On March 16, 2022, The Fed enacted the first of what would be eight interest rate increases. The goal of those interest rate increases was to curb a significant wave of inflation. As spring continues, it seems those actions are beginning to work. The Consumer Price Index (CPI) rose 0.1% in March and 5% from a year ago, below estimates. Energy costs fell and food prices were flat. Finally, the shelter costs increase of 0.6% was the smallest gain since November.

Unfortunately, over the past few months we’ve also seen some shakiness within the banking sector. Silicon Valley Bank was abruptly taken over by regulators on March 10, 2023, and later that weekend the FDIC seized Signature Bank and let go of it’s CEO.

While initial panic faded, there are still some concerns. Later in March a consortium of big banks provided a cash infusion to First Republic Bank to shore up its liquidity. The fallout from this banking situation combined with the interest rate increases the likelihood of at least a mild recession starting later this year. We’ve already seen many of the big technology firms – approximately 131,000 works in US-based tech companies have been laid off so far in 2023.

Besides layoffs many companies will take actions to prepare for and respond to a recession. Those actions typically include:

  • Cuts in capital spending – improvement projects and investments.
  • Decreasing discretionary spending on things such as travel and training.
  • Delay or stop significant implementation projects.

Essentially, companies try to focus exclusively on those things that drive value, revenue, and profit. Some might say they operate in “crisis mode” until the economy turns. You would think that company leaders would turn to resilience leaders who pride themselves on being aware and prepared for risks. They are used to creating contingency plans for situations that could arise in the future and it sure seems like a recession will arise in the future. So, what should resilience leaders be doing to best prepare themselves for the potential for a recession?

It is most important that resilience professionals think about the risks that arise because of the likely recession. What severe, but plausible scenarios should now be considered:

  • Loss of critical staff and skills sets decreases ability to respond to events.
  • Delaying projects and implementations increases the impact of technical debt.
  • Employees are disengaged and disgruntled.
  • Third parties have service degradation that impacts your operations.

It is a resilience leaders’ responsibility to raise these issues to an executive level. In Deloitte’s 2022 Global Resilience Survey of 695 executives, only 32% of companies stated they currently consider finance, strategy, and communications competencies as part of their resilience program. Resilience leaders can lose sight of the broad expectations that stakeholders place on them. It is your responsibility to provide insights and advice and counsel to executives and board members.

Most resilience programs have been increasing dramatically over the economic boom of the past 5-10 years. If you haven’t solidified the value of your program or gotten the focus of senior executives, it’s absolutely time to do that now. We often work with organizations on how to drive greater efficiency in the program, which could include:

  • Utilizing machine learning activities to automate impact analysis or plan development activities.
  • Decreasing monthly fees for resilience technologies by extending contracts.
  • Outsourcing aspects of resilience to cloud or service providers to enable reallocation of skills.
  • Utilize collaborative, real-time exercises to develop playbooks, workaround procedures or plans.

Most importantly now is not the time to hide out at home or in your cubicle. Until recently organizations could rely on institutions and conditions to remain stable over traditional investment and planning horizons. That no longer holds true. In an environment of potentially existential threats, leaders need to develop organizational resilience and corresponding capabilities. Deloitte considers five capitals of organizational resilience:

People ­– building a supportive and transparent environment for communication.

Reputational – being responsive to external perceptions and maintaining trust with stakeholders.

Operational – use resources to adapt, withstand, absorb and recovery from disruptions.

Financial – strategies that withstand events that impact liquidity, income, or assets.

Environment – make strategic choices that sustain the environment and the company.

A deficiency in any single one of the five capitals can put the organization in jeopardy and even bring it down. These last two capitals are particularly important topics right now. The volatility of the banking system could continue in the short term. So, any resilience professionals in the financial services industry should be aware of the burgeoning focus on operational resilience. The Fed’s “SR 20-24 Interagency Paper on Sound Practices to Strengthen Operational Resilience” states, “a firm also should identify and address the resilience of other operations, services, and functions for which a disruption could have significant adverse impact on the firm.” It is incumbent on you to be a key advisor and influencer in this process.

Finally, many organizations are considering the SEC’s proposed amendments to reporting on environmental, social, and governance (ESG) factors. Natural disasters and environmental events have had significant impacts on companies. Resilience professionals cannot forget that these potential reporting requirements aren’t going away. Those climate changes and events will likely continue through any recession that the world and US economy. Reduced resources and investment will put companies at greater risk in the future.

Recessions are not the time for resilience leaders to hide. It is the time for them to be change agents in the organization and to highlight potential risks with which the company is reasonably exposed.

ABOUT THE AUTHOR

Damian Walch

Damian Walch is the managing director, risk and financial advisory services at Deloitte Advisory.

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