Confidence of executives in crisis management vastly exceeds actual readiness

05 July 2018 Consultancy.uk

Few executives are following the advice that crisis management shouldn’t start with a crisis, a new survey from Deloitte reveals. The Big Four firm found a huge chasm between the confidence of leaders in their ability to overcome a crisis, and their actual level of preparedness. The adoption of a smart crisis management strategy is crucial to improving resilience, the firm concludes.

‘Test, don’t assume’ is the mantra of Deloitte’s latest crisis management survey. Aptly titled ‘Stronger, fitter, better’ the report is based on a survey of over 500 crisis management, business continuity and senior risk executives. Despite brimming with confidence that they could rise to meet a crisis, the researchers found that few executives have put their faith to the test.

The gulf between confidence and preparedness comes as a majority of leaders believe their organisations are facing more crises than ever before. The authors of the report – Peter Dent (Canada), Rhoda Woo (US) and Rick Cudworth (UK) – argue that, while confidence is an asset, preparedness is more important for surviving a crisis when it hits. 

“With the rapid pace of change facing companies worldwide, and with crises on the rise, it is critical for organisations to be ready to respond with skilled leadership and plans that have been tested and rehearsed,” said Dent, global leader of Deloitte’s crisis management practice. “Organisations that are adept at crisis management take a systematic approach to steering clear of potential crises and managing those that do arise with an eye to both preserving and building value.” 

Mobilization of crisis management teams

Dent and his colleagues found that 80% of the executives surveyed said their organisations – all of which have annual revenues in excess of $1 billion – had deployed crisis management teams in the past two years. Cyber threats and safety incidents were the most common reasons for mobilisation, followed by security and performance issues.

Cyber is of particular concern among executives concerned with protecting client data. Cybersecurity challenges are a growing phenomenon and a key reason why 60% of senior risk executives believe that their organisations face a far greater number and range of potential crises than they did ten years ago. 

Crises come in all shapes and sizes but Deloitte found one common denominator. Executives consistently express more confidence in their ability to handle one than their actual level of readiness would suggest was reasonable. The most glaring example is with corporate scandals. The authors found that 88% of leaders believed they and their firms were equipped to deal with a major scandal. Yet just 17% had conducted any kind of simulation exercise to put that theory to the test. 

A majority of those surveyed had carried out exercises to mimic a crisis caused by systems failure or cyber attacks, which are relatively easy to simulate. But while just 53% had conducted a cyber attack simulation, 87% expressed confidence that they could cope with the real deal. 

Confidence levels versus simulation activity

For other crises, such as industrial action, policy changes, or product recalls, only small minorities had performed simulations. Yet, for every kind of conceivable crisis strong majorities expected that they possessed the strategic and organisational wherewithal to successfully overcome the emergency. “Crisis management shouldn’t start with a crisis – at this point it may already be too late,” said Dent in response to the findings. “The ability to prevent a crisis can be fortified by looking at the entire life cycle of a crisis instead of just readiness and response.” 

“Successful crisis management also requires overcoming any biases to ensure that the board and senior management look closely at risks. Even those, and perhaps especially those, they believe aren’t likely to happen.” 

Leveraging crises

Deloitte – one of the few consulting firms to have a specialised global center for Crisis Management – advises clients on how to access the ‘unforeseen advantage’ that a crisis can provide. This is best illustrated by the firm’s crisis management life cycle which demonstrates how organisations can leverage a crisis to become stronger and more resilient, learning from mistakes rather than being devastated by them.

“Crises aren’t inevitable” points out Rhoda Woo, Deloitte Global’s crisis management leader in the US. “Many of them are avoidable, which is why smart business leaders invest in crisis management capabilities. These strengths can help their organisations avoid costly, and sometimes irreparable, damage to finances, employee morale, brand, and reputation. Truly effective crisis management goes beyond being reactive and simply protecting existing value. It also enables resilience and powers future performance, thereby enabling an organisation to emerge stronger.”

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8 tips for successfully buying or selling a distressed business

18 April 2019 Consultancy.uk

Embarking on the sale of a business is one of the most challenging experiences a management team can undertake. Even serial dealmakers acknowledge that the transaction process can be gruelling, exposing management to a level of scrutiny and challenge through due diligence that can be distinctly uncomfortable.

So, to embark on a sale process when a business is in distress is twice as challenging. While management is urgently trying to keep the business afloat, they are simultaneously required to prepare it for scrutiny by potential acquirers. Tim Wainwright, an experienced Transactions Partner with Eight Advisory, says that this dual requirement means sellers of distressed businesses must focus on presenting their business in a way that supports buyers in identifying value, whilst simultaneously being open about the causes of distress. 

According to Wainwright, sellers of distressed businesses should focus on eight key aspects to ensure they are as well prepared as possible:

  • Cash: In a distressed situation cash truly is king. Accurate forecasting and day-by-day cash balances are often required to ensure any buyer is confident that scarce cash reserves are under proper control. 
  • Equity story and turnaround plan: Any buyer is going to want to understand the proposed turnaround strategy: how is the business going to enact its recovery and what value can be created that means the distressed business is worth saving? Clear presentation of this strategy is essential.
  • The business model: Clear demonstration of how the business model generates cash is required, with analysis that shows how financial performance will respond to key changes – whether these are positive improvements (e.g., increases in revenue) or emerging risks that further damage the business.  Demonstrating the business is resilient enough to cope with these changes can go a long way to assuring investors there is a viable future.
  • Management team: As outlined above, this is a challenging process. The management team are in it together and need to be consistent in presenting the turnaround. Above all, the team needs to be open about the underlying causes that resulted in the distressed situation arising.  A defensive management team who fail to acknowledge root causes of distress are unlikely to resolve the situation.

8 tips for successfully buying or selling a distressed business

  • Financing: More than in any traditional transaction, distressed businesses need to understand the impact on working capital. The distressed situation frequently results in costs rising as credit insurance becomes more difficult to obtain or as customers and suppliers reduce credit. Understanding how these unwind will be important to the potential investors.
  • Employees: Any restructuring programme can be difficult for employees. Maintaining open communications and respecting the need for consultation is the basic requirement. In successful turnarounds, employees are often deeply engaged in designing and developing solutions. Demonstrating a supportive, flexible employee base can often support the sale process.
  • Structuring: Understanding how to structure the business for the proposed acquisition can add significant value. Where possible, asset sales may be preferred, enabling buyers to move forward with limited liabilities. However, impacts on customers, employees and other stakeholders need to be considered.
  • Off balance sheet assets: In the course of selling a distressed business, additional attention is often given to communicating the value of items that may not be fully valued in the financial statements. Brands, intellectual property and historic tax losses are all examples of items that may be of significant value to a purchaser. Highlighting these aspects can make an acquisition more appealing.

“These eight focus areas can help to sell a distressed business and are important in reaching a successful outcome, but it should be noted that it will remain a challenging process,” Wainwright explains. 

With recent studies indicating that the valuation of distressed business is trending north. With increased appetite from buyers who are accustomed to taking on these situations, it is likely that more distressed deals will be seen in the coming months. “Preparing management teams as best as possible for delivering these will be key to ensuring these businesses can pass on to new owners who can hopefully drive the restructuring required to see these succeed,” Wainwright added.