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Corona: The importance of contingency planning and risk management

Many businesses are struggling due to the Covid-19 outbreak and associated restrictions. They face immediate consequences in terms of reduced labor force, counterparties unable to deliver and own failure to deliver. In this phase, it is crucial for the business to be proactive and set out a plan to maintain operational operations and mitigate the risk.
Stethoscope with financial statement

In a chaotic situation with unforeseen and complex consequences, one may easily react with panic. A clear contingency plan however, will ensure that focus is made in the right direction. Overall, focus should be on critical input factors key to maintain operations. Hence, the business need deal with risks related to failures of such critical factors. It will vary which factors are the most critical, however to most businesses continued access to labor, capital, goods and services will be crucial

In today’s situation, the businesses are unable to control or influent several critical input factors. Orders and other governmental restrictions issued to prevent further spread of Covid-19, impose immediate constraints, which may also have an indirect impact. In relation to leaseholds for instance, if the property owner is forced to shut down buildings also the tenants will be will be unable to continue operations from their leased premises.

To be at forefront and anticipate possible risk scenarios can be key to continued operations. This is obviously challenging as the risk picture may change from day to day. However, by identifying the most critical input factors and possible reactions to failure of such, the business may be able mitigate its risk and reduce the loss. The below issues are risk examples which we consider to generally be relevant to the current Covid-19 situation. Management should address those and other risk factors of specific relevance to their business and put out a business contingency plan.

Workforce management is essential to all businesses. Start with a executing a vulnerability assessment if not already done. How likely is the business to be severely affected by staff shortages? Quarantine restrictions may have an overall impact on work capacity. The same applies if many employees are infected at same time or if staff in critical roles become ill. Map out employees who are infected, establish a procedure for reporting and mapping infectious symptoms; establish a re-allocation plan, a plan for potential layoffs, etc.

Counterparties failure to deliver can be crucial for the business’ own ability to deliver and fulfill own obligations. The business should as soon as possible establish an overview of critical deliveries and assess associated risks to failures. A legal review should be made of all major or business critical contracts. An assessment should be made specifically to force majeure terms and clauses.

Own ability to deliver according tocontractual obligations should be addressed and analyzed. To what extent can the company comply with own undertakings? What are the relevant input factors to uphold deliveries? To what extend will force majeure terms apply and how can the business reduce its loss related to potential delivery failures? Engage in an early dialogue with the relevant counterparties and consider renegotiation. Execution of temporary Covid-19 clauses may be relevant to both existing and new contracts.

Financially the loss of critical input factors may obviously affect businesses liquidity. A thorough analysis, and possibly a revised budget, should be considered. Possible loss of earnings need to be taken into account. Prioritization of creditors for a shorter or longer period may also be necessary as well as renegotiation of credit limits and loan terms.