Car windshields are bigger than rearview mirrors for obvious reasons: Seeing what’s in front of you is usually more important than knowing what’s behind you. Why, then, do so many organizations respond to a crisis after it has happened rather than prepare for it before it occurs?
Human nature is part of the reason: Generally, we think of risk only after an event. Therefore, organizations tend to build reactive versus proactive management models. And once that operating mode is established, it is hard to change. In some cases, organizations fail to see trouble ahead because they prefer to believe messaging that all is just fine, or if they do see oncoming difficulties, they cannot envision the ripple effects. In others, even when cautioned about upcoming turmoil, they often pretend not to notice.
Leading up to the 2008 financial crisis, for example, regulators testified that subprime home mortgages posed no real danger to big financial institutions. But they did. When COVID-19 became a pandemic, it was unfathomable that the world would go into lockdown, especially the West. But it happened. U.S. administrations as far back as President Reagan’s warned Europe that it could face an energy crisis by relying on Russia for natural gas. It is happening.
All of these events caught companies off guard, as did the tumult that they fueled — a housing-market crash and the failure of venerable Wall Street houses, an abrupt shift to remote working and broken supply chains, and skyrocketing energy costs that have forced plants to shut down, to name a few. We could be in for more big shocks, given myriad domestic and global uncertainties such as a spike in interest rates, high inflation, rising layoffs and the continuing war in Ukraine.
But it does not take large, cataclysmic events to spark a company crisis. Smaller business disruptions, such as a regional supplier or vendor that unexpectedly closes, storms that cause power outages, a local flu epidemic, or labor union strikes can also wreak havoc on operations, sending companies scurrying for solutions.
The problem is organizations generally aren’t very good at reacting to sudden change. Companies may have risk managers, but even they tend to conduct postmortem analyses instead of actively scouting for threats. Organizations typically see emergencies as one-off events where they have a moment of panic, react and adjust, and then go back to normal until another crisis erupts and restarts the process. A company’s routine operations often reinforce such conduct — monthly reports, quarterly earnings, customer-satisfaction surveys and other performance models review what happened in the past rather than scan the horizon.
Change Management Road Map
Fortunately, companies have an opportunity to improve their ability to look ahead, meet problems as they are happening and quickly adapt to new environments. To accomplish this, companies need to launch an organizational change management function that continuously and methodically identifies potential threats and develops strategies to proactively address the risks. The following steps can help companies plan for such a function:
- Identify Risk or Imminent Change: By establishing a command center, the change management function can consistently and dynamically assess risks. Here, companies will formalize customer, market and supplier insights, leverage digital communities to gather input, and develop financial models and scenarios.
- Assess Impact: Looking into the organization from the outside will keep it focused on not only the impact of threats but also potential opportunities. This strategy requires communicating a sense of urgency to customers, suppliers and other external players to elicit their participation and determine how an issue or crisis will affect them.
- Develop a Change Strategy: Leveraging data to set targets and goals can help identify internal weaknesses and establish key performance indicators (KPIs) to provide clear measures of success. Envisioning different scenarios can help organizations make data-driven decisions and prepare to take specific actions if certain events occur. It is important to build a consensus around those decisions.
- Secure Executive Ownership: Executive-level support increases the likelihood that the organizational change program will remain focused and ultimately succeed. This includes ensuring that executive and middle management compensation is aligned to corporate goals and targets; developing performance agreements between functional groups, business units and regions; and creating budgets to meet corporate goals and targets.
- Execute Change Response: Formalizing organizational change management principles will complete the program’s rollout by integrating it into day-to-day business operations. Organizations should identify communication channels to all stakeholders, including strategic suppliers and key customers, and regularly reiterate the importance of preparing for uncertainty and potential challenges. This step can also reveal areas in the company that are resistant to change.
- Measure Change Progress: Organizations should continually assess the status of the change effort. In particular, tracking KPIs can help determine the effectiveness of the program and whether it has staying power over the long term.
Replace the Paradigm
While the prospect of recession is weighing on the minds of most corporate leaders, even in the best of times, individual organizations or certain business sectors are likely to face turbulence. The bigger challenge, then, is whether companies can replace the paradigm of reacting to events with one that takes a proactive approach, regardless of the business climate. Those that succeed in doing so, and that can identify potential future risks and problems, will not only be well prepared to prevent or limit negative operational and financial consequences but will also be in position to take advantage of new opportunities as the dust settles.