Crisis man­age­ment: here’s how to manage a crisis

Un­re­li­able con­tract­ors or an in­ter­na­tion­al trade war: no company is protected from un­ex­pec­ted crises. Un­fore­see­able events threaten the existence of otherwise healthy busi­nesses. Where business de­vel­op­ment falters, a strategic business plan can put a company back on track to success. More serious threats include col­lapsing profits and the pos­sib­il­ity of in­solv­ency. Start-ups are par­tic­u­larly prone to the effects of even smaller emer­gen­cies than well-es­tab­lished SMBs.

In­solv­ency is not in­ev­it­able. Using the right measures, company owners and founders can get their act together. Together with a savvy crisis team, the right strategies, and good com­mu­nic­a­tion, a company can overcome a difficult situation. Where pre­cau­tion­ary crisis man­age­ment strategies are in place, busi­nesses can recover even quicker because they’re able to detect symptoms of a crisis rapidly and are able to act according to plan. If you know the different phases of a business emergency and which measures are proven to work, you’re able to avert damage to staff and your brand’s repu­ta­tion.

All busi­nesses face difficult times, from contract or delivery can­cel­la­tions, to many staff off sick or broken servers. Some problems are caused by internal dis­par­it­ies such as a lack of in­nov­a­tion or bad man­age­ment of finances, while others are due to external cir­cum­stances, for example, a stock market crash, natural cata­strophes, or polit­ic­ally motivated delivery shortages.

What con­sti­tutes a crisis? An in­dus­tri­al or business crisis is an event that disrupts the operation of a company long-term. Problems may escalate and can only be solved through radical changes. Depending on the state and type of crisis, the situation may even threaten the existence of a business. Where a company refuses to ad­equately manage a crisis, bank­ruptcy is likely to follow in the short or long run. To avert an ex­ist­en­tial crisis, managers and employees must adhere to chal­len­ging measures. Crises are not as quickly rectified as a normal problem.

A business crisis often follows a certain course of pro­gres­sion. The main phases of an emergency con­sti­tute a (sometimes in­dis­cern­ible) beginning, a turning point, and the end. The end may be marked by a return to business as usual or in­solv­ency. If an employer goes bankrupt, a crisis man­age­ment strategy will come in too late. However, all emer­gen­cies are marked by symptoms. What is important is identi­fy­ing these symptoms early on.

A business crisis usually goes through several stages. Owners who are aware of these phases can detect symptoms and the causes of a difficult time and pull the brake early on. It’s important to un­der­stand that each phase requires a different crisis man­age­ment strategy.

The initial phase of a business emergency is often hard to pinpoint because it usually will not be evident from turnover figures or pro­ductiv­ity targets. Fin­an­cially, a company may appear to be on stable ground. Companies that manage to notice early warning signals, however, have a much broader play­ground to stop an ex­acer­bat­ing crisis. During this time, it becomes evident that long-term business goals are no longer possible. Often, this may be due to a lack of awareness of de­vel­op­ing market trends. In­nov­at­ive ideas may be used up and unique selling points might no longer work.

In some cases, products and services may no longer meet changing consumer be­ha­viours and a business may miss out on tech­no­lo­gic­al in­nov­a­tion. The catalysts can include:

• Lack of promising and market-driven strategic focus
• Outdated pro­duc­tion processes, services, or employee qual­i­fic­a­tions
• Lack of ac­cept­ance and in­vest­ment in new dis­tri­bu­tion channels
• Lack of reaction to external factors such as expiring patents, new legal bills, mis­matched headquar­ters
• Customers are flocking to com­pet­it­ors and orders are di­min­ish­ing
• Market share declines

During these stages, a crisis becomes more no­tice­able. Financial con­trol­lers are usually among the first to realise that the numbers no longer add up, goals aren’t being met, profits drop, and costs threaten to overwhelm available budgets. The weak­nesses of a business’s products and services may be laid bare during these times. Their market position may be no­tice­ably poor, and com­pet­it­ors are becoming a growing threat. At the same time, you may lose regular customers.

At this stage, employees will feel the effects too. This is often ac­com­pan­ied by lower mo­tiv­a­tion and a worsening work climate. Typically, certain symptoms may disappear mo­ment­ar­ily, and it may appear as if the situation is improving.

A crisis is rarely temporary. The later you intervene, the more difficult it will be to get a grip on the situation. Soon, debt will continue to grow. What’s more, to get your act together, small changes usually won’t suffice. The following signals demand proper crisis man­age­ment:

• Net losses and de­creas­ing profits, declining reserve funds, in­creas­ing costs, rising debt capital
• Loss of regular customers and fewer new contracts/sales
• Employees and pro­duc­tion runs aren’t at capacity
• De­mo­tiv­ated staff, growing number of employees quitting, and worsening work climate
• Service and product quality, and vendor li­ab­il­it­ies diminish
• Bank and business partners point out payment declines, de­creas­ing credit wor­thi­ness
• However, liquidity is still secured

Symptoms of a business crisis are difficult to ignore in­tern­ally or ex­tern­ally. Many companies make the mistake of ad­dress­ing problems with man­age­ment and staff once its already too late and the situation has pro­gressed to an advanced level. During this phase, it becomes much harder to change the company’s direction.

Crisis man­age­ment that focuses on the full re­align­ment of a company strategy could help to save a business from in­solv­ency. During the final phase, a company is still liquid, but its reserves are used up. People in charge will be looking for investors and creditors. As a last resort, busi­nesses should prepare for in­solv­ency. Signs of a looming liquidity crisis include:

• Rapid profit losses (over 25%)
• Payment ob­lig­a­tions are no longer being met, accounts are overdrawn
• Crisis is having an external effect
• Banks refuse credit or make obtaining credit harder
• Suppliers demand advance payments
• Business partners bail out
• In­tro­duc­tion of work-sharing or not being able to pay wages
• Re­stric­ted scope of action across all areas
• Liquidity shortages and looming in­solv­ency

Crisis man­age­ment takes on many facets and a company’s approach will differ depending on the stage it finds itself in. Some tasks begin during times of business-as-usual. This is mostly to identify weak­nesses, warning signals, and design tried-and-tested emergency pro­ced­ures. The tasks of the crisis man­age­ment team is to detect critical phases in time and initiate ap­pro­pri­ate measures. Where an emergency is already in progress, crisis man­age­ment defines the necessary measures to take and to co­ordin­ate.

As soon as an emergency is overcome, an eval­u­ation takes place. Crisis managers will then analyse the actions taken to extract useful in­form­a­tion for future scenarios. For a company to fully stabilise or re­hab­il­it­ate, these ana­lyt­ic­al insights are useful to avert future issues.

Crisis managers are tasked with creating all the con­di­tions for a business to deal with emer­gen­cies more ef­fect­ively. In this way, a crisis plan is developed, and a company creates a per­son­al­ised structure, for example, in the form of a taskforce. A dedicated crisis team usually consists of select employees with spe­cial­ist skills within crisis man­age­ment. Often, a team of managing staff and external experts is entrusted with these tasks.

Business owners and ex­ec­ut­ives are well advised to keep the team to a small number of insiders selected for their specific skills. After all, it’s the duty of this emergency task force to bring order to the chaos and make some difficult decisions during tough times. Crisis man­age­ment is marked by the following chal­lenges:

• Planning and eval­u­ation of measures to overcome crises require thorough insights into the structure of the business alongside broad market knowledge
• Despite limited resources, sus­tain­able measures require con­sequent and efficient im­ple­ment­a­tion
• Important decisions will need to be made under time pressures despite missing in­form­a­tion and a general level of un­cer­tainty
• Often, it can be assumed that decisions will interfere with existing struc­tures and may not be welcomed by employees, customers, or business partners.

Before we discuss concrete measures and il­lus­trate possible solutions for every single phase of a crisis, we have collected some general tips below that dis­tin­guish a good crisis response from a bad one.

Crisis pre­ven­tion requires time and staff resources. Nev­er­the­less, it’s a good in­vest­ment. Emer­gen­cies rarely happen entirely un­ex­pec­tedly. An early warning system sounds the alarm as soon as difficult times arise. Measures to prevent a crisis help to overcome a prob­lem­at­ic situation without heavy losses or a threat to the existence of a company. When an emergency occurs, founders and managers are well-prepared and can act im­me­di­ately.

Naturally, the resources of start-ups will reach their limits more rapidly than those of es­tab­lished SMBs. Reserve funds designed to bridge long-term financial squeezes are rarely available to start-ups because they haven’t es­tab­lished them­selves in the market just yet. This makes pre­par­a­tion more important for small busi­nesses. At the very least, business owners can supervise emergency measures and maintain an oversight of finances. Instead of an early warning system, strengths and weak­nesses of a business strategy and market position can then be tested using a SWOT analysis.

Don’t wait for a crisis to end. Even if this results in difficult decisions and setbacks, it’s never a good idea to wait. At the same time, it’s no good sounding the alarm too early and rush to action. A quick response is vital where profits are dropping. However, a CEO should first examine the reasons for an emergency and not im­me­di­ately alienate employees. Taking actions cau­tiously is just as important to success and should not be made by a single person. A company that has prepared a crisis man­age­ment plan and assigned employees ex­per­i­enced in dealing with emer­gen­cies will be better prepared.

The success of a crisis team also depends on the personnel involved. To remain ac­tion­able, the team should be kept small. It’s best to assign decision makers early and dis­trib­ute com­pet­en­cies evenly across team members. Among the social com­pet­en­cies of a taskforce are as­sert­ive­ness, flex­ib­il­ity, tolerance of un­cer­tain­ties, working ef­fi­ciently under time pressure, de­cis­ive­ness, and objective judgement.

Those in charge should emphasise thought-out crisis com­mu­nic­a­tion. After all, any decisions made will result in staff having to adapt to new working processes and this requires tact. On the one hand, staff must be informed of changes in a trans­par­ent manner, while on the other hand, they should remain motivated and not feel dis­cour­aged.

To avoid damage to a company’s repu­ta­tion, keep in­form­a­tion con­fid­en­tial. Com­mu­nic­a­tion is an integral component of crisis man­age­ment. This should be prepared as part of a crisis com­mu­nic­a­tion plan during times of stability and address the following points:

• Quick updates: Even before rumours have a chance to spread, employees should learn more about problems and any measures being taken to address them.
• Matter of fact: Crisis managers should steer clear of blaming single de­part­ments or the general economy. If the reasons for a critical situation aren’t certain, managers are better off reserving their comments.
• Un­am­bigu­ous: Problems should be clearly stated. Avoid flowery phrases. Otherwise, you risk insecure and de­mo­tiv­ated employees and partners.
• Dis­tin­guish fact from spec­u­la­tion: During difficult times, decisions must be made without any promise of success. New de­vel­op­ments could change plans. To prepare employees for the future, it is worth providing an outlook and appealing to the staff’s flex­ib­il­ity. To avoid re­sent­ment and confusion, it is important to dis­tin­guish between fact and spec­u­la­tion.
• Keep it simple: For a better un­der­stand­ing and pro­tec­tion of business secrets, it’s a good idea to keep com­mu­nic­a­tions brief and simple.

Start-ups and early-stage SMBs are often in­ex­per­i­enced in dealing with crises and lack the necessary know-how. There are lots of points in favour of internal crisis man­age­ment, but there are also some against it.

An important advantage of external crisis managers is that they have a fresh point of view and a more objective image of the situation. Ad­di­tion­ally, external parties aren’t involved in internal conflicts of interest. After all, it’s not about the survival of a single de­part­ment. However, they won’t be used to the company structure and often need to be briefed before beginning their work. You can appoint crisis managers who look after your business long-term and are involved in planning crisis pre­ven­tion schemes during healthy times. Make sure that the person you choose is an expert in your field and has good ref­er­ences.

At the same time, busi­nesses must be aware that experts often look for experts at the same time. So, if a third-party is hired to help with crisis man­age­ment, be aware that they’ll gain access to con­fid­en­tial in­form­a­tion. Sometimes it’s possible to con­trac­tu­ally forbid experts to work with com­pet­it­ors. One challenge for SMEs is the high fee charged by external experts. In that case, it’s worth checking the al­tern­at­ives.

In case of legal action, ap­point­ing lawyers and mediators is un­avoid­able.

Crises go through multiple phases and each phase requires a different approach.

Even “healthy” companies should work out a concept that helps them to detect critical phases early on. It’s a good idea to have an es­tab­lished crisis man­age­ment plan at the ready. Initially, this should focus on in­vest­ig­at­ing risks and un­cov­er­ing solutions. In terms of business liquidity, it’s important to assess various possible dangers and det­ri­ments. This makes it easier to create mean­ing­ful reserves. A func­tion­al early warning system also defines company-specific in­dic­at­ors.

A crisis plan usually manages the structure and sequence of a company’s crisis man­age­ment. It provides guidelines in case of emergency, prevents chaos, and enables rapid action. The plan de­term­ines or­gan­isa­tion­al structure and lists the most important points.

The goal is to always be able to call upon a crisis team when necessary. This ensures that no single person makes the decisions, but experts col­lect­ively agree on how to proceed. The plan appoints employees and their re­spons­ib­il­it­ies and creates the legal found­a­tion for an emergency procedure.

A taskforce should look something like this:

• A core team of 1 to 3 people with expanded decision-making power
• A team leader who has the final say
• An extended special working group to in­cor­por­ate man­age­ment and other de­part­ments
• Where ap­plic­able, an external advisor

Start-ups without enough manpower are doing well if they’re able to detect signs of a looming crisis. Even dis­cus­sions between employees could offer insight. A trans­par­ent company culture avoids hiding problems.

Aside from personnel set-up, sus­tain­able crisis pre­ven­tion should provide re­com­mend­a­tions for op­er­a­tion­al pro­ced­ures:

• Who is the right contact person when a situation escalates?
• Who should be informed first? Who is au­thor­ised to initiate measures?
• Who evaluates and controls the success of these measures?

All these questions should be answered by the internal co­ordin­a­tion and schedul­ing de­part­ment. Im­port­antly, there should be a chain for com­mu­nic­a­tion so that important co-workers can be brought up to speed swiftly. At least one member of staff should monitor which actions are suc­cess­ful.

It happened: your delivery chain has collapsed, trade is in the red, stormy weather or a burglary has left your office in a state. To ensure cautious action, crisis man­age­ment should begin by in­vest­ig­at­ing the reasons for what happened and in­tro­du­cing the necessary measures.

Where a crisis plan is on hand, the relevant personnel should be notified. Otherwise, it’s a good idea to quickly assemble a skilled team. Some problems can be addressed im­me­di­ately before a company descends deeper into problems. For example, if an office can no longer be used, employees could work from home.

To address more complex issues, whose reasons and impacts are not ne­ces­sar­ily im­me­di­ately evident, crisis man­age­ment should take stock of the situation and evaluate it. If you have a picture of the situation, you know the phase your company is currently in and which actions may be more suitable. For example, if tra­di­tion­al sales are no longer gen­er­at­ing the desired profits, an inventory of your least prof­it­able products could be a solution. Sometimes you’ll find that your stock is not your problem, but your sales channel is.

In a second step, people re­spons­ible should examine the situation more clearly. To create a case study, you could evaluate customer and employee opinions and consult marketing personnel. If they confirm your initial as­sump­tions, it’s likely the business is ex­per­i­en­cing a crisis of strategy. Now, the taskforce can select and roll out cor­res­pond­ing actions.

One solution may be to sell products via an online shop or al­tern­at­ive platforms. Before you implement any changes, however, check your tech­no­lo­gic­al and personnel ca­pa­cit­ies. Perhaps you already have a website through which you could sell products? Or maybe some of your employees have know-how of online marketing? Only once you’ve verified these points, you can introduce digital dis­tri­bu­tion channels.

A crisis of your strategy requires that you correct your business model. Before ad­di­tion­al customers are jumping ship and profits break away, a company must adapt to the market situation. Would new markets and dis­tri­bu­tion channels be more lucrative? Is your range of products outdated? Does your current pro­duc­tion line no longer deliver a high quality?

In the first instance, company owners must evaluate the signs of a problem to determine the un­der­ly­ing reasons and launch an effective crisis man­age­ment plan. The following points should be addressed:

• Crit­ic­ally assess previous areas of business
• Determine areas that may hinder de­vel­op­ment (e.g. outdated product lines)
• Assess core com­pet­en­cies and focus on these
• Examine and readjust working tools and personnel resources
• Define new strategic goals
• User synergy effects with other business partners and markets
• Uncover new key markets – if ap­plic­able in­ter­na­tion­ally – and dis­tri­bu­tion channels
• Ac­cel­er­ate com­pet­i­tion and market watch ap­proaches
• Demon­strate in­nov­a­tion and com­pet­ency through the launch of new products

To conclude the example above, where high street sales alone aren’t enough, an online shop could be a promising channel of dis­tri­bu­tion.

During the advanced phases, strategic changes alone won’t be enough. Fur­ther­more, finances will have decreased by then, making a sub­stan­tial in­vest­ment in new areas of business not feasible. To keep the business going, business leaders should focus on min­im­ising costs whilst boosting ef­fi­ciency and profits. This will often require sig­ni­fic­ant changes to the business and may require the following ap­proaches:

• Ad­apt­a­tion of sales price, de­vel­op­ment of cheaper sources of supply, product op­tim­isa­tion, or improved marketing
• Mon­it­or­ing of expenses and avoidable ex­pendit­ures
• Reduction of expenses (e.g. cheaper dis­trib­ut­or, dis­solv­ing storage unit, sep­ar­a­tion from late-paying customers)
• Exploring hindrances for efficient working with employees (e.g. lengthy decision-making processes)
• Outsource fewer lucrative areas of business
• More offensive marketing across proven areas of business
• Evaluate price war and radical com­pet­i­tion over quality
• Adjust products to meet demand
• Implement cost-saving pro­duc­tion processes

During this phase, crisis managers should focus solely on averting in­solv­ency to save the company. This can only be achieved if a crisis manager com­mu­nic­ates openly with the finance de­part­ment, bank, local tax office, business partners, and other parties expecting payments. Naturally, this will result in damage to a company’s repu­ta­tion, may lower its credit wor­thi­ness in the long run, and risk investor trust in a company. However, at this stage, the damage is done, and it becomes about survival.

• A cash check provides an overview of current ex­pendit­ures, income, and reserves
• Which re­pay­ments are the most important ones? Create a list of pri­or­it­ies
• Is enough equity available?
• Consider selling shares
• Collect out­stand­ing sums from other dis­trib­ut­ors or customers
• Gain trust from bank advisors or business partners and consider deferred payments
• Contact tax office to minimise advance payments
• Grow credit volume

During this phase, it’s a good idea to consult external advisors. Some com­munit­ies and chambers of commerce offer free con­sulta­tion hours with in­solv­ency advisors.

Where a business has overcome a crisis, it will quickly return to business as usual. Many employees may still feel the effects, es­pe­cially if there were layoffs or other struc­tur­al changes to the company. Dis­trib­ut­ors and business partners will likely have taken notice of the situation. In case of a self-inflicted liquidity crisis, it will require some effort to regain their trust.

Things are different where an economic crisis was caused by cir­cum­stances beyond a company’s control. Either way, crisis man­age­ment should form part of a company’s internal and external com­mu­nic­a­tion strategy. To further the internal know-how and find new talent, strategies must be re-evaluated.

In some cases, res­tor­a­tion measures will be ongoing to ensure a company remains stable. Im­port­antly, business owners should consider whether these measures affect the whole company or certain de­part­ments.

Evaluate where you could save by dis­solv­ing areas of the business. Good recovery planning ensures that a company continues to be com­pet­it­ive long-term. Re­flec­tions on lowering fixed costs and boosting ef­fi­ciency will keep a crisis man­age­ment team busy long after its survival of a liquidity crisis.

Mistakes can be learned from. This is an important aspect during crisis man­age­ment follow-ups. It’s an in­vest­ment in the future when members of team members can look back and evaluate measures and actions that were taken. Any insights gained during this stage should form part of crisis planning to prepare for the next potential threat to the business.

Please note the legal dis­claim­er relating to this article.