Banks have had stress tests (imposed) to see how they would cope with difficult market conditions. For example, in the US, a typical stress scenario in the past has been: 50 per cent drop in equity prices; 21 per cent decline in housing prices; unemployment at 13 per cent. Regulators will ‘see’ how a particular bank would do under these circumstances. They will asses its responses, its reserves etc. Then, they will issue a pass or not.
Hardware and software products have stress tests to see how they will react under given circumstances. People undergo Cardiac Stress Tests to see what would happen with your heart during extra-ordinary effort. Doctors put people on treadmills and examine the Electrocardiogram during enforced, non-normal circumstances. It helps to uncover possible hidden anomalies.
Organizations should also have Stress Tests. I am not talking about financial conditions, but organizational. Some examples of real life ‘stress situations’ are:
An acquisition that, although always a possibility, had not been expected so soon. It will divert lots of attention and resources and will create great disruption
New product launches that are too close in date but these can’t be changed. There will be a 6 month mad peak followed by prolonged calm.
Recruitment is much slower than predicted and there will be significant and prolonged resource gaps beyond expectations.A sudden leave or illness of a member of the top leadership team in charge of a delicate business area will require a care taker, extending the already unstable situation.
Other sources of Stress Tests my be a technological crisis, product recalls or a complicated or hostile merger, for example.
Management teams should simulate these scenarios and map possible reactions. It is the equivalent of military manoeuvres. It’s not difficult and has zero cost. First step is to define which situations will put the company under sudden stress, list them, and agree on a few top ones. Agree on criteria to pass the test. Then simulate responses and imagine bad and less-bad scenarios. List reactions and, assess the cost (not just monetary). Have you passed?
One of the expectations about leaders is that they will have great ability to project and imagine the future. But, we are not very good at this in organizations. Despite a myriad of SWOT analysis and scenario planning techniques, people usually revert to a linear, predictable, extrapolated world in the crafting of a Business or Strategic Plan. If I could have 100 pounds (or dollars) for every Scenario Planning flipcharts covering the walls, after exhausting hours, only to be ignored at the next item in the agenda, e.g. the business plan itself, I could have a few exotic holidays
Stress tests should be routine in any Planning process. It’s the company on a treadmill. It’s called a health check up. And they should be in your calendar.