Posted by : Sajith Sreedharan on May 20th, 2020 in Strategic Advise And Management Support
Business Continuity Strategies in a post-COVID World
In a little over 4 months, COVID 19, the disease caused by the novel Coronavirus has become a serious international public health concern. To minimise its effects on the health and mortality of their citizens, many countries have declared national lockdowns, a difficult choice that has led to a virtual standstill of economic, business, and social activity. As of 18th May 2020, India had been in lockdown for almost over 56 days. Since the beginning of the lockdown declaration, the Narendra Modi-led Government has periodically reviewed the situation to determine if and when lockdown conditions can be relaxed to allow businesses to commence their operations. However, following expert analyses on the economic impact of COVID19 by organisations such as the World Bank (WB), International Monetary Fund (IMF) and Asian Development Bank (ADB), it is evident that the current slowdown will remain the ‘new normal’ for several more months or even a year, adversely affecting the growth prospects of countries all over the world. In this article, we discuss checkpoints to restart or recommence business operations in case of a pandemic. We focus on three specific areas: Human Resource Management, Operations Management and Contracts Management.
Let’s start with Human Resource Management. During a crisis when profits tend to take a massive hit, the knee-jerk reaction for most corporates and SMEs looking to cut costs and salvage their bottom line is to shrink their workforce. In other words – mass layoffs. However, this is not advisable. In fact, companies should avoid mass termination of employees’ agreements even if it appears to be the most viable option that may reduce their costs. This is because such short-term actions can result to higher recruitment, training, and retention costs in future. Several other proactive approaches can be adopted by firms instead. One such approach is to stop increments or incentives, irrespective of whether it is based on performance or inflation index. Other possible approaches could be to adopt a needs-based travel policy to keep expensive hotel costs down, to keep on hold or postpone new vertical and/or horizontal recruitment, to keep on hold overseas training programmes or sponsored higher studies for employees, etc. These measures can lead to substantial cost savings. However, in chasing these savings, companies must not sacrifice critical employee benefits. Management may also propose pay cuts across the board based on level and/or role. If HR can contribute at least 1.5% reduction on the overall cost for the company, the latter can increase its chances of coming through any crisis with all their employees intact and with minimal need for painful retrenchment.
The second part we address is Operations Management. Operations are the heart and soul of any company in any industry. Without operations, there can be no product or service, no customers and definitely no profits. In any company, it is critical for management and leadership to periodically review operational processes and benchmarks aka SOPs (Standard Operating Procedures) in order to find ways to potentially cut costs. Firms must also trim wastages, curtail unnecessary costs, determine options for economically optimum production, instil financial discipline with strict adherence to production and delivery milestones at all levels, avoid prolonged maintenance periods, and be vigilant about breakdown times and wherever excessive, carry out root cause analysis to address the underlying problems reduce breakdown. Furthermore, they must follow approved daily, weekly, and other schedules to achieve economically beneficial production levels and analyse the production and/or supply chain to determine opportunities for cost reduction. Firms that take these steps can expect at least 1% to 2% of cost reduction that can have an amplified effect on its eventual profits.
Finally, we address the third part of our article – Contracts Management. Businesses need to revisit their contract agreements in light of the prevailing circumstances brought about by the COVID 19 crisis. All applicable clauses in every agreement, whether based on standard or bespoke contract formats, require techno-commercial and legal interpretation. If a Force Majeure clause is included in the contract, it must be updated to reflect the realities of the lockdown and lockdown period (56 days as of 18th May 2020 which is likely to be extended , depending on the central Government’s decision). Firms must also verify if the timelines mentioned and agreed in the original contract are likely to be sufficient or if they need to be qualified under the Force Majeure clause. They should also check the clause with regards to impossibility or frustration conditions for qualification. Most contracts qualify the above only after completion of 54 days or 84 days or 140 days from the date of invoking such remedy. Revisit your supply chain clause to establish the days required for the supply side to return to normalcy post lockdown.
The Contractor or Employer should revisit the contract and its clauses in detail for techno-commercial and legal interpretation to check commencement and delay clauses, performance and schedule of works clause, variation clauses associated with determination and extension of time with or without cost clause, and dispute resolution clause. The contractor may incur additional banking financial liability due to accumulated or delayed payment of interest with saturated depreciation and maintenance cost due to the COVID19 crisis. His operational costs may also increase, which may lead to a termination of the contract (either by the employer or the contractor himself). Therefore, it is in the best interests of both parties to renegotiate costs and time extensions for completion of performance with suitable, appropriate, and applicable amendments duly signed and stamped.
It is a good idea to follow a thorough Dispute Resolution process by appointing a Dispute Board during pendency of contract. This can help businesses avoid complicated and costly disputes later. If a dispute does arise, it will help them address it without time-consuming or costly delays. In such a case, a good option is to resort to mediation. If a dispute arises, it is better to invoke emergency arbitration and/or a fast track arbitration process to address the disputes quickly and minimal financial impact instead of opting for a long-winded and often expensive judicial course of action.
Prof. Dr. George Yesu Vedha Victor,
International Arbitrator & Emergency Arbitrator Risk, Conflict and Contracts Management