Long Read: So, we failed – but let’s learn from it

Written by Matt Scott & Ian Goldin Tuesday 25 August 2020
Just-in-time left many organisations just-about-finished in the wake of Covid-19. In future, we need to make sure we see resilience, spare capacity and the ability to withstand shocks not as liabilities but as assets
Cracked screen with lights behind it

The coronavirus pandemic has shone a spotlight on the underbelly of globalisation. It has thrown into stark relief the good, the bad and the ugly of a highly interconnected business world with supply chains that span the globe.

What Covid-19 has made abundantly clear is that globalisation has some major failings with multiple dimensions.

The biggest failure, of course, is the failure of the global community to be able to stop a global pandemic, but what that really is is a wider failure to understand systemic risk and a failure to empower the World Health Organization by giving it the resources, the reforms, the technology and the people it needs to stop pandemics.

We are going to need that to stop the next pandemic – which could be even worse – just as we need stronger global institutions to stop climate change and future financial crises.

On the upside

Of course, globalisation does have remarkable levels of resilience engrained in its systems. When we go to the supermarket, there is an extraordinary variety of foods still available, and apart from some initial challenges that largely arose from panic buying, supply chains have been remarkably robust given the lockdown restrictions and the problems facing the shipping and air freight sectors.

Likewise, it is the demonstration of organisations’ digital resilience that has perhaps been the most remarkable strength to come to the fore during this crisis. Our collective digital strength has never been tested at this level before, and not only did the technology work, but it has shined.

What’s more, the majority of businesses have been able to reorganise their operations quickly so that workers could continue to work remotely, allowing them to service clients, win new business and continue their day-to-day functions. Some banks are even managing to conduct trading from their people’s homes, which is truly remarkable given the complexities and security issues associated with such functions.

Then there’s the rapid response of the government in having created the furlough scheme, as well as other business support schemes. That’s not just in the UK, but across Europe and beyond.

So, for me, this is a glass-half-full situation.

Too much is tied up

However, the pandemic has also highlighted the issue of short-termism in a lot of measurement systems used by companies and other organisations to report on their performance.

It has shown up the short-termism of politicians too. They have always known that a pandemic is a big threat, but they’ve repeatedly kicked the issue down the road. They simply hoped it wouldn’t occur on their watch and so they’ve become complacent – just as they got complacent around financial integration in the run-up to the 2008 financial crisis.

In the business world, this short-termism is reflected in the prevalence of just-in-time management and lean management thinking, as well as the outsourcing of all functions that aren’t regarded as “core”.

This has been exacerbated by increasing pressure from analysts and financial markets for quarterly reporting, as well as accounting standards that push firms to reduce the amount of working capital that’s tied up in the business – citing the old adage that working capital tied up in a business is working capital wasted.

All this doesn't only apply to private profit-making firms; it also increasingly applies to the public sector. Hospital trusts are under pressure not to have spare oxygen or spare masks or spare personal protective equipment, because that’s all capital tied up in things that might not be needed. Similarly, firms running just-in-time supply chains don’t have spare parts or spare people or spare resources.

Running such lean operations means that a wrinkle anywhere in the supply chain can amplify and become a major knot somewhere else in the system. The effects can be dramatic.

Time to rethink value

To combat this lack of resilience in overly lean and globalised supply chains, organisations need to change the way they operate – and the way they think.

There is already an awareness of this issue, but there is also a need to see resilience, spare capacity and the ability to withstand shocks not as liabilities – as they are currently – but as assets. This will require a fundamental rethinking of accounting practices, and for businesses to ask themselves some pretty profound questions. How much spare capacity is the right amount? A week? A month?

That depends where the next likely shock is going to come from. We’ve had a pandemic, so what’s next? Is it a tsunami in Japan, another Hurricane Sandy in New York, or a volcano erupting in Iceland? What is the threat we’re safeguarding against?

We know that these risks are multiplying, but exactly where they will come from and how much we need to prepare is a big question, because if we constantly prepare for everything and stock everything we might need, then that would be extremely expensive. Organisations simply don't have the resources to do that.

Instead, organisations need to think carefully about what it is they’re building resilience against – and it’s very important we don’t develop a nationalistic response when doing that.

As we have seen in the context of supply chains and their resilience in the wake of the COVID-19 pandemic, it doesn't make sense for any one country, even one with a pretty big manufacturing base like the UK’s, to try and do everything. After all, the whole principle of competitive advantage is that you specialise where possible, preferably in what adds the most value to your economy. That means not doing everything.

This isn’t only true of manufacturing, where just-in-time management and lean thinking are most common; it is also true in finance, where holding less capital on the balance sheet ultimately increases your profitability because of the expense associated with maintaining a large capital base.

Building this kind of resilience into a globally connected business ecosystem is a much wider issue than many think, and will require lots of joined-up thinking.

Firstly, it is going to require shareholders in listed companies to value companies differently, taking into account the ability of a business to withstand shocks to the economy or its business model.

Progress has already been made here, in the shape of the increasing popularity of environmental, social and governance (ESG) investing. We could soon see shareholders preferring to invest in firms that are able to respond to shocks and are therefore more likely to deliver long-term sustainable growth.

This will require educating shareholders about the long-term benefits of resilience. Regulators will also require better ways of reporting organisations’ levels of resilience. Ultimately, these changes will require trailblazing businesses to lead the way.

But these trailblazers may be hard to find. Many firms, having withstood the pandemic shock, will point out that their problem now isn’t one of supply, but of demand. Until the economy recovers and demand picks up, many firms won’t be focusing on building up supplies and introducing more costs. As such, the economy may be left facing the same systemic risks it faces today.

This was originally published in CMI Magazine – one of their exclusive member benefits. Why not check out what else CMI membership offers?

For more fantastic content relating to change management and dealing with the challenges of the crisis, visit our Covid-19 hub.

Ian Goldin is professor of globalisation and development at the University of Oxford and the director of the Oxford Martin Programme on Technological and Economic Change. He is the author of The Butterfly Defect: How globalization creates systemic risks, and what to do about it (Princeton University Press, 2014).

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