Should you plan your "beautiful" default?

2nd July 2020  

by Michela Borin



As the coronavirus (COVID-19) pandemic continues, businesses are facing severe business challenges, and CEOs and leaders have to take action now in order to fix immediate priorities and prepare short-term and long term plans.

But, as many have already recognised, in this case, traditional “crisis responses” approaches won’t be enough.

The business side of this health crisis is unlike any other previous crisis, also due to containment policies which are definitely shaping not only how we work but also our behaviors as consumers. In addition, the collapse of customer demand, supply chain interruptions, drop in investments, significant constraints on cash and working capital, including potential liquidity challenges, cost-reductions and layoffs, among others, and increased uncertainty are creating major disruption, leading to a potential economic depression.

So, how can leaders and CEOs navigate effectively in these chaotic conditions?

While managing crises, most companies are worried about addressing urgent needs, such as protecting employees and customers, stabilising business activity and cutting costs; and when the walls are caving in, it’s difficult to see the bigger picture. As in every crisis, the coronavirus tragedy unfolds over an arch of time, with a beginning and an end, which will be the 'new normal'. In order to adapt and prepare for this new normal, business leaders and CEOs have to take a broader focus, distinguishing between temporary shifts and permanent ones and anticipating what will come next week, next month, next year, and even three years from now. In the midst of this crisis, leaders need to take the long view in order to lead the organisation to the best possible outcome.

But, can a default be one of the best possible outcomes? We think so.

In assessing the level of impact of this crisis on the organisation and in developing their contingency plans, there are a lot of information and questions to which leaders need to find answers. In order to keep a long-term view, leaders have to deep dive into a scenario-based planning approach, which considers factors and events that might impair or promote simulations of the “new normal” for their business environment. Therefore, it’s critical to constantly perform stress tests on such scenarios, especially considering cash flows and liquidity constraints, update commercial plans and prepare actions for each scenario. In this activity, we believe that a default has to be included among the possible scenarios, even if it is one of the most unlikely (or scaring).

Why?

First of all, planning a default provides leaders and CEOs with a priceless advantage: time. Time can support leaders in evaluating, assessing and hopefully preserving the interests of all “creditors” of the organizations, such as investors, employees, suppliers, etc. Secondly, planning a default provides leaders with the opportunity to identify and analyse alternative options, such as trade sales to third parties or competitors, strategic business combinations or investors’ shares repurchase arrangements, which might even preserve founders’ interest in preserving the business continuity.

So, even a crisis can provide for opportunities as long as leaders will be not afraid to plan now for unwanted possible outcomes.

Are you ready to simulate your default?

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