By Keith McDonagh
Head of the Institutional Solutions businesses for Massachusetts Mutual Life Insurance Co. (MassMutual).
Unforeseen events on the scale and breadth we’ve seen in 2020 represent a distinct call to action for business leaders. The ongoing pandemic and its fallout demand a unique combination of immediate action, intermediate-term adaptation and longer-term strategic positioning. Firms that are able to thoughtfully address each phase are more likely to be poised for long-term survival and post-crisis success.
Let’s take a closer look at these three critical action phases and what our experience suggests is required for success. Of particular note, CFOs and financial managers face the demands balancing their firm’s short-term liquidity needs with its ongoing financial stability and long-term growth aspirations.
The initial reaction to a highly uncertain and evolving situation must be immediate and targeted – processes need to be put in place and actions taken to mitigate short-term risks including management and employee personal risk, liquidity and financial risks, operational risks, supply chain disruptions, distribution impacts and market risks.
Responses vary from firm to firm. However, effective crisis management depends on empowered and knowledgeable teams working together across an enterprise to prioritize action steps and quickly address issues of relative immediacy and severity.
The effective coordination of key operational units is critical to a crisis management teams. Equally important is that the team leaders have direct access to management and all team communications are swift and clear.
In this phase, financial managers have a particularly critical role to play, since adroit liquidity management may likely be the key to enterprise strength. First, they must obtain a realistic, current view of available liquidity and understand which liquidity sources may be under stress. Next, management needs to develop a set of possible short-term scenarios against which to forecast future cash flows. Finally, available levers to enhance liquidity should be identified, along with timing concerns, benefits, costs and potential hazards of each scenario.
After immediate steps are taken to ensure mission critical operations continue, assessments and actions should be taken to function under altered conditions. This phase of the plan may call for a reformulation of the fundamental operations of the business. The workplace may be re-organized or even re-imagined, facilities redesigned, employees’ roles and responsibilities redefined, distribution practices and outlets changed, and new supply chains developed.
In this phase, CFOs may need to adjust, at least for a period of time, to new revenue generation and expense expectations. In addition, focus should shift from short-term liquidity facilities to consideration and employment of intermediate-term funding strategies across the organization. Capital management and risk management tools and techniques also take center stage as the firm adapts to a new environment.
Organizations that effectively manage uncertain and volatile times then pivot towards long-term strategic re-assessment. A longer-term strategic planning exercise should take place to most productively reposition the organization to operate in the new world. New product design, new delivery platforms, new markets, and new suppliers are all on the table.
This new reality may drive a reconsideration of the firm’s current financial risk posture and capital structure. This analysis may require improving the quality and flexibility of the balance sheet with de-risking strategies, such as a pension risk transfer.
The right team
Critical to effective management in times of uncertainty is having a team of people who have been there before and has the experience to help you advance your initiatives through all types of environments.
Since 1861, MassMutual has stood by its customers through wars, depressions, recessions, market crashes and many other financial calamities and challenges. We’ve stood the test of time by applying our risk management capabilities and financial experience to help customers prepare for the worst and take advantage of opportunities.