Thursday, March 5, 2020

Combating coronavirus – how business needs to react

Rarely has a new disease made such a dramatic arrival.  

As 2019 drew to a close, a spate of unusual illnesses in Wuhan, China were detected, described at the time as an ‘unidentified pneumonia outbreak’. But within days, a novel coronavirus, thought to be similar to the viruses behind SARS and MERS, flared into an outbreak, then an epidemic.  

Now, with the World Health Organisation poised to declare the spread of virus Covid-19 a pandemic, the impact of tens of thousands of cases are being felt not just in hospitals but on global stock markets and in the risk management meetings of business leaders everywhere.  

So with fear posing as significant a threat to economic confidence as an actual outbreak of disease, what are the steps businesses need to do to combat rising panic?  

Baker Tilly experts across the globe are helping companies prepare. 

Countries and companies exposed to new threat

The speed of the virus has caught business — and supply chains — by surprise.

The World Health Organisation says Covid-19 cases are spreading quickly beyond the initial outbreaks in China, forcing authorities to move from in-country containment to actions designed to minimise the spread in vulnerable populations.  

As of March 5, there were cases in more than 75 countries, most significantly in South Korea, Italy and Iran. The WHO has resisted declaring it a global pandemic but it has urged governments to act swiftly and aggressively to contain the virus. 

Sports and cultural events are being cancelled, while Italy, Japan, Iraq and Dubai are following China and Hong Kong in closing schools, and travellers through the most affected countries are increasingly being asked to self-quarantine.  

Italy closed all schools and universities on Wednesday until at least mid-March and barred fans from sporting events. United Arab Emirates’ schools and colleges are to close for 4 weeks and the virus is being blamed in part for the collapse of low-cost airline Flybe.

One of the immediate impacts for businesses that trade with, or manufacture, products out of China has been the impact of factory and business closures across the nation referred to as ‘the world’s factory’. 

Dun & Bradstreet estimate close to 90 per cent of China’s active businesses are located in the 19 provinces most affected by the viral outbreak, counted as those with at least 100 cases per province, with wholesale and manufacturing businesses making up about 40 per cent of these. 

An estimated 51,000 companies around the world have one or more direct, Tier 1 suppliers in the impacted region, and at least 5 million global businesses have one or more Tier 2 suppliers from the area.  

The Tier 1-impacted group includes at least 163 companies in the Fortune 1000, Dun & Bradstreet says, while 94% of these large companies have Tier 2 exposure.  

Jeff Jorge, Principal Firm Leader, International Services at Baker Tilly US, says reconfiguring supply chains has been a pressing issue for US firms for the past year or more, as lingering US-China tariff dispute affects trade. 

The latest disruption among suppliers will only exacerbate that pressure.  

“Supply chain effects are already being felt in the US and other countries,” Mr Jorge says. 

“Outbound freight from China into major market economies such as the US are on lockdown and not expected to re-open until April.  

“This places a major strain on businesses that depend on Chinese-sourced items to remain in business.  

“The fallout effect likely to be significant should said importers not make a change to the supply base or source.” 

He says clients who were previously looking to avoid tariff pressures by rebalancing their supply chain with non-Chinese sources now needed to act urgently. 

“From the US perspective, this current suspension of trade routes from China has heightened the strategic benefit of near-sourcing the supply base to markets such as Mexico,” he says.  

“We have encouraged clients to accelerate such a shift and have been engaged in recent weeks to help them do so in turnkey manner — reducing risk and fast-tracking time to market.” 

While largely able to avoid the US-China trade war, European businesses are now feeling the impact of Covid-19 disruption. 

Johannes Becker, Partner at TPA Romania, says the current crisis shows the limits of over-optimisation in supply chains, including the reliance on just-in-time inventory, in which delivery of materials is designed to be synchronised to reduce the time stock or parts are left waiting around.  

“Reducing stocks to the absolute minimum and large-scale outsourcing has its merits in reducing costs and improving cash flow,” Mr Becker says. 

“But once something out of the normal is happening, it can backfire.  

“Just as with body builders who reduce their fat reserves to almost zero and have to be hospitalized in case of minor health issues, so companies that optimise to the limits become increasingly vulnerable.” 

Michael Sonego, Partner Corporate Finance at Baker Tilly’s Australian firm Pitcher Partners, says businesses that have not identified alternative supply chains as a matter of course will now struggle to replace suppliers given the changeable nature of the outbreak.  

Clients across Australia have reported shortages of goods and components that would normally travel easily from China, he says, but the window of opportunity to establish second and local sources of supply has likely closed.  

“If you haven’t already identified alternative sources of goods or thought about how you would reconfigure your supply chain, it is probably too late for now,” Mr Sonego says.  

“From the time you identify alternative sources to getting that in place can be several months. 

“What you can do is use this time to look at how you might reconfigure the way you do business, and for many people that will be a faster and easier change if they start moving now.” 

THE CONVERSATION TO HAVE RIGHT NOW: We have seen in previous disasters, from the Sendai earthquake to Hurricane Katrina, that when companies haven’t mapped their upstream supply chains, they can be left exposed.  

Map your suppliers as far back as you can and open the channels of communication, so you know if and when they are facing delays or disruption, before the wave reaches you. Even if your current exposure is low, it is past time to look at building supply chains with second sources, including local suppliers where feasible.  

At the same time, businesses need to avoid knee-jerk transfers of existing relationships to other markets and should work to ensure secondary supplies supplement the existing supply chain where possible.  

When the SARS epidemic hit in 2003, the world was a very different place. China was the sixth largest economy in the world, representing about 4.5% of the global economy.  

And while the virus was deadly — killing an estimated 800 people or one in 10 of those reportedly infected — it only cost the economy about $40 billion. 

Today, China is the second biggest economy, representing more than 16% of global activity, and globalisation of trade and travel mean economies and societies are far more interconnected. 

But one big change that could help the world manage the financial impact of Covid-19 is the use of technology. During SARS, and even the more recent swine flu outbreak in 2009, many businesses were still largely paper-based or needed to operate from a single location.  

That’s no longer the case, with the rise of cloud computing, the option of remote working, social media and collaborative tools and low-cost video software like Zoom, Skype or Facetime.  

In the US, 77% of businesses report having at least one application or process in the cloud, while in Europe, it is estimated a quarter of all businesses use cloud computing, growing up to 65 per cent in Scandinavian countries.  

Home internet use in many countries is near saturation, and although some nations lag in access, mobile phone penetration is helping to close the gap.  

Mr Sonego says the opportunity for many businesses is to use technology as a way to reduce exposure, helping contain the spread of the virus and protecting staff or clients who might be more vulnerable to Covid-19.  

That might mean fully remote operations or reducing the need for face-to-face meetings by using video conferencing or collaborative work tools.  

“Businesses should be examining what is the strategy for staff who are caring for people who are ill, or engaging with clients who might themselves be unwell,” he says. 

“We’ve invested pretty heavily in systems and processes and technology over the last few years which mean that our people can work from anywhere.  

“In part, that is a function of our requirement that people can be able to work from client premises and also the growing trend for people who work from home. We think that in our office, therefore, there will be limited changes needed for us to be able to collaborate from different locations.  

“But for many businesses, it might not be possible to work from home or it might be that they haven’t invested in the technology. 

“Will people actually turn up if they still require them to head to the office? Absenteeism becomes an issue. And will a business whose staff need to stay away find their lack of investment means that they need to shut down?  

“This is a critical time for businesses to think about what can be done quickly as they don’t have years to put a solution in place.” 

THE CONVERSATION TO HAVE RIGHT NOW: Having a remote operations strategy is critical if you face prolonged staff absences, but so is your communication with staff. 

Businesses will need to balance the need to continue operations with the need to limit attendance of anyone who could be at particular risk.  

If you have invested in technology to collaborate and operate remotely, test and scale this up now. If you have not, now is the time to urgently investigate the processes that can be conducted remotely, those that need to be in situ and those that can be automated or outsourced.  

The more you communicate with employees about contingencies and how the business will continue to function, the calmer all staff will be.  

At the heart of your corporate response to any disruption are the people you rely on to run your business. Even if all remain healthy, that group is likely to include people afraid for their health and safety, as well as those who might be unable to undertake ordinary travel. 

Communicating calmly and clearly with those employees and engaging them in your response is the advice Baker Tilly Mooney Moore is sharing with clients.  

Donal Laverty, Partner in Consulting at the Irish firm, says staff may feel under pressure to perform and turn up for work, and managers need to put employees’ minds at ease. It’s a simple action that could have far-reaching consequences.  

“Employees will feel less nervous about taking time off work if they feel confident that when they return from sickness, they won’t be punished,” he says. 

“Lead by example. It’s all well and good to preach a culture of self-care, but if your employees see you at work when you are ill, it sends out the wrong message.  

“How will staff ever feel confident enough to take a sick day themselves? If you care about their wellbeing, you shouldn’t go into the office and make them sick too.” 

In addition to having a robust sickness policy and sending staff home when unwell, Mr Laverty says managers must make sure they protect their team when illness is rife.  

“Placing tissue boxes, bins and hand sanitisers around the office will help trap germs and protect your team’s health,” he says.  

“Sending out reminders about hygiene and personal responsibility for one’s own wellbeing is important as well.” 

While businesses usually worry about absenteeism, in this situation ‘presenteeism’ — or attending when sick — could pose the greater risk.  

Presenteeism is associated with increases in common mental health conditions, as well as stress-related absence, Mr Laverty says, so he suggests take time to re-evaluate your employees’ workloads and how you can alleviate some of the pressure.  

“The key element of employee-employer relations during a health incident is to act in good faith,” he says.  

“For an employee, act in good faith and be honest with your employer about how you are feeling and any concerns you have. If you are finding your return to work difficult, get help and support – your workmates and employer are probably experiencing similar feelings to you.  

“For the employer to act in good faith means to be honest with staff. Show flexibility in dealing with the situation, take a flexible approach to changing and adapting your normal policies, communicate well and often, put employee safety and wellbeing at the heart of your effort.” 

As with previous epidemics, the actual health risk can be disproportionate to the social and economic impact — and if food or good shortages arise that can lead to panic and fear. 

TPA Romania Partner Johannes Becker says people should have confidence in public decision makers, who have been taking action against the health threat.   

“We have seen that authorities had reserves of medication and protection materials, and emergency plans that could rapidly be implemented,” he says.  

“Companies have to learn from events like this to be better prepared.” 

THE CONVERSATION TO HAVE RIGHT NOW: As a manager, you have a responsibility to consider the health of your people, and take steps to mitigate their risk.

This may mean reconfiguring workplaces so people can more easily work from home or work in isolation from other employees. You might not be able to prevent people becoming exposed to a virus, but you can ensure that your company culture isn’t causing your staff to get ill.  

Consider extending some deadlines or spreading out the burden of work across your team more evenly to lighten the load. Establish – and enforce – a robust sickness policy, and put the minds of your team at ease that they won’t be punished for taking sick leave. Lead by example, while encouraging personal responsibility for hygiene.

For businesses in regions where government rules require a suspension or activity — or those who have seen a rapid decline in business as customers retreat or supply chains break — assessing the financial cost becomes a matter of urgency.  

Many companies have business continuity insurance, but each policy will differ in what it covers or what triggers need to be in place for a claim to be made.  

Here, the best step — Baker Tilly advisers say — is to be in touch with your insurer or broker and understand what you are covered for and what the fine print says.   

“Unfortunately, if your insurance and your business interruption policy isn’t what you hoped at this point, it’s too late for you to put one in place,” Mr Sonego says.  

“But it’s still better to know what you’re faced with so that you can then understand how much harder you need to work should something eventuate, rather than it come as a surprise at the time that you’re uninsured or that your technology won’t work.” 

New Zealand firm Baker Tilly Staples Rodway advises clients to also get in touch with creditors to update them on changing exposure to Covid-19 and the implications on markets and personnel. 

“Don’t suffer in silence,” the firm is advising its clients.  

“Speak to your bank to investigate options for an overdraft or revised payment terms. You will likely find them more receptive given the nature of the issue, which is beyond any business owner’s control.  

“Likewise, ask your landlord about concessions on your rent and discuss repayment options with creditors to provide some relief during the disrupted trading period. 

“The longer the situation continues, the more likelihood of a global recession. Whatever the future holds, it’s up to business owners to be proactive about managing their cashflow and seeking assistance before it becomes too late.” 

Baker Tilly Singapore Partner Nicodemus Tan says businesses caught in the middle of a Covid-19 crisis, can feel overwhelmed by the scale of the challenge, so getting advice and support is vital. 

“Most clients have some form of a business continuity plan or disaster recovery plan but such plans are normally based on specific scenarios or loss of access to resources such as a sudden loss of office venue, key personnel or vendor supply,” he says.  

“The plans did not cater for a pandemic which actually cuts across all facets of business.  

“In badly affected countries such as China, the supplies have stopped, the staff have been granted mandatory leave from work and there are cases where basic infrastructure such as electricity may not be a given. 

“In such cases, expected emergency responses such as having a ‘cold’ back-up worksite or having a skeleton work force could not be obtained.  

“But the biggest challenge shared by clients is uncertainty leading to loss of business confidence. The whole macro-economic environment has deteriorated so badly that customers are adopting a ‘wait and see’ attitude and sitting on the fence rather than acquiring goods for sales to end customers.” 

The advice from the Singapore firm is to avoid paralysis by making the best of the disruption by taking the opportunity to rethink systems and processes and building stronger, more personal relationships with clients. 

“A company that can weather the virus better than other companies will come out stronger,” he says.  

THE CONVERSATION TO HAVE RIGHT NOW: Even if your business isn’t trading directly with countries affected, there are still likely to be implications from the economic fallout coronavirus has created across the globe. The general rule of thumb is to stay the course. 

Clients can also see the current situation as an opportunity than a threat. They should critically examine for wastage in their systems (working on a skeleton workforce will reveal a lot), focus on servicing their clients well even if it is loss-making, and take the chance to acquire any needed resources cheaply. 

The role of responsive leadership