How will current economic circumstances affect attitudes towards operational risk, strategic risk and business continuity?
Economies everywhere are in a mess. The United States has been in recession for almost a year, with Japan and Western Europe following swiftly behind. As a result of the credit crunch, turmoil in the financial markets and recession in the UK, firms up and down the country are cutting costs and making redundancies, or in some cases suspending projects and even shutting up shop. The question is: what impact will this grim scene have on operational risk, strategic risk and business continuity functions, and will the staff that run them be better or worse off as a result?
Despite the gloom, there are strong indications that the field of business continuity and risk management will be in a much better position. J Michael Barrett, principal at Diligent Innovations and former director of strategy for the White House Homeland Security Council, points out: “It’s dawning on people that this is an age of risk, just as the 90s was an age of IT.”
While a few of the smaller consultancies have fallen on hard times as a result of the small business model’s reliance on fewer accounts, on the whole, risk consultancies and providers seem fairly unperturbed by recent events. While downturns may not be considered the ideal environment for growth, a steady stream of business and enquiries are keeping the service providers busy, with some even taking on more staff to cope with client demand.
“There are still a lot of opportunities out there,” declares PA Consulting Group’s Stuart Anderson. The principal consultant at the London-based management consultancy explains that resilient businesses are better positioned to seize these opportunities, as well as to withstand the current turmoil. “Organisations that have diverse and flexible strategies, and are used to dealing with change, could flourish and prosper, even in bad times.” SunGard Availability Services’ Keith Tilley’s view echoes this sentiment. “I have been around long enough to have lived through the 1992-3 recession. Our business grew then, as indeed it has done consistently over the past 30 years,” he recalls.
“We have long-term contractual commitments so we have security. That said, we talk to customers clients have said they are holding back a bit. There has been some tightening, but equally we have customers that still are interested in business continuity so they are recosting,” explains the firm’s managing director UK & executive vice-president Europe.
SunGard will have invested some £40 million in the UK by the end of this year alone, with a number of new products being launched in December 2008 and plans for a new centre in Woking still on track for Spring 2009.
Also worthy of note are the results of FSA research carried out in 2006, which shows that at the time, 60 per cent of respondents were carrying out their own business continuity – representing huge potential now for service providers. While this possible new business may not materialise overnight, the opportunity is considerable.
Not such a gloomy picture, after all, then. It’s certainly not the worst of times in oil and gas, for instance, where record profits are being posted and the opportunities for risk and business continuity work are good. Utilities, too, are keeping consultancies busy for the right reasons. There is also considered to be considerable room for growth in the public sector. If champagne’s off the menu anywhere, it’s in retail and construction, and certainly – for the time being – in the financial sector, where business continuity functions seem to have been hit the hardest.
It will be revealing to see what happens to teams as a result of the turmoil, opines Anderson, PA Consulting Group. “The current crisis is interesting for business continuity as a profession – how do they get a seat at the top table in this climate? Business continuity professionals may not be heard during a liquidity crisis – does this mean less attention is being paid to their risks?
“The challenge now for business continuity is to discuss risk in conjunction with their peers and also the leadership team, and align it with the organisation’s strategy. This means with other disciplines to ensure there is an integrated approach to risk across the business that leads to greater organisational resilience,” he suggests.
Companies with international operations face particular challenges. “What we are seeing in Europe is a trend for spontaneous protests and strikes from workforces that have seen significant layoffs,” explains Rafael Gomes, director of strategic services at Exclusive Analysis. Liquidity problems are also spreading across industries. “We see this to a very high degree in Germany, where car manufacturers are cutting down on production and seeking new loans. This is having a knock-on effect on suppliers. BASF, for instance, has cut output by 25 per cent and closed offices worldwide,” he adds. Companies are having to put new projects on hold, and re-focus on day-to-day decisionmaking and managing longstanding relationships.
Around the world solvency problems are affecting governments’ financial policies considerably. Ukraine and Argentina, for example, have faced severe problems. In Eastern Europe and the Baltics, severe current account deficits are also likely to raise currency risks.
Recent events mean additional work in assessing other companies’ financial health. “Assumptions made by credit rating agencies – particularly focusing only on a few financial indicators – have been called into question since the start of the credit crunch. Several agencies have lost some credibility,” says Gomes. “Creditworthiness has a lot to do with due diligence; it is not only a balance-sheet issue.”
Short-term shocks, long-term gain?
In a downturn, increased pressure to seek value and a need to reduce costs alter the risk dynamic. “With that, there is a tendency for many customers to roll over contracts with existing suppliers,” says Tilley, who adds that customers are looking for greater value as cash flow becomes an issue. “Payment terms may need to change. We may have to help those companies out,” he explains.
“SMEs and supply chains are at much greater risk now than they were a year ago, and that affects retailers in particular.” Indeed, SMEs that forget their business continuity commitments may put their own conditions of contract in jeopardy as the validity of their plans is brought into question.
The upside is that change is inevitable and this will be good for the industry and for resilience in general. For businesses looking to streamline continuity plans, this can be a great opportunity, though experts warn against forgetting the ‘softer elements’ of plans.
One commentator, currently working for a major investment bank which has recently undergone a merger, explained to Continuity, Insurance & Risk how difficult the integration work has been. “Demands for immediacy are high. People do what needs to be done under these circumstances,” he said. With staff being moved and made redundant, the bank risks losing experienced human capital, as well as losing the continuity associated with crucial but perhaps undocumented information. The resultant systems issue is another challenge to address. “Our outsourcing contract is being stopped, with the work being brought back in-house.”
Few would imagine that the coming months will be a bed of roses. But, as Michael Barrett points out, this may be no bad thing. Just as the market determined that an IT department head should develop to a fully-fledged CIO when IT grew in importance, so it will mean that risk is no longer an afterthought and a chief risk officer will become a chief resiliency officer.
“In the old days it seemed the only option was to draw out discrete, singular risks and protect against the most likely and the worst of them. But now the change is too rapid, and the breadth of challenges too great to have such a linear thought process.
“It’s like hitting a target with a rifle versus a shotgun blast – you are more likely to hit the target with the broader spray-pattern of resilience than with single rifle shots... so resilience will be the watchword. And for those who can quantify and measure resilience and its value there will be plenty of work, once we get past the immediate bleak spot of frozen capital markets and constrained cash flow.” So when the markets do eventually revive, the hope is that they will do so in a more resilient and robust environment.