By Geri Westphal
Threats of a eurozone collapse in 2012 along with various natural disasters should prompt contingency planning for 2013.
The continuation of the eurozone crisis in 2012 forced treasurers to create more comprehensive contingency playbooks addressing all aspects of business risk.
Currently, risk models and internal treasury policies are being enhanced to recognize “early warning” signs of potential risks and allow enough time to make appropriate decisions before the crisis hits. Many treasurers have implemented new market-risk policies to include commodities, FX and interest rates so that they have comprehensive policy in place.
In The NeuGroup universe, members agree that the creation of a Greek playbook has allowed them to use the basic blueprint for other countries in the event it becomes necessary (i.e., Portugal, Spain and Italy). These playbooks, which include a range of risks and mitigation steps to ensure minimal disruption for clients and employees, are usually incorporated into a larger corporate-wide strategy that addresses all aspects of the business. Now, many treasurers are taking the time to expand the European contingency playbook to include other possible contingencies like natural disasters or major economic slowdowns.
Based on feedback from several of NeuGroups many used the lessons learned from the events in Argentina in the early 2000s as a basis for the creation of this new contingency strategy. Members agreed there were several important aspects to be considered in the creation of this new playbook.
People Management
All members agreed that it is important to ensure you have accurate updated employee contact information as well as a documented communication plan (call tree) so that you can quickly contact all appropriate stakeholders in the event it becomes necessary. Each member of the crisis team should understand their individual roles and responsibilities, and the business dependencies, in the event of market disruption. This plan should be tested with sporadic “surprise drills” so that everyone can be sure the pieces are in place and are working as expected. It is always best to test contingency plans well before they are executed in real-time.
Payment and Collections
Contingency planning for a disruption in your payment or collections activity should include a full understanding of your key customers, including their ownership and business location. You should know where your largest customers source their revenue so that you can determine potential down-stream effects and plan accordingly. It is also important to understand the business details of your key suppliers; where they are headquartered and where they source their raw materials, so that you can plan for potential disruptions in the delivery of your raw materials to ensure production is not disrupted. It is important to identify a communication plan for large key clients and vendors so that you are ready to address payment terms if necessary. Some members have implemented Supply-Chain Finance programs in the event their key clients are unable to access bank funding.
Show Me the Money
Liquidity fears are one of the most prominent issues faced by members and are the subject of a variety of stress-testing scenarios and contingency-planning strategies. It is important to understand how your organization will manage through extreme levels of volatility making sure that your cash is safe and accessible as needed. Extreme contingency plans have gone as far as holding levels of cash on hand in vaults and other secure locations in the event that banks are closed and funds are unavailable for an extended period of time. Making sure that the business can function on Day One after a significant announcement is of a primary focus for treasurers and their teams. It is likely that banks would close for a period of time and would impose capital controls or other reporting requirements or lifting fees, so it is critical that treasurers identify ways to keep the local office running as smoothly as possible. These important step-by-step details should be included in the overall contingency strategy.
Trigger Events
Each organization will need to address relevant trigger events that are specific to their individual organization. It is important to understand what trigger events you will monitor to ensure an early warning of potential disruption. Try not to predict what might happen, but instead use it as a contingency-planning tool. Understand where your cash is and how you can access it. Identify what key stressors exist in your supply chain and how can you contain risk to prevent significant business disruption. Crisis management teams should meet periodically to address any changes to the status of the crisis and make necessary changes based on specific trigger events that may have occurred.
Operations and Technology
Have you stress-tested existing systems and procedures to manage changes in volume? Are you confident in the readiness plans of any third-party providers? How soon will software providers be ready to accept new payment instructions or new currency codes? These questions should be carefully considered as part of the overall contingency strategy. The smallest detail can trip up a treasury team if it was not considered ahead of time. Some members have gone as far as to create new accounts with banks outside the “danger zone” to be opened upon the announcement of a country exit or bank closures.
These new accounts are not active, but would become so in the event it became necessary. Some believe this gives them a jump-start on being able to operate efficiently after a significant event.