The Case for Reopening Economies by Sector

The Case for Reopening Economies by Sector

by Jean-Philippe Bonardi , Arturo Bris , Marius Brülhart , Jean-Pierre Danthine , Eric Jondeau , Dominic Rohner and Mathias Thoenig - May 19, 2020

The greatest challenge we face in the current crisis is striking the right balance between preventing not only the damage inflicted by Covid-19 but also that which comes from a severe contraction of economic activity.

This is a matter of both life and death, and prosperity or poverty, as a deep recession is likely to cause widespread hardship, including increased mortality rates for reasons other than the virus. We must, therefore, find smart strategies for reopening businesses while minimizing health risks.

As economists, we have explored a variety of options: a long lockdown, relaxation with rules, stop-and-go lockdowns, and phased-in lockdowns by age, geographic region within countries, and by country in sectoral waves. Our analyses suggest that, assuming that minimum epidemiological standards are met (declining new cases for one week or two weeks, adequate intensive care unit capacity and testing and tracing protocols), the latter approach - sequential opening of sectors starting with those least likely to generate a substantial resurgence of the virus - is the most promising.

Here’s why:

The Long Lockdown

While it is difficult to be precise about the economic cost of continued lockdowns, we know the effects are already massive. In Switzerland, for example, the loss of value added is between CHF 0.7 and 1.4 billion per day. In Spain, the cost is slightly above €3 billion per day. In the United States, it is a staggering $14 billion per day. There may well be other less visible but potentially significant non-monetary costs, including depression and other mental health problems, domestic violence, the saturation of hospitals impacting the treatment of other diseases, etc.

Ideally, societies would find an epidemiologically risk-free approach for reopening, for example by waiting for a vaccine to be discovered. However, this would take as much as 12 to 24 months. We cannot remain in full lockdown that long.

Another risk-free option in medical terms would be to make the release of the lockdown conditional on a serological immunity test. But the WHO recently warned that the presence of antibodies (IgG) does not necessarily offer comprehensive and lasting protection. And, again, we have no visibility into when such testing will be widely available. Moreover, it is likely that immunity in the population is still too low: blood tests conducted in Santa Clara County, California, estimate that only between 2.5% and 4.2% are infected. In Geneva, one of the hardest hit parts of Switzerland, the estimated prevalence is 5.5%. Herd immunity is very far from being achieved.

Relaxation with Rules

Could we lift the lockdown on a large scale by imposing only strict rules on the wearing of masks, social distancing, and other sanitary rules applied in every business? This is what many corporate leaders clamor for, but it faces limitations: Will there be enough masks? Will people follow the guidelines, for example, by installing privacy preserving contact tracing applications on their smartphones?

More importantly, relying on individual responsibility here creates obvious conflicts between personal and collective interests. Will a retailer who doesn’t have the space for of social distancing be prepared keep her shop closed when her direct competitor with a larger floor is allowed to open? And, importantly, it will be difficult to control the human density outside their stores, offices and production sites, particularly in city centers and on mass transit systems.

Stop and Go

A fast and large-scale lifting of the lockdown would likely lead to other lockdowns in the near future. There are several important drawbacks to this stop-and-go approach.

First, governments and health organizations are still not able to closely monitor the spread of the virus or lock down at great speed. Data lags and political decisions take time. This creates the risk of generating new Covid-19 explosions, which eventually will make a stop-and-go option even more costly - medically and economically.

Second, a stop-and-go period would greatly increase uncertainty, curbing business investment and economic growth beyond the effects of the pandemic. This will be not only about the dates when the economy starts or locks down again, but also about how workers, suppliers, consumers, and the markets will react.

Last, there are fixed costs involved in restarting businesses, including payroll adjustments and commercial effort reactivation, which will have to be incurred irrespective of whether the “go” period is short or long.

Phased-in Re-opening by Age Group

A tempting option for a selective lifting of the lockdown would be to proceed by age group; for example, by first releasing those under 45. Our computations, based on Swiss data, suggest that, compared with a release of the entire population, the risk of overcrowding intensive care facilities with this approach would be reduced by 80% for the obvious reason that younger people are less susceptible to complications from infection. However, not all are; many have already fallen victim to Covid-19.

And such an approach would raise other issues. Besides the fact that it is inherently discriminatory, it ignores the ubiquitous complementarity between workers of different generations. Indeed, with a sequential release by age group, firms with younger workforces would find themselves at an advantage over their competitors, but they would also face major management and monitoring difficulties.

Phased-in Re-opening by Region Within Countries

Another option would be to design the lockdown release by geographical area. Countries such as France and Spain seem to envisage taking this route, with the degree of openness and freedom to commerce depending on the severity of the pandemic in a specific region. The United States also seems to be adopting such a strategy, letting states decide when they reopen.

The efficacy of such an approach will depend on the coincidence between the epidemiological and the economic realities. First, regional differentiation makes sense only to the extent that there is a clear difference in the prevalence of infections. Second, unless in the case of clearly distinct market units - an island or distant state like Alaska, for example - an approach by region ignores the difficulty to restructure intra-state/region supply chains and connected product markets. It distorts competition. It is not compatible with labor mobility. And it relies to a great extent on personal responsibility, since enforcement would require a control of regional borders.

Phased-in Re-opening by Country in Sectoral Waves

We believe the best option is a gradual release by sector - in several waves, within countries - with the objective of avoiding a congestion of hospitals and especially intensive care units. Our analysis suggests that this is actually possible. The sectors to be released from lockdown as a matter of priority could be chosen based on the following analysis:

• Inability to conduct core business from home. Industries such as accommodation and food services, construction, healthcare, transportation, and warehousing could be the targets of a first wave of lockdown release because they are less suitable for virtual work. Some organizations in these sectors have already been deemed essential and continued operations through the pandemic.
• Importance to the national economy. In some countries, manufacturing accounts for a larger percentage of GDP than accommodation and food services (e.g., China or Ireland). In others it is the opposite (e.g., Australia or Norway).
• Value added per worker. All else equal, it makes sense to release fewer (less risk of contagion) but more productive (smaller economic loss) people.
• Business viability. One must also take into account the viability of certain sectors. For example, retailers are facing severe hardships and the business model makes it harder for state support to compensate.

A caveat: Within each sector, certain functions are either dispensable in the short term or easier to perform remotely. Companies reopening would therefore determine which jobs could remain virtual or begin later. Think of support staff, coordination, and reporting jobs, certain maintenance and service tasks, and management and non-operational departments within large firms.

As an example, we apply our model to the case of Switzerland. We start by constructing an indicator of “value loss in the lockdown,” which combines the ease of switching to remote work with the relative weight of a sector in the economy. For some sectors (construction, retail) we acknowledge that, irrespective of their contribution, they are mostly represented by small businesses whose return to economic activity is vital.

Confronting this measure with an evaluation of the risk of contamination - that is, the density of the workplace and the resulting ability of workers to operate while observing requirements of social distancing and hygiene - we conclude that, for Switzerland, employees in the health (those not already directly involved with treating Covid-19 patients), construction, and manufacturing sectors could be released in a first wave (1.8 million people, out of an active population of 5.5 million). The second wave would concern workers in retail and wholesale trade (0.6 million). Third, and in the absence of a surge of the epidemic (a process that will have to be followed with all the available means), the 1.2 million in finance, administration, hotels, restaurants, and transportation could be released.

Some logistical complementarities would still have to be considered during this transitional period; for example, the reopening of day-care centers and primary schools, and a cautious return to work of certain catering and transport functions. Our analysis suggests that this proposed plan would progressively put businesses back into full action at a pace that would have to be adapted to national circumstances and with reduced risks of overwhelming hospitals.

We have done a similar analysis for Spain, which would suggest that, in the first wave, manufacturing, construction, and health services are released. In a second stage, retail and real estate would be allowed to operate. In a final wave, the rest of sectors (mainly tourism, financial services, and administrative and professional services) could reopen. The comprehensive analysis can be found here.

This strategy has the virtue of being adaptive - as data is gathered following each sector-wide reopening, adjustments can be made concerning the timing of subsequent phases, and protective measures adopted in previously released sectors can be copied and improved as more is learned about the epidemic. If adopted by national governments, plans for phased-in re-openings by sector would offer companies some much needed forward guidance and allow them to plan accordingly.

There is no perfect strategy, at least not with the information we have today. But we think this approach will allow us to get through this once-in-a-century pandemic with as little loss of life and life opportunities as possible.

Jean-Philippe Bonardi is a professor at and the Dean of HEC Lausanne. He is also a member of the executive committee of the Enterprise for Society Center (E4S), jointly created by the University of Lausanne, EPFL and IMD. He can be reached at jean-philippe.bonardi@unil.ch.

Arturo Bris is a professor of Finance at IMD and the director of the IMD World Competitiveness Center in Lausanne, Switzerland. He is the president of the Board of Trustees of the IMD Pension Fund, a member of the Strategic Board of Debiopharm Investment, a member of the Advisory Board of the Wealth Management Institute in Singapore, and a member of E4S. His email is arturo.bris@imd.org.

Marius Brülhart is professor of economics at HEC Lausanne (University of Lausanne, Switzerland). His main research areas are international trade, economic geography and public finance. He is a member of the Swiss government’s COVID-19 Science Task Force and E4S. He can be reached at marius.brulhart@unil.ch.

Jean-Pierre Danthine is professor at Ecole Polytechnique Fédérale de Lausanne, managing director of the Enterprise for Society Center (E4S), president of the Paris School of Economics and member of the Board of Trustees of the Center for Economic Policy Research (CEPR) in London. He was a member of the Governing Board of the Swiss National Bank from 2010 and its vice-chairman from 2012 until 2015. Before joining the SNB, he was a professor at the University of Lausanne and managing director of the Swiss Finance Institute. He can be reached at jean-pierre.danthine@epfl.ch.

Eric Jondeau is a professor of finance at HEC Lausanne. His main research interests are financial econometrics, sustainable finance, asset-liability management, and macro-finance models. He has started the Center for Risk Management – Lausanne and is a member of E4S. He can be reached at eric.jondeau@unil.ch.

Dominic Rohner is a professor and co-director of the economics department at HEC Lausanne. He is also associate editor at the Economic Journal, the PI of a European Research Council grant, and leader of the CEPR Research and Policy Network on “Policies for Peace”. He is a member of E4S and can be reached at dominic.rohner@unil.ch.

Mathias Thoenig is a professor of economics at HEC Lausanne and is a member of E4S. His main research areas are international economics and political economy. He can be reached at mathias.thoenig@unil.ch.

Why Economic Forecasting Is So Difficult in the Pandemic

Why Economic Forecasting Is So Difficult in the Pandemic

by Arne Pohlman and Oliver Reynolds - May 18, 2020

The coronavirus pandemic has introduced extreme uncertainty into nearly every aspect of society. Will health care systems hold up? Will scientists develop a vaccine? Are essential workers safe? When can regular employees go back to the office? The answers to these questions - when there are answers - seem to change daily. And with each change the stock market (and our hopes) rises or falls.

Since the Covid-19 pandemic began, we’ve seen pervasive uncertainty manifest in a sudden and massive divergence in macroeconomic projections. For example, in early February, the spread among economic growth forecasts for Q2 in the U.S. was 3.5 percentage points according to FocusEconomics data. By April 29, the most optimistic forecast among the 28 institutions in our weekly coronavirus survey saw the U.S. economy contracting 8.2%. The most pessimistic projected a huge 65.0% contraction - a spread of 56.8 percentage points - with an average of -31.4%. While most institutions expected a rebound in Q3, some saw further declines. And in Q4, although all economists projected growth of some form, forecasts ranged from a minimum of +1.1% and a maximum of +70.0%. The spreads observed in recent weeks are by far the widest recorded since we started covering the U.S. a decade ago.

Looking at countries with a longer time horizon, the current forecast spread among analysts is far larger than at any point during the past 20 years, and significantly above that seen during the height of the financial crisis - the last period of extreme, prolonged global uncertainty. For example, during the 2008 financial crisis, both Brazil and Mexico saw the spread for annual GDP forecasts widen to close to six percentage points, before returning to under three for most of the 2010s. The percentage point spread is now well over seven percentage points.

Why So Much Divergence?

The short answer to why there is so much divergence is because no one knows for sure what is going to happen. Digging deeper, three key factors are causing forecasters particular difficulties.

First, the economic impact and speed of policy changes have never been higher. In normal times, most governments can be relied on to at least attempt to encourage economic growth and preserve employment. Today, however, they are deliberately provoking recessions to save lives, and containment measures are crushing domestic activity. Simply miscalculating the end date of a nationwide lockdown by a couple of weeks throws annual GDP forecasts completely off-kilter. Moreover, bills which generally endure months of parliamentary ping-pong are being rushed through legislatures in days as governments and central banks race to respond to the rapid advance of the virus. Many governments have adopted emergency powers allowing them to rule by decree. What’s more, the fiscal and monetary stimulus being announced to palliate the downturn dwarfs that seen during the financial crisis. For economic forecasters, keeping up with the constant flurry of measures and correctly incorporating them into models poses challenges.

Second, the pandemic is undermining the reliability of economic data - the bedrock of any good macroeconomic model. In particular, survey-based data of businesses and households is suffering as lockdown measures reduce response rates, amplifying sampling error. The U.S. Bureau of Labor Statistics data for March, for instance, saw establishments’ and households’ response rates fall by nine and 10 percentage points respectively relative to their recent average.

Paul Donovan, chief economist at UBS Global Wealth Management, explained the problem this way: “If you are filling in survey forms in a lockdown, you are likely to be an unusual person, and possibly not representative. Sentiment affects answers to surveys. Data, like consumer price inflation, includes restaurant prices, but restaurants are closed. What happens when you survey something that is not there? Online spending is likely to have increased in lockdowns. Online spending may stay higher after the lockdowns end. It may not be properly captured in official data.”

The third reason the models are diverging so much is because economic forecasters are having to delve into the unfamiliar world of epidemiology to better understand the likely evolution of the coronavirus outbreak in each country. However, this is a challenge even for health experts. Predicting the scope and effectiveness of future public health interventions, or how health care systems will respond under pressure, is tough - particularly for countries at early stages of their epidemics. There is no firm timeline for the arrival of game-changing treatments or vaccines, or clarity over the likelihood or severity of a second wave of cases.

Handling Uncertainty

The divergence in economic forecasts should narrow somewhat going forward. Greater clarity will emerge on the effectiveness of recent stimulus, and any further fiscal or monetary measures will likely be more modest in scope. The gradual lifting of lockdowns will facilitate the collection of economic data. Our knowledge of the virus and its spread will improve. But a return to pre-virus levels of economic uncertainty will have to wait until a lasting solution to the pandemic - likely in the form of a vaccine - is found.

While the coronavirus pandemic poses a unique challenge to macroeconomic forecasters, the profession has faced similarly profound shocks in the past and emerged fortified. The global financial crisis of 2008 caught most economists napping. But the insights gained in areas such as the economics of financial contagion and the impact of unconventional monetary measures have improved the quality of today’s forecasting models. In the same way, Covid-19 will shine new light on areas such as behavioral economics - how consumer spending is affected by fear of contagion for instance - and the economic effects of radical fiscal policy. The knowledge gained could make the uncertainty of future economic crises, whenever and however they come, that bit less extreme.

Arne Pohlman is Chief Economist at FocusEconomics.

Oliver Reynolds is Economist at FocusEconomics

The Key to Building a Successful Remote Organization? Data.

The Key to Building a Successful Remote Organization? Data.

by Mike Walsh - May 18, 2020

The Covid-19 crisis forced many businesses to suddenly adapt to having an entirely remote workforce. And once we all got past the novel challenges of family interruptions, #funnycatvideos, and virtual etiquette, a more complex problem raised its head: How do you work together when you are, in fact, alone?

For a virtual organization to function, geographically dispersed teams need the ability to communicate effectively. But that’s only half the story. Decision-making has to be delegated and decentralized as well - and that means using data to shake up your culture.

Centralized offices have one big advantage: you can get everyone in a room until they solve a problem. But when you work virtually, you have to plan every part of the decision-making process, especially when it is asynchronous. Small things that we take for granted in physical meetings - such as body language, non-verbal agreement, and interpersonal connections - require a different kind of attention when you work remotely. That, however, may be an advantage.

Consider a company that was “born digital,” like workflow automation company Zapier, which was designed to operate with virtual teams from the outset. The coronavirus crisis didn’t force the company to manage a complex transformation in work style. For them, there is no such thing as “remote work” - only work.

I spoke with Wade Foster, CEO of Zapier, who is adamant that the discipline that comes with distributed decision-making can bring out the best in us. In his view, when it comes to managing people and outcomes, traditional organizations let leaders get away with too much: “In traditional organizations, leaders can manage by presence - you can see your folks, and you can see work getting done,” he says. “But when you can’t see your team, when you’re not sure what’s happening, or you literally don’t know if they’re at work or not - you have to redesign how you manage your workforce from the ground up. That forces you to be a better leader and a better manager.”

For many traditional organizations, sending teams home was a direct response to emergency “stay at home” orders - not an organizational design choice. When your entire head office decamps to “WFH,” the hardest part to manage is not the technology or connectivity, but the culture shock.

Didier Elzinga, CEO of Culture Amp, a software firm that helps organizations track employee engagement and performance, believes that the shift to remote work will have profound implications for the organizational culture of big companies, especially when it comes to giving distributed teams autonomy to make their own decisions.

Leaders struggle to delegate when they wrongly believe that only certain people in the hierarchy can make a particular decision - someone who has earned the right to do so on account of their experience or skill. “Actually,” he says, “it is because they have the context that somebody else doesn’t have. Fortunately, data is a pathway to context.”

When the pandemic hit, the first thing Culture Amp did was to address the impact that the crisis was having on the speed of their decision-making. “We’ve created a daily situation room,” he says, “where we track everything that’s changed overnight, internal to the business, but also in the external world.”

The situation room at Culture Amp is a daily meeting with about 20 leaders where they run through a deck of the latest information related to the crisis, which is then published on an open channel on Slack. Once they gave people the data they needed to contextualize their decisions, Elzinga and his team made an exciting discovery. Leaders were more comfortable distributing authority and allowing teams to make their own informed decisions, without wasting time chasing down information and approvals. “Autonomy means getting to make your own decisions, and being trusted to make your own decisions,” argues Elzinga. “But it also means trusting others to make decisions on your behalf, too.”

When it comes to building trust, a little bit of structure goes a long way. At Zapier, distributed teams use a framework called DACI, which stands for driver, approver, consulted, and informed. Anyone involved in a decision will play one of four roles: a person responsible for driving the work and collecting the relevant data; an approver who gives the go-ahead; consultants who can provide expert opinions; and finally the informed, who need to know about the outcome because it impacts the work that they do. Knowing decision roles upfront speeds up team interactions and avoids ambiguities that can cause delays or friction.

Transparency is critical at both of these organizations. Major decisions at Zapier are documented in a decision log called Async, which is an internal tool that they built. The purpose of Async is to surface important conversations that might get lost in fast-paced Slack forums. It replaces internal email and acts as a searchable archive for anyone on the team to reference old discussions and keep up with company updates. According to Foster, Slack is where the teams at Zapier talk about work, while Async is where they share work with the rest of the team.

In this respect, distributed organizations are typically ahead of more traditional ones - where documentation can be sparse or buried in private email chains. “In theory,” explains Foster, “this means we should get better at making decisions over time because everyone can benefit from the organizational decision-making muscle.”

A good decision will still be wrong if it takes too long. Mars, Incorporated, makers of treats and services for humans and pets alike, was already well advanced in their plans for digital transformation before the crisis hit. However, when I spoke to Sandeep Dadlani, the company’s Chief Digital Officer, he explained that the pandemic led Mars to embrace a new internal clock speed. Typically, big global consumer packaged goods (CPG) companies develop a rigid annual plan with their retailers that covers their products, promotions, and inventory. However, in this new world, with rapidly shifting consumer patterns and unpredictable events, rigidity no longer works. “In week one of the coronavirus crisis, getting your groceries was not a challenge,” says Dadlani. “But by week six, suddenly buying groceries online had become 15% of the American market, a number that Mars was tracking to reach five years from now.”

With speed now of the essence, or as they call it at Mars, “delivering value at 100x,” Dadlani realized that the organization needed to reduce some of the subjectivity in communications and decision-making, and encourage their newly remote teams to frame problems in a way that led to scaled-up solutions. Dadlani told me, “Our supply chains are built of wonderful leaders who have known each other for many years, who pat each other on the back, and who know how things run because they’re in the factories. They watch the trucks, pick up the phone, and get calls from the retailers. They nudge their other friends and workers to push another batch out or to get another production line changed.” But, as the crisis accelerated, Dadlani noticed a behavioral shift. Now that the logistics and technology teams have lost their in-location perspective of the supply chain and can only access raw data about inventory, supplies, materials, and packaging, their interactions have changed. Conversations between remote team members have become more focused and less subjective, productivity has improved, decisions have become more data-driven, and new, more probing questions are being asked: “Why is inventory at this level? Can the raw materials in these factories be moved elsewhere? Can we drive a higher throughput?” It was, in other words, what the digital transformation team had been trying to achieve for some time.

“Organizations like ours have to pivot to identify trends, pick the right business models, fail a few times, and then succeed,” he says. “At Mars, we call it the Digital Engine: find the problem, solve the problem, and then scale the solution as fast as we can.”

Notwithstanding the importance of agility and response time, as companies and teams become more digital, there is a corresponding need for leaders to be able to grasp the nuances and risks of data-driven thinking. At Culture Amp, Elzinga coaches his clients and employees on recognizing the limits of AI and other statistical models - especially when it comes to predicting human behavior, or making sensitive hiring and firing decisions. “The challenge for us as an industry and for HR in general,” he says, “is that we have to work not just on finding the answers, but also on data literacy.”

Data literacy is a hard-won skill.  It does not come easily, even to a generation fluent with apps, emojis, and hashtags. To get there, organizations need to invest in dedicated training and education. At Mars, Dadlani was shocked when an email intended for his technology team inviting them to a course on machine learning accidentally went out to thousands of employees at the firm, and - much to his surprise - many of those unintended recipients showed up, which changed his thinking about how ready everyone in the organization was to take on the challenges of new technology.

Foster has actively encouraged data literacy programs at Zapier, offering employees a five-part mini-course called The Golden Path to Data, which provides training on using data tools, creating queries, and interpreting results. As a further incentive to upgrade skills, requests to the data team are prioritized for people who have actually done the course.

Foster says, “You don’t need everyone to be an expert, but the real benefit starts to happen when every team has a data power user in it, which can help the team respond to new questions and challenges faster. And that increases the decision-making velocity that’s happening inside the organization.”

Data will never be a substitute for genuine social interactions or company culture, but as we build more global, distributed, and virtual organizations, what it offers is something just as important: a common language for transformation.

Mike Walsh is the author of The Algorithmic Leader: How to Be Smart When Machines Are Smarter Than You. Walsh is the CEO of Tomorrow, a global consultancy on designing companies for the 21st century.

Onboarding a New Leader - Remotely

Onboarding a New Leader - Remotely

by Mary Driscoll and Michael D. Watkins - May 18, 2020

Imagine that you have a new supply-chain leader starting next week. You hired her to do supply-chain transformation before the crisis took hold. But now she is joining remotely and inheriting a remote team, and her short-term, urgent priorities are very different from what they appeared to be before the pandemic. As her manager, how can you make her onboarding experience a productive one? What can you do to support her so that she’ll hit the ground running?

Earlier this month we polled leaders about their companies’ current onboarding practices. Of the 125 who responded, 75% said that their organizations were still onboarding leaders, albeit many (45%) at a lower rate than before the crisis. However, only 17% indicated that their organizations had developed systems for onboarding new leaders into remote-work environments. That’s a big gap, given that most onboarding is happening virtually now and that the stakes in quickly getting new talent up to speed have rarely been higher.

The good news is that it’s quite possible to onboard new leaders effectively into a remote-working environment. The biggest barrier is probably mindset. We are all being tested to adapt to new ways of working, and it’s no different with virtual onboarding. Here are some principles to guide you.

1. Be crystal clear about short-term objectives.

Like every leader in transition, your new hire needs to quickly figure out how to create value, and that’s even more important during a crisis. If you hired someone specifically to help with crisis management - for example, with workforce downsizing - their role and goals should be clear from the outset. But if you hired someone before the crisis, as in the case of the new supply-chain leader, they need to understand their role at a greatly accelerated pace. Continuing the example, you should clearly outline what aspects of the original supply-chain transformation role still are a priority and what has changed because of the need to deal with immediate disruptions - ideally before the new leader starts.

2. Provide a structured learning process.

To accelerate learning in a virtual context, you need to provide information in a more structured manner. Doing so requires paying much more attention to what you include in the upfront “document dump”: organizational charts, financial reports, strategy and project documentation, and the current crisis response plan. In a recent Savannah Group study of 200 senior interim executives, 95% said access to that information made them more effective in their first few weeks, especially if the organization asked them ahead of time what would be most valuable. Beyond that, you need to help your new hires get a broader and deeper view of the organization and their role in it. For the new supply-chain leader, you could schedule virtual briefings on critical issues related to the existing system and associated challenges along with ones on culture, planning, and decision-making processes.

3. Build a (more) robust stakeholder engagement plan.

Your next priority is to help your new hires identify, understand, and build relationships with key stakeholders. When onboarding is virtual, it’s essential to be even more detailed and structured here, too. Start by building a consensus internally about who the new leader’s key stakeholders are and, critically, the order in which the new leader should meet them; these things are often not apparent to new hires themselves. For the new supply-chain leader, there may be people one level down in finance and operations whose support will be crucial. Once you have identified the key stakeholders, reach out and align them on the objectives you have set for your new leader; that will maximize the value of their meetings.

4. Assign a virtual-onboarding buddy.

Quite a few companies built buddy systems into their pre-crisis onboarding processes (Microsoft is one example). And for new managers coming into remote-working organizations, a buddy is essential. Good buddies play four key roles: (1) They help orient new hires to the business and its context (2) They facilitate connections to people whose support is necessary or helpful (3) They assist with navigation of processes and systems, and (4) They accelerate acculturation by providing insight into “how things get done here.” Of course, you must take care to choose buddies who have the time, ability, and inclination to help, and you need to brief them on how they can be of most assistance. Typically, they should not be in the new leader’s chain of command; they should be peers or others with the “big picture” understanding necessary to be of real help. For the new supply-chain leader, a peer in operations could be a good choice.

5. Facilitate virtual team-building.

Helpful in face-to-face situations, a new-leader assimilation process is essential when onboarding happens remotely. This is a structured process for creating alignment and connection between a leader and their inherited team. A facilitator asks the leader and team members questions to uncover what they would most like to share with and learn about one another. The facilitator summarizes the resulting insights and uses them to guide a conversation between the leader and the team. The good news is that this process can be done effectively through video conferencing.

6. Consider hiring a coach.

Well before the crisis, research had established that transition-acceleration coaching halves the time required for new executives to become fully effective in their roles. Given that you, your team, and your new leader’s team are all dealing with the stresses of responding to the crisis, transition coaches can be especially impactful now. They are particularly helpful when they understand the organization, the company culture, and the stakeholder environment. Buddies and coaches play complementary roles in advising new leaders on the challenges they are facing and providing a safe space within which to discuss them.

As you apply these guidelines, keep in mind that effective virtual onboarding doesn’t just mean helping external hires. Employees making internal moves at a remote-working organization can face challenges that are as tough as - if not tougher than -  those confronted by new leaders coming from the outside. And in the midst of a crisis, it’s just as important to get them up to speed fast. So you should use the same approach to accelerate every new leader joining your team.

Mary Driscoll is a partner at Savannah Group, a global executive search and interim firm based in the U.K. She places senior interim transformation specialists to support periods of change and to improve Operations and HR performance.

Michael D. Watkins is a cofounder of Genesis Advisers, a professor at IMD Business School, and the author of The First 90 Days and Master Your Next Move (Harvard Business Review Press).

Good Leaders Can Overcome Institutional Inertia in a Crisis

Good Leaders Can Overcome Institutional Inertia in a Crisis

by Michael G. Jacobides - May 18, 2020

Although Covid-19 is clearly a catastrophe, it offers what every social scientist craves: a “natural experiment” that allows us to compare different responses to similar shocks. We have already learned much about what does and doesn’t work in tackling the virus itself. We can also glean profound lessons about the role of leaders.

Consider the experiences of Lombardy and Veneto, the regions where the virus first emerged in Italy. Both are prosperous and have solid infrastructures. The two are similar demographically and differ just slightly in population density, and the virus hit them at about the same time. But their Covid-19 outcomes were radically divergent. As of the end of April, Lombardy’s registered cases amounted to 6.75 per thousand residents, and 1.24 in every thousand residents had died. In Veneto, the figures were 3.59 and 0.27.

Why such a big difference? As so often in this crisis, it comes down to the speed and nature of the response. Veneto’s officials were quick to make the coronavirus a top priority, rolling out extensive testing and asking sick people to self-isolate unless they truly required hospitalization. In Lombardy, testing was lacking and patients were hospitalized indiscriminately, turning medical facilities into mega-contamination sites.

The actions of the two regional presidents defined the differing responses. Veneto’s Luca Zaia steered a steady course, communicating consistently with the public and adjusting policies as new information emerged. Lombardy’s Attilio Fontana took his cues straight out of the populist’s handbook. First he downplayed the risk. Then he blamed it on immigrants and the Chinese. Finally he executed a clumsy volte-face when the depth of the crisis was unmistakably clear.

The differences can’t be attributed to party politics. Both leaders belong to the conservative Lega Nord, or Northern League, and both are professional politicians. The differences sprang from ability, strategy, and leadership skills. The idea that leadership matters is nothing new, of course, and we have already drawn valuable  lessons on leading during the pandemic. Good leaders need to be direct and bold (yet not inhumane), especially in a crisis. They must be decisive and unite rather than divide. The critical lesson of the pandemic is just how big a difference good leadership can make.

The truth is that in normal, predictable times, leadership is not that critical; the quality of institutions and other structures is far more important. Leaders are more symbolic than practical; they are figureheads who can inspire, but they don’t actually do all that much. Whatever virtues leaders have, whatever appetites, skills, and communication talents they bring to the table, they may be unable to overcome deep-seated organizational inertia, transformational though they may try to be. But in a crisis, even the strongest organizational habits, structures, and resources may be inadequate to meet challenges that are formidable and sometimes completely new. In those circumstances, strong leadership is crucial. Rough seas demand a skilled captain.

In countries large and small, Covid-19 has been showing us who the true leaders are. At present, everyone’s favorite is New Zealand’s Jacinda Ardern, whose approach seems to have paid off handsomely. But an even better example may be the Greek Prime Minister Kyriakos Mitsotakis.

Unlike New Zealand, Greece is plagued by structural problems: Its population is aging, its institutions are weak, its civil service is ineffective, and its National Health System is badly under-resourced. What’s more, the country was only just beginning to climb out of the longest and deepest recession in its history when the pandemic struck. Yet it has mounted one of the most effective responses in the world: as of this writing, just 148 Covid-19 deaths in a country of nearly 11 million. Mitsotakis has kept the population wary but not panicked, cajoling the notoriously independent-minded Greeks into a surprisingly high level of compliance with social distancing, shop closures, and other measures to contain the virus. Even more impressive, he has overseen a well-run state operation that has earned the public’s trust, and he has leveraged the crisis to digitize and rationalize a cavernous bureaucracy in record time. Granting that severe difficulties surely lie ahead for a country so heavily dependent on tourism, his was a remarkable feat.

As we start to emerge from the crisis, there will be less scope to initiate reforms, the urgency and momentum of which will no longer be enough to overcome inertia. Leaders will again take second place to the civic infrastructures over which they preside. That fact points to a clue about which ones will have truly managed the pandemic well. It will be those who not only got their countries through it but also seized the opportunity to reform the state, giving their nations a stronger infrastructure after Covid-19 than they had before it. Countries - and companies - must hope that their leaders are not just helping them survive the pandemic but are using the crisis to make a lasting difference.

Michael G. Jacobides holds the Sir Donald Gordon Chair for Entrepreneurship and Innovation at the London Business School.

We Work Harder When We Know Someone’s Watching

We Work Harder When We Know Someone’s Watching

by Janina Steinmetz and Ayelet Fishbach - May 18, 2020

In the current pandemic, finding motivation for those working in self-isolation presents unique challenges. Many people struggle more than ever to efficiently get their work done in their home offices and to focus on video conferences and email exchanges. But it’s easy to overlook another key source of motivation, which is conspicuously absent for many workers in the current circumstances: the presence of other people.

Social psychologists have known for decades that people are motivated to work harder when others are watching. When they are observed, people run faster, are more creative, and think harder about problems. These effects occur for several reasons. For one, people want to impress others through their performance, and thus try harder. Anyone who has ever stayed in the office late when their boss was still around experienced this phenomenon.

However, the presence of others has a further and more fundamental effect on people. Not only does it affect what people do, it also impacts how they think about their actions. When others are watching, people feel that what they do is magnified, which can then fuel their motivation. This effect occurs because when others are watching, people include others’ perspective into their own perspective. The dual perspective then magnifies their work, because investing time, energy, and effort into something that feels big and meaningful is much more motivating than investing in something that feels small. The magnification of one’s work increases one’s motivation to work more and harder.

For example, we found in our research that the more spectators watched a badminton player during a tournament, the more the players felt that their efforts had helped their team. In another study, when others were watching, people felt that they had worked harder on math problems than when they were alone. More generally, the more people watch what we do, the larger and more meaningful our actions feel.

These research findings might explain why it is so difficult to summon the motivation to get work done in social isolation. Our accomplishments, whether it is inbox zero or a project finished on time, feel less meaningful without the presence of others. Because the good feeling of having accomplished something is less intense when we are alone, our motivation to work hard crumbles in self-isolation.

At first glance, it might seem that our research suggests that we need others to be physically present to find motivation. This would suggest a bleak outlook for the next few months of some form of social distancing. However, our research also shows that people magnify what they do not only when they are observed, but even when they merely feel observed. In one study, even symbols of watching eyes to signal that their screen was recorded led people to think they worked harder. A camera recording people was similarly as effective as an actual human observer. These results point to an avenue for how we can use the motivating presence of others even in self-isolation. We can invite other people’s observing eyes to look at our work and find strategies to bring the motivating presence of other people into our lives without violating social distancing rules.

Here are some examples for how this might work in practice:

• Leave video meetings with your colleagues running during the day to watch each other do your individual work - almost like having a real colleague in the cubicle next to you.
• Exchange emails for even brief video calls to make sure others can see and hear what you are doing.
• Set up an online group with colleagues to exchange your progress on your projects and to keep each other accountable.
• Use productivity apps that let you post your efforts.
• Take pictures of your work and share them with colleagues, supervisors, or even your friends.
• Send updates to colleagues and supervisors on your projects.
• Make a growth list with colleagues of skills that you want to learn or improve on, and share your progress.
• At the end of each day, write a “done” list and share it with colleagues, friends or family members. Don’t forget to include seemingly trivial tasks such as cleaning up your folders, writing a dreaded email, or checking in with someone you met at a conference.

While virtually everyone’s daily life is more difficult during the pandemic, our motivation to get our work done does not have to suffer. Thanks to technology that connects us, we can experience the motivational boost of the presence of others even in self-isolation.

Janina Steinmetz is a senior lecturer in marketing at Cass Business School in London  

Ayelet Fishbach is the Jeffrey Breakenridge Keller Professor of Behavioral Science and Marketing at the University of Chicago’s Booth School of Business.

The Case for M&A in a Downturn

The Case for M&A in a Downturn

by Brian Salsberg - May 17, 2020

Most companies are still in the early days of assessing the impact from the Covid-19 crisis on their business. But as they begin planning for the future, there may be opportunities to make one or more long-sought acquisitions.

Businesses are, or should be, examining their existing lists of potential acquisition targets and should be prepared to act, as deal premiums are likely to come down and assets that companies had been reluctant to sell may become available.

But the window for maximizing value could be relatively short, if history is any indication.

Learning From the Global Financial Crisis

Evidence from the global financial crisis (GFC) from late 2007 through early 2009 shows that companies that made significant acquisitions during an economic downturn outperform those that did not.

There are some caveats: The GFC was, as its name indicates, a financial crisis, and was somewhat limited to the financial services and real estate sectors. Governments needed to bail out banks as many companies were overextended. Consumers were crunched as the value of their homes dropped dramatically and some found their mortgages underwater.

Today, we have almost the entire services sector of the economy immobilized and unemployment at a much higher level. The Covid-19 crisis is first and foremost a health crisis, and the progress of the disease is likely to be the key factor in determining the length of the downturn and, thus, the optimal M&A window. Still, the GFC is the best modern example we must examine the ultimate shape of the eventual recovery from an M&A perspective.

With regard to dealmaking, the recovery beginning in 2009 was very much U-shaped. That is, it took more than five years for deal volume to recover to average pre-crisis levels and deal value never quite recovered.

The story regarding deal multiples - defined as enterprise value divided by EBITDA (or, earnings before interest, taxes, depreciation, and amortization) - was somewhat different, with much more of a V-shaped recovery. Deal values plummeted from an average of 10.8x in the three years before the 2008 crisis hit to as low as 6.5x in 2009, before rebounding to the 10-year average of 11.6x by 2019.

History suggests, therefore, that there will be a relatively short M&A window that opens as the Covid-19 crisis ends, during which bargains will be had by those with the liquidity and the risk tolerance to move quickly, and who have done their homework in advance.

Active Acquirers May Outperform

There are some qualifiers to consider when examining the data.

First, there can never be a true control in the M&A world to measure against - a company either does a deal, or it does not. Additionally, company performance as measured by total shareholder return (TSR) is the result of a mix of inorganic and organic activities, as well as any number of external factors, none of which can be totally isolated.

That said, we nevertheless can conclude the following:

• Those companies that made acquisitions totaling at least 10% of their market cap from 2008 through 2010 (active acquirers) had an average TSR of 6.4% from January 2007 through January 2008, compared with TSR of -3.4% for less active companies. (See Figure 3.) A similar difference was seen in median TSR.
• The trend continued over the period of January 2007 through January 2010, when average TSR was 10.5% for active acquirers, vs. 3.3% for less active companies.

TSR for active acquirers with strong liquidity positions (cash and short-term investments to revenue of at least 7.0% in 2007) increased by an average of 5.0%. In contrast, other companies saw an average increase of 1.7% over the period from January 2007 through January 2010. This gap continues in the long term (five years) with active acquirers’ TSR growing at an average of 16.9% vs. 4.9% for other companies.

Deal Activity May Be the Best Option for Excess Liquidity

Companies with excess liquidity may find that shareholders and boards are more conservative about how this liquidity is used. Specifically, share buybacks, and possibly dividend payments, may be curtailed for several years and companies will need to keep a higher level of cash on hand. These factors will require them to use any truly excess cash to generate long-term shareholder value.

At the same time, with a focus on preserving the health of the economy and jobs, governments and regulators are likely to be much more tolerant of larger acquisitions in many industries.

EY analysis suggests it is not too soon to consider M&A opportunities and to be ready to act. CEOs, CFOs and heads of strategy and corporate development need to think strategically now about the “new normal” and which acquisitions would be accretive to their current business models. There are a few areas in the deal process that will no longer operate business as usual, particularly during this period of social distancing. Companies thinking about M&A will need to consider some of the unique aspects to getting a deal done, including:

• Transaction Diligence: Even if the majority of diligence can be concluded remotely, it is likely to take longer. Diligence requiring onsite visits, such as to physical plants, is much more difficult to do via video. Boards may also be reluctant to approve an asset or operations-heavy transactions without an actual site visit. Pressure-testing the strength of the balance sheet and forecasting expected cash flows for the next 12 to 24 months will be more critical than ever. Additionally, cyber diligence (that is, assessing the strength of the target’s IT vulnerability) will increasingly become a focus area due to the accelerating reliance on technology.
• Synergy Modeling: Synergy modeling will need to be conducted with an eye towards the “new normal.” For instance, resilient supply chains have more redundancies than efficient supply chains, meaning they are more expensive and have fewer opportunities to cut costs and achieve synergies.
• Business Models: Business models are likely to change in our “new normal,” and it is not just what is obvious. For example, that hot new kombucha beverage with all the social media hype may struggle to find a space on the retail shelves of the future where grocery channels begin re-prioritizing established brands and safety stock over the next hot product.
• Post-Acquisition Integration: Maintaining employee morale and engagement is more critical, especially in this environment, as many will be focused on their own job security, so asking them to put their energy towards onboarding target employees may be difficult. While it is possible to work your way through much of the integration playbook remotely, the culture, and change management aspects can be tricky to accurately get over a videoconference call. Being considerate of working hours; ensuring various integration meetings stick to a reasonable timeframe; and infusing the process with the appropriate amount of “ice-breaker” activities (e.g. virtual happy hours) are some ways to ease the burden of the work-from-home context.

Ultimately, M&A requires significant rigor about understanding post-Covid-19 recovery curve scenarios that target companies are likely to experience coming out of the crisis, in addition to understanding the true liquidity situation of the target and any of the target’s near-term capex or similar needs.

Special thanks to Rahul Agrawal, Manvi Gupta, Banipreet Kaur and Vaishali Madaan for their contributions to this article.

Brian Salsberg is the EY Global Buy and Integrate Leader. In this role, he leads fully-integrated M&A management services across sectors for the EY organization. He has experience working directly with CEOs, executives, business teams and boards of directors, as well as PE-backed companies, in all facets of strategic planning, due diligence, corporate development and M&A.