Impacts of COVID-19
The impacts of COVID-19 on many businesses around the world have been enormous. The firms that have invested in preparedness and have the operating model to make work-from-home realistic for its people have been able to proceed as if everyone was just embracing flexible working. The firms that have under-invested in preparedness and not managed risk appropriately have had to scramble to change their operating model to support remote work.
For firms in industries profoundly affected by government shutdowns, their revenue could have plummeted to zero already. For others, particularly in discretionary spending areas, they have already seen the negative impact on their cash flow and balance sheet. Many companies have had no choice but to shut down operations and layoff employees. Many boards and senior executives have cut pay and bonuses in solidarity and because they can’t appear unaffected by the seriousness of the problem.
One of the fascinating things to watch as this crisis has unfolded is the difference in response from some firms. Some firms are replaying their Global Financial Crisis playbook – shut down, layoff staff, slash costs and scramble to preserve cash. Other firms are taking a more responsible approach and considering how to balance recognising the precariousness of their position and the impact on their customers, employees, suppliers, and community of their decision-making.
A firm’s operating model is the framework for how they deliver value to their customers. The people, processes and systems they combine into capabilities that enable value streams for customers don’t exist inside a vacuum. They are a living entity that needs continuous improvement and efficiency gains to maintain a competitive position.
The impact of COVID-19 on many firms has highlighted the weaknesses of their operating model. The rise of outsourcing and focus on core capabilities only has left many firms in an invidious position. In essence, they have so many contractual commitments outsourcing functions or capabilities left, right, and centre that it truly is impossible to hibernate their firm for even a month because of the contractual consequences.
There are no easy choices during a crisis, but boards and senior executives and responsible for identifying and managing risks which includes tail risks. If their operating model is fragile, the buck stops with them. While the enormity of the revenue losses due to government shutdowns was extreme, the ability of a business to function with everyone working from home is a bare minimum of business continuity planning.
The rapid decisions to layoff workers or raise equity finance massively diluting existing shareholders will present ESG risks for some firms. There will be consequences as this crisis is more severe than the GFC or the Great Depression and the resiliency of business to sudden shocks will become a critical assessment criterion for enterprise value over the next decade.
Possible Changes To Operating Models
Some of the parts of an operating model are people, processes, systems, locations, and suppliers. I will deal with each in turn.
People are an essential part of any business. Even a highly automated technology business requires highly skilled people who can work together collaboratively to deliver value to customers. Critical considerations for this area of an operating model include:
- Health and wellbeing – how are we supporting our people through this crisis?
- Cross-functional capability – how cross-skilled are our people?
- Digital literacy – can our people work from home productively?
- Succession planning – has it been done and does it extend down through the business?
- Minimum FTE requirement – how many people do we need to deliver value?
- Keep the lights on – what is the actual “business continuity plan” critical number of FTE?
Processes are how the organisation transforms things from raw inputs into valuable outputs for either internal or external customers. The need for manual intervention in a process creates friction and increases risk, particularly in this situation. Critical considerations for the operations include:
- The known manual process breaks – how do we automate them today?
- Maker-checker tasks – how do we ensure controls are in place when remote working?
- Client handoffs – how do we help them improve their processes?
- Reporting – are there any non-standard reports that should have better governance?
- Redundant processes – what do we not *have* to do that we’re wasting time doing?
- Work allocation – how are we responding to peaks and troughs in transaction volume appropriately?
Systems are the technology and applications that power the processes and are increasingly an enormous proportion of a value stream’s commercial value. They are also complicated and costly, as many firms are still struggling with legacy systems. How do you sort out longlasting problems during a crisis?
- End-user experience – can everyone work from home? If not, why not? Where’s the gear?
- Video conferencing – what can we leverage? Please no free services for an enterprise
- Cybersecurity – what controls do we have in place around remote working?
- Change – is there a change freeze? What about vendors?
- Test – what ready-for-business checks aren’t already automated
- Real-time analytics and dashboards – where are they? If they aren’t, why aren’t they available?
- Capability – do we have the right systems to enable value to be delivered? If not, why not?
Locations include offices, factories, retail stores, or distribution warehouses. They now definitely include people’s homes!
- Office space – how much are we going to need if we reduce FTE and more people work from home?
- Factories – how is our offshoring strategy going with border closures?
- Retail stores – what is the margin contribution of a physical store vs same sales online?
- Distribution warehouses – how efficient are we? What optionality is there for growth?
Suppliers are critical parts of your value chain. For many firms whose target operating model included a lot of outsourcing, external suppliers are responsible for many capabilities. The interlocks between a firm and its suppliers are critical to managing risk. Key considerations include:
- ESG risk – how are they treating *their* customers, employees, suppliers and community during this crisis?
- Controversy – has the supplier caused any controversy during COVID-19 with their actions or words?
- Capability – has the supplier been able to deliver what it has to?
- Business continuity plan – if the supplier invoked their BCP, how did they communicate and had they previously tested this with you?
- Continuous improvement – are they partnering with your teams to enable efficiency wherever possible?
- Above and beyond – have they been a partner or a contractual counterparty throughout COVID-19?
The Post COVID-19 New Normal
There will be many changes in how firms operate because of COVID-19. I believe that a higher focus on remote working, efficiency, automation, simple product and service lines with lower complexity to deliver and focus on value-for-money will emerge on the other side of the bridge.
Many firms will be working on these changes already with some sort of crisis response team. The smart ones will be using the crisis to implement accelerated transformation wherever possible to take advantage of lower internal resistance to change and politics. They will emerge much stronger once this health crisis is under control.
The new normal will be similar to what best practice was before the crisis – your target operating model design has to incorporate delivering excellent outcomes for your stakeholders. You have to consider risk management and plan for the tail risks.
The relentless drive for cost control and efficiency can sometimes forget that over-optimising and leaving no slack in the system means a firm is unable to respond fast in a crisis. A lean operating model doesn’t mean zero slack. You still need to be prepared for emergencies and have substantial risk mitigants in place for the risks your particular business faces.
Once this COVID-19 pandemic has died down, the level of risk aversion will increase at board level. Directors will hold senior executives to account for their mistakes in managing the firm’s COVID-19 response and give a due endorsement of their successes where that is warranted. The post-COVID-19 new normal will lead to serious consideration of offshoring, outsourcing of critical functions, and the genuine demand for office space.
COVID-19 isn’t a crisis like many others – the sudden shock to economic activity has caused many to challenge their assumptions about a suitable response. A focus on delivering value not just to customers but to a broad group of stakeholders, while maintaining their trust and support, is not an easy task. But boards and senior executives will need to simplify and optimise their operating model because the level of competition for winning new business after this crisis subsides will be enormous because of the output gap in the economy. Only the most robust and most responsible will prosper.