Brodies advises business resilience in turbulent times

Companies must work on their resilience in order to weather the inevitable storm facing the global economy as it recovers from the coronavirus crisis, writes Rosemary Gallagher

Businesses must take protective measures to ensure that the adverse effects of future turmoil are adequately covered.
Businesses must take protective measures to ensure that the adverse effects of future turmoil are adequately covered.

The resilience of people, companies and countries has been tested by the Covid-19 pandemic, and the long-term impact on society is unclear. But resilience is required for many different challenges, so it is important that lessons are learned.

Grant Campbell, partner and head of Brodies’ commercial practice, says: “One of the things we need to remember is that events which require resilience go beyond Covid-19.

“Covid is the event everyone is talking about, but we also need to consider such things as climate change, natural disasters, earthquakes, flooding, cyber-attack, political instability, and trade disputes.

Campbell: Every business needs to understand its vulnerability to turbulent times, what its exposure is and its potential losses

“But this is the most turbulent time for business in the 25 years I’ve been a lawyer. I would say Covid is unique in that it affects customer demand as well as supply. A lot of other occurrences are supply chain events.”

Campbell points out that unsettling events happen more often than people generally think, but they do not always appear on the radar of those in Scotland. Natural disasters that occur far from the UK do not tend to feature much in British consciousness, but they can have a big impact on supply chains.

“An earthquake or flood in a country on the other side of the globe may affect a particular supply chain,” he says. “If that geography is a concentrated area for the supply of a particular thing, such as computer chips, there can be a whole range of businesses trying to find supplies because there is a shortage.”

At the moment, Covid-19 is the big thing testing business resilience and there is no one-size-fits-all answer as to how the corporate world should react. Campbell says: “Every business needs to understand its vulnerability to turbulent times, what its exposure is and potentially what its losses would be.

“When you’re creating measures to become resilient, there is a cost-benefit analysis to be carried out. How much a business is prepared to spend on resilience depends how exposed it feels, what its attitude to risk is and how catastrophic it could be if an event happens.”

With Covid bringing the importance of resilience to the fore, Campbell explains there are key things for businesses to think about. An area of focus for him is contracts and supply chains.

He says: “When dealing with business resilience, one of the most fundamental considerations is counter-party risk – the risk that the other party to the contract either defaults or goes out of business.

“You need to think about the complexity of your supply chain. Over the years many organisations have refined and streamlined their supply chains to make them more efficient. But by making them efficient, some chains have become more complex and elongated. That then increases risk when events like Covid-19 happen.”

Campbell warns another risk that a complex supply chain carries is a lack of transparency – meaning that a business may not know who is at the far end of its supply chain until that company fails or defaults and, if it turns out to be critical provider, the problems caused can be immense.

Issues can also arise if a supply chain is concentrated geographically and that area is hit by a natural disaster, such as a flood.

“You have to look at the whole supply chain in the round and understand the interdependencies,” he advises.

Moving on from supply chains, Campbell identifies cyber security as another risk, partly due to a transformation in how and where people work.Campbell says: “More people are working from home or from alternative premises. Fraudsters have used the disruption caused by Covid-19 to increase phishing attacks to confuse people into doing something they wouldn’t normally do.

“And if remote working continues, you may actually have a workforce geographically spread and no longer even in the same country. You need to think about cyber security in that situation.”

Turning to contracts, Campbell says that Brodies has been advising clients on such things as force majeure clauses during Covid-19. Such clauses deal with whether parties to the contract can be excused for non-performance because of an event outside their control.

Other areas being considered are termination rights, and contractual obligations to comply with law given all the changes Covid-19 has ushered in.

He adds: “One of the things we are saying to clients is that they need to look at their contract terms again to work out if there are things that should be built in that will provide more protection in future.”

When it comes to resilience, cash management is key, according to Campbell: “The businesses that are in a position to weather the storm tend to be the ones that have cash behind them to enable them to work their way through it.”

To mitigate against events that test businesses, there are various steps that can be taken, many focused on the supply chain.

Campbell says: “One mitigation may be to carry stocks or parts in store so you have them when you need them. Also, by increasing transparency in the supply chain and knowing who is in your supply chain, businesses can also carry out proper due diligence.

“Decide whether your supply chain should be single or multi-source, so if one company is affected you can easily switch to another.

“Organisations may also look at, for example, switching from bespoke components going into their products to more standardised components.”

According to Campbell, data is another important differentiator. He says that organisations on top of their data – in terms of how their business operates – can use that information to be agile and gain an advantage.

“In a Covid world, for example, organisations with the ability to quickly make their retail store inventory available online were in a better position than those who had stock in stores which they couldn’t access at the height of the pandemic,” he says.

Another area for business to examine is insurance. He says: “Companies should ask whether their insurance would respond to a pandemic or to the particular risk they are most worried about.”

Looking ahead, Campbell believes some of the changes enforced on businesses during Covid may permanently alter the way people operate. He gives the example of the acceptance of electronic signatures to agree contracts.

“In the past, people didn’t quite understand how electronic signatures worked and preferred the idea of a wet ink signature. Through necessity we have seen more deals being done electronically.

“We have shown that can work and that will increase. The days of a big boardroom stacked with papers that people had to walk along in a row to sign won’t be happening as often.”

Once the world has weathered the storm of Covid, businesses should not lose their focus on building strength to cope with the unexpected.

Campbell says: “Covid-19 has happened, and amid the terrible human tragedy of the pandemic, businesses are learning to adapt – but events that require resilience go well beyond the pandemic.”

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