What is the biggest management challenge in a crisis like this?
There are two. The first is to define a work model that keeps employees focused and motivated. And the other is to understand the main risks to the business and act assertively on them.
Mundo Corporativo – What impact can these changes forced by the crisis change the way organizations work?
The barriers that prevented a greater use of digital technologies in some sectors were more psychological than real. And with the crisis, we were suddenly forced to work remotely. Psychological barriers have fallen. The crisis opens up opportunities for companies to move forward in their digital transformation. The current situation showed the need for teams to act in a multifunctional and collaborative way.
Mundo Corporativo – What lesson does this crisis teach about risks?
Everyone needs to think about business risks, not just the areas focused on these activities. The risk culture needs to be part of this transformation. We all feel that crises can come unexpectedly, and the consequences can be very serious. Discussions about risks must be based on data, not just conceptual issues.
Mundo Corporativo – Despite all the problems, can organizations come out better after this crisis?
Apart from all the bad and tragic aspects, talking specifically about business, I believe that we will work in better way. We may not need to work as hard in the offices. And the crisis reinforces the importance of a good governance. Those who were already in this type of management came in more prepared to respond to the challenges of the current scenario. Those companies that had to build a governance structure lost precious time.
Do you want to receive content from the Mundo Corporativo and Deloitte first hand?Register