Jan 26, 2021

Bain & Company Dispels 5 Myths of Building Resiliency

riskmanagement
businessresilience
Bain&Company
supplychainresilience
Laura V. Garcia
5 min
Balloon and cactus
Bain & Company dispels five myths that stand in the way of building organisational toughness...

For years now, companies have been fixated on improving efficiencies and driving out costs. Consolidated supply chains leveraged for better pricing, just-in-time inventories, and the elimination of redundancies to drive out waste have removed any protective cushioning, increasing the likelihood that even the smallest supply chain disruptions can have large impacts on their operations.

The global pandemic has exposed vulnerabilities and garnering the attention of executives who now see the value in investing in their business resilience.

“Analysis of the Bain Resilience Index shows that while high risk can generate high rewards, more-resilient companies have nearly double the survival rate over the long run,” Bain says.

But what does ‘business resilience’ really mean? Bain believes there is a lack of clear discussion on the dynamics of business resilience, what it means for every company, and how to improve it. They challenge business leaders to consider:

  • Most of the things you’ve been worrying about are too short-term and modest.
  • Improving resilience doesn’t have to come at the expense of shareholders.
  • If you don’t get ahead of the challenge of becoming more resilient, expanding government regulations or restrictions―such as forgoing dividends or stock buybacks in return for bailouts―may further limit your options.

Business heads will need to recognise the trade-offs involved and make choices around their revenue portfolio and their operations Bain & Company says. They go on to explain that although executives have come to recognise the criticality of improving resilience, they believe there are five prevalent myths to be dispelled.

Bain & Company’s five myths that must be debunked:

Myth 1: Resilience eliminates volatility

Volatility must be distinguished from risk, and that it is unrealistic to believe resilience will help eliminate earnings and share price volatility. Bain describes volatility as “predictable fluctuations in every business over time,” whereas risk is “exposure to a lasting adverse change in trajectory.”F

Failure to define risk appetite is a rampant issue. Rather than attempting to improve on earnings certainties, management teams and boards should look to identify and mitigate their most prominent adversaries, whether it be bankruptcy, a hostile takeover or activist investors.

Myth 2: It’s all about the balance sheet

Increasing resilience is about more than examining leverage and liquidity. Risk may lay in five distinct areas: strategic, financial, operational, technological and organisational. 

Adopting a realistic, holistic approach to resilience building that acknowledges all of the areas of exposure, and their impacts to your organisation allows business leaders to make better informed, smarter decisions on where best to invest resources.

A simplistic and transparent business model makes for a more resilient business. Complex and opaque supply chains can make risk assessment nearly impossible, leaving organisations exposed to operational risk due to unforeseen disruptions such as shortages of critical parts that lay beyond their visibility.

Myth 3: Past resilience guarantees future resilience

Building business resilience is about looking forward to what may happen in the future that could have significant deleterious effects on your business, not about looking back. Although Covid-19 may have you better prepared to withstand the same type of disruptions, executives must evaluate the likelihood of all areas of risk.

As we continue on the trend of digitisation and industry 4.0, cybersecurity should remain of the utmost concern. Although identifying all potential risk sources is an impossible task, executives must build the ability to evaluate the likelihood and impacts of risk scenarios, and mitigate their most significant threats.

Myth 4: Resilience should be handled by the risk function

“Too often, risk gets treated as an obligatory but unfortunate box-checking exercise, then relegated to a corner of the business. Accepting this more limited scope, risk functions may fall into the trap of becoming overly tactical and blinkered in their identification of risks.”

“This approach falls short in a world of greater turbulence. The combinatorial nature of many risks demands that companies identify and mitigate risks for the entire business… Moreover, many future risks will emerge from the ecosystem of partners outside the firm, and traditional risk-management functions are ill-suited for this challenge.”

Preferably, organisations should incorporate risk management into their existing channels and processes for critical decision-making at the C-suite and board levels. Leaders at all levels in the organisation should adopt a risk ownership mindset considering potential impacts on the company across the entire business and over the long term.

Myth 5: Resilience doesn’t require difficult trade-offs

Business leaders must openly discuss the need to balance both short and long term gains. “For their part, many investors are trying to balance the desire for responsible stewardship of capital over the long term with the need to avoid allocating funds to systematic underperformers.”

Agreeing on the metrics to be used can be a sticking point. To help create fact-based discussion, Bain has constructed the Bain Resilience Index, “a 100-point scale that assesses a company’s resilience based on the statistical relationship between performance during a crisis and a wide range of readily observable metrics including scale, growth, margin, asset intensity, leverage, liquidity, and geographic and product concentration.”

Bain & Company goes on to explain that “once you get past these five myths, it’s clear that there’s no single solution or quick fix, no binary black-or-white choices, but rather a series of decisions in the grey areas of marginal risk. Developing the right level and type of resilience demands a combination of long-term vision, a deep understanding of company and industry economics, and a significant dose of creativity.”

Getting Business Resilience Right offers a three-step approach to setting the wheels to resilience building in motion, as well as excellent examples of the successful business resilience strategies of Nissan and Southwest airlines. For more on that, click here

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