KPMG: A guide to the business implications of COVID-19

Embedding resilience: A guide to the business implications of COVID-19

Source: https://home.kpmg/bh/en/home/insights/2020/03/the-business-implications-of-coronavirus0.html

 

The rapid outbreak of the coronavirus presents an alarming health crisis that the world is grappling with. In addition to the human impact, there is also a significant commercial impact being felt globally. As viruses know no borders, the impacts will continue to spread. In fact, 94 percent of the Fortune 1000 are already seeing COVID-19 disruptions.1

It’s possible that the coronavirus threat will eventually fade, as the Ebola, Zika, and Severe Acute Respiratory Syndrome (SARS) viruses have in recent years. But even if it does, the next devastating, yet-unnamed outbreak is not so much a matter of “if” but “when.”

To help you understand your exposure to COVID-19, and more importantly, position your business to be resilient in the face of this and the next global threat, please review timely insights from KPMG business leaders.

 

- COVID-19: The data deficit

The data you need for better decision-making.

How long will this last? Has the government of [Country X] gone too far? Have they not gone far enough? Are you a social pariah for going out for your morning coffee? How far should you go to #FlattenTheCurve?

All valid questions, and around the (virtual) dinner table, my personal views are closer to this article from STAT, “A fiasco in the making? As the coronavirus pandemic takes hold, we are making decisions without reliable data.”

But I am not a health expert, and I don’t want to wade into the debate around the economic value (or cost) of a human life. For business though, I think two of the fundamental points outlined in the article hold true: first, we are making decisions without reliable data; second, better information is needed to guide decisions and to monitor their impact.

We all know this in theory, but in practice we have a tendency to rely on intuition over data; 71 percent of respondents to our 2019 CEO Outlook survey indicated they have overlooked insights provided by data and analytics in the past three years because they contradicted their intuition. Which means we can fall prey to any number of behavioral biases and heuristics in our decision-making – like overestimating the probability of some relevant event (overconfidence bias), or estimating the probability of an event by the ease with which instances of that event come to mind (availability bias).

Even more relevant to our current environment is that our judgement of risk is not based solely on what we think, but also how we feel. Which plays out in several ways: although risk and benefit are often positively correlated in the real world, in our heads, they tend to be inversely related (i.e. high risk means low benefit). When we express information in terms of relative frequency (e.g. 10 in 100), we judge it as more ‘risky’ than when it is expressed as a probability (10 percent). We also become more sensitive to possibility, rather than probability, which means very small probabilities carry far greater weight.

Decision-making can still certainly benefit from ‘gut’ feel, and there is no doubt that a degree of human empathy needs to be taken into account when preparing your response. But it is data that will provide more certainty amidst an uncertain and fast-changing environment. So, what do you need to measure and monitor?

As usual, this depends on your geography and your sector, so this list can’t attempt to be exhaustive, but it can be helpful to frame your thinking into three key categories:

  1. Forward-looking: this is a time where predictive analytics can truly ‘make or break’ a company. The most important analysis you can undertake - at what point (if any) under which scenarios is the continuation of operations no longer viable, and suspending business activities is preferable?

    For many private enterprises, detailed analyses of future working capital and cash-flow requirements are being conducted – to inform the consideration of how to: optimize the availability of tax incentives; identify alternative financing sources; ensure access to all available government incentives and programs; and recognize expense-reduction opportunities.
     
  2. (Near) Real-time: inventory data, customer demand, supplier capability, and system performance category alerts. In the retail sector, the ability to manage demand has never been more important; some retailers are seeing demand fall away and customers shift channels, others are facing unprecedented spikes in demand.

    Simulations can be run swiftly to identify “sweet spots” between apparently conflicting objectives, based on real-time data. Increasingly enabled by AI and automation, these scenarios can help prescribe rather than just predict.
     
  3. Rear-view mirror: COVID-19 is a perfect example of a ‘structural break’ - an unexpected shift in time-series data when patterns among historical variables change. Leading to the unreliability of the model and significant forecasting errors, and fundamentally impacting assumptions and planning (the phrase ‘blindsided’ comes to mind here).

So, historical data needs to be taken with a grain of salt at times. But it can still inform future decisions. Monitoring and measuring how you come through this crisis will be critical to ensuring your eventual rebound and embedding longer-term resilience. Take the chance to measure and evaluate business (in)efficiencies stemming from alternate models of work.

 

- COVID-19 Economic Relief: A global view

Government measures may help to alleviate business stress for many private companies.

Important measures are being taken by countries and territories around the world to protect public health, in an effort to slow the spread of COVID-19, and calm public concerns. Financial support for ill and unemployed workers is at the heart of these measures.

Simultaneously, it has been necessary for many major governments to introduce incentives and economic relief programs that not only provide a financial cushion for affected individuals, but also fight the broader economic disruption caused by the virus. These programs are intended to help alleviate business stress and bolster economies.

The program components vary widely, reflecting each country/territory’s key business drivers and most urgent needs. Despite the variations, I believe these programs share two essential objectives: protection and sustainability. They help to protect the economy by restoring confidence, stimulating investment, and keeping people employed, with the ultimate goal of achieving sustained business and economic health and social well-being.

The financial incentives and economic stimuli are wide-ranging. Some, such as those in Japan, include interest-free, non-collateral loans for businesses that have experienced sales losses due to COVID-19. In China, the government is encouraging banks to offer loans at an interest rate of less than 1.6% to enterprises that produce, sell, or transport medical products and daily necessities. A 100% expense deduction has also been introduced in China for equipment investments that expand production capacity. Israel has introduced an innovative grant program of approximately US$13 million for startups and established companies that have research and development plans, proofs-of-concept, products and technological solutions that address the impact of the COVID-19 pandemic.

Additional financial relief mechanisms include corporate income tax rebates, deferral of government payments, and reductions in tax rates to help owners retain more immediate cash in their business. The Irish Revenue Agency has announced that interest will not be payable on late tax payments in order to aid company cash flow.

In Israel, small and medium-sized businesses facing liquidity problems due to the current situation have access to additional loans through the State’s Small Business Fund and special programs created by the banks. Similarly, Canada recently announced a CAD55 billion package to help sustain business liquidity through tax-filing deferrals and a CAD10 billion credit extension. (At the time of publication, details of the U.S. stimulus-program were pending.)

Several countries are providing incentives for specific industries, such as tourism, shipping, airlines, and manufacturing, which have been particularly hard-hit by the effects of COVID-19. Businesses in Singapore’s tourism sector can access temporary bridge loans, for example, to support their immediate cash-flow requirements, service taxes are being deferred for hotels in Malaysia.

In addition to providing businesses with financial support, some countries are also introducing innovative government programs to address an urgent need to adopt creative work models for keeping people employed. These include initiatives such as Australia’s income-support for close to 120,000 apprentices, and a targeted jobs scheme in Singapore that helps companies retain local workers.

In other jurisdictions, business management guidance, such as the government-sponsored mentorship programs and financial workshops in Australia, are being introduced to help business owners strengthen their financial management and planning skills.

Irrespective of the tools and mechanisms that are being employed, it is clear that government and industry have come together across the globe to fight COVID-19’s impact on entrepreneurs, family businesses, family offices and private companies.

This global overview of government initiatives is the first in an ongoing series of blog posts which will seek to probe more deeply into the country/territory-specific details of the economic stimulus and incentive programs that are continuing to evolve across Asia, Europe, and North America.

 

- Technology takes on greater prominence

During a time of crisis there is no greater opportunity for technology to shine.

For all the discussion about the benefits of technology as compared to potential pitfalls, during a time of crisis there is no greater opportunity for technology to shine.

As the COVID-19 outbreak expanded from a global health emergency to being classified as a global pandemic, many companies have shifted most, if not all, of their employees to working remotely in response. At the same time, some schools, colleges and universities have closed their campuses and switched to more distance learning. 

This re-emphasizes the fact that the technology exists today to enable these remote options to help to fight this virus. It’s innovation from the technology sector that is now almost taken for granted.

Recognizing the role technology can play in the battle against COVID-19, the technology industry answered a call to action by the United States Office of Science and Technology Policy to assist with the response to the global COVID-19 pandemic.  Technology companies such as Google, Facebook, Amazon, Microsoft, IBM and Twitter came together to brainstorm with the U.S. government on response needs and solutions. “Cutting edge technology companies and major online platforms will play a critical role in this all-hands-on-deck effort,” said U.S. Chief Technology Officer Michael Kratsios.

Here in the United States, during a press conference held on March 13th by the COVID-19 task force, the efforts of the tech companies were put front and center when President Trump mentioned their assistance. There are many ways in which technology is being used to help in the efforts around the COVID-19 response.

  • Stopping the spread of misinformation – Twitter has stated “we have a prompt in place which directs people searching for Coronavirus content to accurate information from the relevant local bodies.”  Google’s Trust and Safety team “has been working around the clock and across the globe to safeguard our users from phishing, conspiracy theories, malware and misinformation, and we are constantly on the lookout for new threats.”
     
  • Tracking the spread of the virus to enable faster response to hard hit areas – Facebook is working to supply anonymous data to researchers in this effort.
     
  • Efforts to diagnose patients and improve testing – Tencent is using their AI Medical Innovation System (AMIS) and cloud technology to help quickly identify cases. Verily, an Alphabet company, has created a website in collaboration with the state of California to expand access to COVID-19 screening and testing in areas with a high volume of known cases. Microsoft and Amazon have committed millions of dollars to help local healthcare workers on the front line.
     
  • Using supercomputers to assist in analysis for treatment development – Researchers are using the IBM-built Summit supercomputer to analyze compounds as they race to find a cure.
     
  • Autonomous vehicles and robots being used to deliver medical supplies to hospitals and food to those quarantined at home – JD.com, a Chinese e-commerce company, has enlisted such self-driving robots in Wuhan where the outbreak originated.

One of the many things to take away is that we are reminded again that in a time of crisis, as global industries, communities and citizens, we come together to find a solution. This time it’s humans and technology together for the greater good.

 

- Six considerations in dealing with the impact of COVID-19

A view on the impact for financial institutions.

With the spread of COVID-19 dominating news outlets – and conversations – I’d like to share some perspectives based on discussions that I and the Global Financial Services Leadership Team are having with colleagues and clients of KPMG member firms.

The main consensus is that we will be dealing with the effects of the COVID-19 pandemic for the foreseeable future.  Financial Services business leaders across the globe are consistently focused on six principle challenges in dealing with the impact of this pandemic, and in dealing with the increasingly stringent containment measures that governments are putting in place:

1)      Employees
How you treat your employees now will have a massive effect on their wellbeing, and consequently on their loyalty and productivity.  Be very vocal with your support for any changes they need to make to work arrangements and performance targets in order to fulfil their responsibilities to their families and communities.  Be a champion of good citizenship, and support containment and home-working where it is possible. 

Financial Services institutions all over the world are making significant changes to working arrangements – in some cases speaking with regulators to ensure that these meet compliance expectations – and this is helping them continue to deliver services to their customers.
 

2)      Customers
Customers still have needs, and this includes regular reassurance from their Financial Services providers on continuity of service delivery.  They also need to know how their providers are dealing with issues directly related to COVID-19 – health and travel insurance, investment portfolio performance, online payment facilities.  For companies, effective digital delivery of services is essential while organisations deal with staff shortages, office closures and other public health protection measures (e.g. businesses refusing to handle cash). 
 

3)      Liquidity
Financial Services companies need to thoroughly understand their available capital and liquidity resources and to assess the resilience of these.  Central banks are under pressure to deliver stimulus packages in order to offset a larger, systemic liquidity crunch. This will bring down borrowing costs, but there is a risk that some companies will hoard cash and open credit lines to keep their businesses going through the crisis.
 

4)      Supplier relationships and third party dependency
FS companies (and their customers) have substantial third party networks – vendors (including in-person agent networks), outsourcing partners, technology provider, etc.  They need to regularly assess and monitor these third parties on information security, business continuity and other risk domains.  The COVID-19 crisis forces companies to review these suppliers, assess which are most likely to be impacted, which are critical to ongoing business operations, and where they need to urgently mitigate risks posed by these relationships.
 

5)      Communications and transparency
As the business and the economic impacts of the crisis begin to bite, FS companies will need to ensure that they are communicating effectively with multiple stakeholders: employees, customers, shareholders and regulators.  The crisis is a breeding ground for disinformation and rumour, so FS companies need to ensure that they are clear about the steps they are taking to manage the impact of the pandemic.  Regulators expect FS companies to focus on and ensure continuity of their core operations, including support for their customers. And FS companies need to regularly assess their digital communication capabilities, and how to leverage such capabilities to communicate with customers and the broader marketplace.
 

6)      Scenario planning
Financial Services companies are in the business of imagining the future – understanding the significant immediate challenges to society and economies posed by this pandemic, and how this will impact the interconnected financial system.  They are using their scenario modelling and contingency planning expertise to help themselves and their customers to make good decisions in the face of a highly volatile operating environment.  They will also need to incorporate new indicators, prioritized by the COVID-19 outbreak, into their decision making activities.

At a time of crisis, it is important that we share our insights and experience as much as possible, helping each other to contain and mitigate the impact of COVID-19 on the financial system and the broader economy.  KPMG professionals are speaking every day with Financial Services business leaders, and will continue to share our insights into how the industry is responding to the crisis. 

 

- Adaptive, fact-based and humane

Leadership in the face of COVID-19.

Effective crisis management plans, as any experienced Asset Management (AM) leader can tell you, place an emphasis on timely, decisive, well-informed action. While some threats envisaged in these plans are more-easily anticipated, assessed and mitigated, the current COVID-19 health crisis is uniquely challenging in terms of its speed, scope and impact.

That said, amid the turmoil, I believe strongly that by demonstrating a composed, agile and humane approach – and faithfully following proven best practices for crisis management – AM leaders can feel confident in their ability to limit disruption, safeguard employees and continue managing client assets in the troubled days ahead.

Keep in mind that some clients – and perhaps many of your employees – will not have experienced the Global Financial Crisis and its huge impact on markets and portfolios. The AM industry weathered that storm and emerged stronger and more resilient. Bringing that experience to bear on this situation could indeed prove helpful in maintaining a confident and optimistic outlook in your communications over the coming days and weeks.

 

Communicate, communicate, communicate

Communication is step one on the journey to successfully managing today’s crisis. That may sound trite but amid the current tumult in the markets, it has never been more true. The COVID-19 story dominates the news in every country and across every channel. Clients and staff need, however, to hear what leadership is doing to manage the impact on their portfolios and their working lives, respectively.

From my current vantage point in Hong Kong, for example, I have been monitoring the impact of the global pandemic very closely and maintaining regular contact with my clients – responding to queries and concerns and assuring them that I remain easily accessible at any time. Our communications to staff on the issue have been, and will continue to be, on an ‘at-least-weekly’ basis. There’s no such thing as ‘over-communicating’ in this environment.

 

Clients, staff and regulators need to hear from you regularly

Many clients will no doubt have urgent questions about their investments. As clients turn to their relationship managers and client service teams for guidance, their ability to project an air of calm, as well as being well informed about market conditions and clients’ portfolios, will be critical to retaining those assets and protecting value. It’s crucial to provide reassurance that the organization has experienced and effectively managed volatility before and is taking the right steps to stay on course amid the current headwinds.

Staff will also have urgent questions about working arrangements and many will have fears about the potential for job losses. Authentic, timely and fact-based communication will be the sine qua non to retain their trust and loyalty. Be accessible to employees. Avoid speculation amid the likely rumours, predictions and social media hysteria. The COVID-19 outbreak is an unusual crisis posing an array of critical uncertainties – don’t pour fuel on the bonfire of speculation. Be honest and simply stick with the facts as you know them today – you will be remembered for how you effectively managed the firm in the face of COVID-19.

Given the recent market gyrations, regulators may also have questions and concerns. Encourage an open dialogue with your regulators; inform them of instances where you are seeing stresses and use that as a platform to explore where they may be able to ameliorate – now or in the future – the impact on client assets.

 

Surround yourself with your best leaders

Every member of your crisis management team must be able to provide guidance and information that will help to maintain business stability and client confidence. Any weak links in the leadership chain will be ruthlessly exposed through this crisis.

 

Resiliency plans will need to evolve...

My sense from the AM leaders I talk to is that they are working as a C-suite team on a daily basis, for example, to ensure that their resiliency plan is functioning as it should, including consideration of risks posed by outages or disruptions affecting critical service providers such as fund accountants and custodians, or impacting offshore locations such as India and Hungary.

AM resiliency plans are also maintaining a sharp focus on the well-being and needs of staff, especially portfolio managers (PMs). PMs are like the ‘first team’ squad at a soccer club – without them, the business fails. I realize this view may be somewhat controversial and may fly in the face of many firms’ espoused corporate values of treating every employee equally. It does, however, reflect the reality of running an AM firm.

As the crisis spreads across the globe and more employees begin working remotely, you will need to rapidly assess your ability to support ‘mass working from home,’ e.g. scaling up VPN capacity and modifying data security policies. If you are allowing traders to work from home, for example, what new controls should you be implementing?

 

…so will 2020 budgets

This crisis is a moving target and markets are highly volatile, but leaders need to consider the implications that current – or even lower – market levels will have on their 2020 revenues. Budgets for the remainder of 2020 need to be reviewed. My advice in this regard is simple: Don’t hesitate to eliminate all discretionary spending until further notice.

 

Be a force for good

It is at times like these when we as leaders come to realize just how fortunate we are in terms of the talent that we have at our disposal and the resources we have available to ‘do good’. I would urge all AM leaders to use this time to reach out into their communities – wherever you are in the world – and find a way to help those less fortunate than ourselves.

 

To close . . .

The COVID-19 crisis is a truly dreadful situation. AM leaders who not only adapt their plans quickly but also communicate in calm, authoritative, sympathetic tones will steer their firms through the crisis and emerge with a renewed vigour and passion for managing their clients’ assets.

 

Source: https://home.kpmg/bh/en/home/insights/2020/03/the-business-implications-of-coronavirus0.html

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