Stress Testing - Keep Stressing Out to Stop
The start of the new year is invariably a time for reflection on lessons learned. The past several years have offered some doozies for companies seeking to comprehend a challenging and shifting landscape. Leaders are finding ways to improve and ensure their companies can cope with whatever might come their way. The following article appeared in some time back Open Forum - Why You Should Stress Test... and the wisdom it provided bears repeating. As the last few years bore witness, events beyond a company's control (and beyond its borders for that matter) have an impact. To help mitigate disastrous consequences, companies should understand what impact potential events might have on them. An easy and direct way to see the impact is to perform a stress test.
The goal of a financial stress test, for example, is to determine how your business will react under simulated strains while under the protection of a controlled environment. The effort offers rich data as to the true health of the business and reveals underlying problems before they become acute crises. A stress test also helps leadership determine where resources should be allocated to prevent future problems from occurring.
Peter Drucker once stated, “The most serious mistakes are not being made as a result of wrong answers. The truly dangerous thing is asking the wrong questions." An effective stress test measures your company’s ability to respond to plausibly acute situations. The “acute” part is important because the scenarios being stress tested could significantly impact your company, often without warning. The article also emphasizes the fact that the plausible part of the requirement is equally important, as these efforts cost time and money. Ask what keeps your team up at night.
The article offered a few good examples based on recent events:
- Brexit or any of the other geo-physical challenges at play.
- A flare-up in the Middle East or SE Asia.
- Lack of qualified engineers due to H-1 visa constraints.
- Lack of certainty in the direction the President intends to take the country.
- After failing to reach a consensus on a new collective bargaining agreement, your factory workers go on strike.
- A raw material used in the development of your product is found to contain hazardous materials and its use is banned by Federal regulators as a result.
- An unexpected earthquake in California destroys your main source of raw materials with no expectation of the company returning to operations soon.
- A routine audit discovers that several managers and employees colluded to defraud your company of $30 million while also falsifying financial statements that were subsequently used by investors to evaluate an investment in your company.
- After a new technology launches, your company is forced to compete with a solution which offers customers the same results for one fifth the cost of your solution.
Some good pointers include:
Record everything for internal training purposes. Similar to a case study, stress tests provide great learning opportunities for future managers at your company. Make the copies available as part of a formal management training process and as a resource on your company’s intranet.
Use a cross-functional team. You want to have a broad of a perspective as possible, and to make the results realistic, and inclusive.
Remove the org chart from the team so everyone feels free to participate, and not holding back. If its not a complete effort, the results are no better than if it had not been done in the first place.
Consider making this effort an annual exercise and add new people to the mix. New people = new ideas.
May the results of these exercises and the subsequent responses your company has allow you to sleep better in the new year!