Scaled response makes for smart crisis management

Sabah Al Binali looks at Zawya, a media business, and its response to the global financial collapse of 2008 that wiped out many of its customers.

In a world of uncertainty, management is constantly evaluating potential risks as they unfold and deciding how to respond.

At one end of the response spectrum is what might be called the Anglo-Saxon Fast & Furious model: ignore all risks until they become an existential threat of such dire proportions that there is only one available response and it is blatantly clear to all involved.

At the other end of the spectrum is what might be called the Asian Ancient Wisdom model: treat everything as an existential threat at all times and avoid taking any proactive decisions whatsoever, lest it lead to greater danger.

The Anglo-Saxon method works on the principle of go as fast as possible, make as much money as possible and pay for the mistakes later. A great example is the investment banks that made tens of billions of dollars in profits, but are only paying billions in costs and fines.

This model is prevalent in guilt-based cultures that easily forgive once the guilt is expunged. It seems to work because human memory often forgets bad behaviour, and profits come first in these cultures, aka capitalism.

The Asian model works on the principle of avoid mistakes at all costs, take as long as you need to get it perfect, build the global business over generations or even centuries: Toyota, Samsung, Singapore Airlines. Growth of businesses following this model can often lag. This model is prevalent in shame-based cultures where the shame of a mistake is carried for life. It seems to work because human nature in such cultures abhors mistakes, and blemish-free performance comes first.

The difference between these two crisis-response strategies can be reduced to the binary classification of false positives and false negatives. In this case, a false positive is a management decision that there exists a crisis when one does not exist. A false negative is a management decision that a crisis does not exist when one does exist.

The problem with false positives is that resources are inefficiently deployed to manage a crisis that does not exist, negatively affecting expenses. Furthermore, the slowdown in business delays product and service development and deployment, negatively affecting revenues.

On the other hand the likelihood of a real crisis being missed and severely affecting the business is reduced greatly.

Similarly, false negatives lead to a crisis developing further than it should, requiring greater resources to be deployed for the now clearly identified crisis. The impact of cleaning up a crisis as opposed to catching it early on is great. However, being less stringent during the early phase of crisis identification can provide not only savings but allow for good momentum in the business.

Clearly, the Anglo-Saxon strategy prefers false negatives to false positives, and vice versa for the Asian model. As with all things one is not necessarily better than the other. Their common flaw, however, is that they are static.

Adaptive strategies are the solution, and in particular an exponentially increasing crisis-response strategy. A good example is Zawya, a media business, and its response to the global financial collapse of 2008 that wiped out many of its customers.

The full extent of the crisis was not clear at that time, and there was a fear that if Zawya overreacted (Asian) that it would lose market share and that if it under-reacted (Anglo-Saxon) that it would severely harm the business.

The solution was to agree a series of triggers comprised of sales, cash and expenses. The trick was that the response to each new trigger had to be far greater than the previous trigger, hence the exponential part.

If the first trigger was pulled then new projects were suspended. The second trigger meant that senior management salary payments were slashed by 50 per cent. The third is other employees were slashed by 50 per cent (the employees unanimously voted to take across-the-board pay delays rather than terminate positions). It goes on, with each subsequent crisis response having a larger impact on cash.

Fortunately, Zawya did not need to trigger its crisis-response strategy. Unfortunately many companies had inadequate crisis-response strategies, responding with equal magnitude for each subsequent crisis trigger. A bank that suffers large losses needs a thorough review. By the time it needs a bail out, the board and management need to be fired. Think JP Morgan.

Sabah Al Binali is an active investor and entrepreneurial leader. He was the chairman of Zawya from 2001 to 2012. You can read more of his thoughts at al-binali.com