The Covid-19 pandemic has underscored the importance of business resilience for most companies, but five common misconceptions stand in the way of them getting it right. Bain Partners Dunigan O'Keeffe, Hernan Saenz and Andrew Schwedel debunk these myths and present three takeaways for leaders who are striving to strengthen their resiliency.
Read the Bain Brief: Getting Business Resilience Right
Read a transcript of the conversation below:
DUNIGAN O'KEEFFE: There have been many, many lessons this year about resilience that we have uncovered. The first is we don't think enough about it—that we need to be contemplating much more deeply our resilience.
HERNAN SAENZ: In a high-predictability world, what most companies have done is actually pursue efficiency. In a pursue-efficiency world, we're lowering costs and we're minimizing the number of assets being used. And then an event happens.
What happens when an event happens? We don't have the ability to supply. That is the issue.
ANDREW SCHWEDEL: So why did we decide to write a brief on the topic of resilience? You know, it struck us—and this is a little bit like the way people talked about digital three, four or five years ago—it is the trendy topic, it's a major phenomenon we all know we need to deal with. But what exactly does it mean? Through the research and work with clients, we've identified five myths around resilience and started to debunk those myths and lay out an action plan for companies to put a more coherent resilience strategy in place.
O'KEEFFE: We've seen oftentimes when you start a conversation on resilience that people begin thinking about volatility. They want to imagine that actually by really focusing in this area, they can smooth out their earnings. But the reality is you can't remove volatility.
We saw, you know, a great example of Nissan coming out of the 2011 earthquakes in Japan—extreme shock to their business. But they proved to be resilient. They had designed their supply chain and designed their organization that they were able to absorb that shock as severe as it was and be back in business in two months, with production fully up and running.
And there's no way you're going to remove that volatility. You need to think about how you're going to build resilience so when the volatility comes, it doesn't create a risk to your business that could threaten its long-term viability.
Oftentimes, when you begin to get into a conversation about resilience with a board or a chief executive officer, the first thing people want to talk about is their balance sheet. When you think about [it,] actually that there are five big levers of resilience that you need to kind of work through one by one to really have a holistic sense of how resilient your business is. One is strategic. Do you have leadership positions in your various parts of your portfolio?
The second is really financial resilience, which is the topic around balance sheet, which is, as I said, super, super critical. The third is operational. Do you have a heavy fixed cost structure which is going to be very stressed in a crisis?
The fourth is technological. As you think about how our businesses are becoming—all of us more technologically oriented, relying upon cloud services increasingly, relying on remote workforces that are tapping into our networks through new technology. That exposes us to a set of risks. And the last one is organizational, which is, do you have a culture that has been tested in the past and is great in moments of crisis and actually is close enough to the front line in the customer, such that you see those crises early and are able to respond?
SAENZ: Number 1, there's this issue that you're preparing for yesterday's swan event. Right, you had a problem with commodity pricing and now you're hedging. Turns out that the next one event is a technology problem. That's a big issue.
And the other one is to just cover certain areas, right, the ones you've covered in the past and the ones that you read about in the news. But now, you have to cover everywhere—your strategy, your operation, your organization, your technology. So you don't want surprises in any big angle of your business.
There is no doubt that enterprise risk management functions are incredibly important. But they are not day-to-day in the business. They don't see the patterns. They don't see the problems. Therefore, they cannot be the ones to design the business model or to manage the business model. So this has to be embedded in the line.
Now, let's be clear. It's not either/or. You're going to need enterprise risk management and a line that manages risk resilience.
SCHWEDEL: So what we found is that if you look across different market cycles, and you look at the high-resilient companies versus the less-resilient companies, there is in fact, a little bit of a premium for shareholder returns for companies that are—call it less resilient or taking more risk. But what I think was more interesting was that while the performance is very similar through a full cycle, the more resilient companies had a much, much higher long-term survival rate. So I think the choice and trade-off and the question for management teams, boards and investors is, are we willing to run with higher risk, potentially in service of generating somewhat higher returns through a full-market cycle at a significantly higher risk of fundamentally running into a survival issue if you hit a crisis?
O'KEEFFE: There are really three things that we would suggest every single board of directors and leadership team really begin to think through as they invest in strengthening the resilience of their organization. One is have a very specific, but also broad conversation about the risks intrinsic in your business. The second is really understand your appetite for risk.
And then lastly, you need to set an integrated game plan, and you need to win over your investors to this. There are going to be some investments you're going to have to take for resilience, which are going to hurt near-term profits.
SAENZ: Our point of view is the world has changed—less predictability, you have to adapt more in the long term, you have to respond and be more resilient in the short term. This is now not only a cost of doing business, it is a source of competitive advantage. The companies that actually get this right are actually going to thrive and survive at much higher rates than any other company.
Five myths stand in the way of allowing a company to hedge against, absorb and recover from the inevitable shocks to its system.