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Build resilience before it’s too late

Build resilience before it’s too late

Corporate resilience is more relevant today than ever, and the Covid‑19 pandemic has only sharpened the focus on it. Supply chain disruptions will cause 65% of annual debt/earnings before interest, taxes, depreciation and amortisation –known as debt/EBITDA – loss over the course of the next 10 years, and cyber crimes could cost $1 trillion worldwide annually, and the figures are growing

The impact of operational risk is far greater than the immediate loss, and it is expected to impact shareholder returns five times the direct reported loss.

The International Monetary Fund notes that global uncertainty has grown since 2000. Additional data reveals that cyber incidents have risen 24% since 2013 and the frequency of natural disasters is also rising. All of this calls for companies to arm themselves with the most potent resilient defences.

From risk management to strategic resilience

According to Risk.net research, the top 10 operational risk losses for 2021 totalled $15 billion. The largest op risk losses of 2021 by sheer mass occurred in the hinterland of institutional finance – the world of cryptocurrency trading – where two mega-heists of more than $2 billion apiece topped the charts.

Although the top 10 largest losses of 2021 represent a significant proportion of the year’s total losses in the field, institutional op risk losses by volume and by number fell from $28 billion in 2020 to $15 billion in 2021, and from 490 events to 466 in the same period.

When thinking about corporate resilience, companies must think about technology, organisational, reputational and business model resilience. The holistic, 360° look at resilience provides an incredible source of competitive advantage.

At a recent McKinsey summit on the subject, industry leaders shared their views on how best to boost resilience at any organisation.

“We think that building back community-based connection is an incredibly important part of building up that social fabric of society, and hence resilience at a global level,” said Sarah Friar, chief executive of Nextdoor and Walmart board member.

Friar highlighted the importance of neighbourhood and communities, and how human contact helps people recover. Local community connection has never been more important, and this is a lasting change, she added.

The more engaged neighbourhoods are pre-crisis, the faster communities will recover from crises. The power of proximity in a neighbourhood is also vital. The second thing she noted was just how much residents needed a way to find each other.

“In the case of Hurricane Harvey, the neighbour who got in a boat, took the boat over to your house, helped you off the roof and took you to a place of safety – this demonstrates true resiliency at the local level.”

She added that policy-makers need to invest in hyper-local communities online and offline before a crisis to get ready ahead of time.

Leaders also stressed the importance of having a clear value system. Alain Bejjani, chief executive at Majid Al Futtaim Holding and executive director, Majid Al Futtaim Holding Board, emphasised the importance of having a ‘North Star’ to guide an organisation and its leaders.

“In addition to values, you really need to have a clear North Star. All of us leaders make a lot of choices. A lot of these choices could be right, but could also be wrong. And you should have a North Star that guides you on what matters and where you want to go, not just based on your values today but where do you see yourself in the future.

“We need clarity, and the only way to have clarity is to take the time to think forward. What do we want to do, and how does it work? When you have a set of very real anchored values and you have clarity of where you’re going, decision-making is much easier.”

A company must plan for how it can be agile for future situations of uncertainty, he added. To be agile in a time of need or to make the right call in a heated moment, a company must first have clearly defined its North Star and be deeply rooted in a set of values.

Bejjani highlighted the importance of efficiency in building resilience.

Having business continuity in place is not enough. “What mattered prior to the pandemic was efficiency: how can we do more for less, how can we be as efficient as possible, how can we optimise stock quantities and how can we be efficient on a different level?”

He said having one eye on the immediate and one eye on the future is equally important. “You need to have one eye in the microscope and the other in the telescope when you are in crisis. Today we are living a great example of both eyes in the microscope.”

Thinking about resilience is very important, he added, and companies need to make sure that their core is very strong. “I would say resilience gives us the perspective that we need to think forward during crisis.”

Setting clear business objectives is also extremely important, said Howard Davies, chairman at NatWest Group.

“We did have a very clear alignment around that objective, which carried us through with minimum disruption and distractions. That’s often the case with people being a bit too hopeful – and gambling on resurrection. We had a common view at the board that we’d done enough gambling on resurrection, the bank had done enough of that in the previous crisis.”

Concerns of inflation and overexposure are threats to resilience. The secret to navigating a crisis for a company is coherence around objectives. Executives must be clear on what the overall objectives are, said Davies.

“The main secret to getting through all of that, which has been very difficult at times, has been to ensure the executive and board were clear on what the priorities were. And we were clear that the priority had to be to achieve a position where we were not under threat of capital shortage,” he added.

Greg Case, chief executive of Aon, said that Covid-19 became an incredible catalyst for how we view long-tail risk, and has opened up patterns we can see in other categories, such as cyber, climate change and intellectual property. Fundamentally, resilience is the business. Resilience is taking action at scale.

“Now it’s no longer the risk leaders. It’s the chief financial officers, the treasuries, the chief executives and boards of directors that are asking questions. How do we deal with this new type of volatility that will impact supply chain, demand, and so on?”

He added: “If you think about resilience as a capability – fundamental in terms of company-building – it’s a completely different orientation. It changes the psychology in terms of how companies think about it – it certainly has for Aon. In essence, resilience is really about the ability to take action and action at scale – to both ‘defend the house’ and ‘build the house’.”

Case said Aon has seen as much opportunity to build the house in times of volatility as it has to defend the house.

“The other piece is around the resources. How do you build it? What do you do? Often we hear talk about how we’re making investments in resilience. We’re spending money. But the source of resilience we find most compelling, most durable, is around organisational conduct and how you approach the world as a company. From Aon’s standpoint, 15 years ago we were doing fine as a firm, but we realised we need to keep up with our clients in terms of their innovation and what they were doing and evolving.”

Case emphasised that companies must take a view that reflects the idea that resilience isn’t a discrete investment. “It really is an orientation. If resilience really does drive opportunity in times of volatility, it’s not a side part of your business, it means taking action at scale to improve your business.

“That’s why it is really an organisational investment, not a one-off investment, and driven by this kind of organisational orientation that we want to work together and see opportunity in volatility, as opposed to risk in volatility.”

According to McKinsey, companies can take three steps to get started in building resilience for the years ahead: describe how resilient you are today, determine the degree and nature of resilience you need for the future, and design your approach to building and maintaining the resilience you need.

Companies that understand the resilience they need for the future can implement sensible change today, and be better prepared for what the future might hold.

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