Fiscal fire bubbles — the case for financial crisis simulation

Run. Hide. Fight.

As we pass the one year anniversary of the mass shooting at Parkland High School, active shooter protocols and training videos are the norm in the world we navigate each day.

Students during a “duck and cover” practice drill in preparation for a nuclear attack (photo credit: Getty Images, 1962).

Crisis preparedness is not a new concept. Fire drills are standard in schools. Some parts of the country practice for earthquakes and tornados, and we’ve all seen those iconic nuclear “duck and cover” pictures. In the wake of the Great Recession, the Dodd-Frank Act requires the Federal Reserve to conduct annual stress tests of banks. On an even larger scale, the military conducts war games because the experience is invaluable. The challenge is that, while important, these coordinated experiences are also resource intensive and time consuming.

Tabletop exercises exist between the extremes of full-scale military exercises and plans that sit in binders. These simulations offer an alternative for organizations to test crisis management plans, protocols, and procedures in action. They allow an organization, or a collection of organizations, to see if their plans work in action and to gain invaluable experience with decision making under pressure.

Fiscal fire bubbles

I once surprised a team that I was leading by throwing out a biweekly meeting agenda and spending most of our two hours together navigating and debriefing a crisis simulation. The scenario was simple: I was on a cross-country flight and out of communication while the school was facing an evolving threat. Since this was a new kind of experience for our team, I asked the group to identify the threat before we began as an improv group might do at the start of a sketch. One of the more creative team members shouted out, “Fire bubbles!” From that day forward, fire bubbles became our code for all future discussions of crisis planning.

Active shooter exercises are a necessary part of managing a school or workplace. Yet, organizations are far more likely to face a financial crisis before they face something so horrifying as a mass shooting.

How will your organization respond if a grant dries up and your nonprofit loses 25 percent of its revenue? What happens if the federal government limits the number of student visas it allows from China? How will your organization pivot if a combination of recent tax law changes and a major recession dramatically reduce annual giving?

Give yourself a fighting chance: test the plan

Having a plan, testing it in a controlled environment, and seeing if the plan works is the best way to give yourself a fighting shot to weather a crisis. For the majority of organizations, tangible actions that impact people we know and care about are the hardest to consider. In a lockdown situation, it is a painful moment when employees realize that they can’t let potential victims into the building if they are caught outside because it increases the threat for everyone else.

The same painful moments occur in financial crisis simulations. Everyone knows in the abstract that if revenue drops you may need to cut programs and eliminate employees, but what specific programs and which named employees? How do you handle the fallout from those decisions? What are the downstream effects on the organization’s perceived value and ability to enact the mission? The answers to these questions determine if the threat will become a blip on the radar or the tipping point into a death spiral.

Questions quickly begin to arise beyond how to modify financial spreadsheets. Policy questions must be navigated about the governing role of the board of trustees and the operational role of senior leadership. How do these groups, and their respective committees, demonstrate the necessary agility and wisdom in collaborative work? What keeps decisions both anchored to institutional values and responsive to dynamic conditions? How are plans communicated within and beyond the organization?

Financial Crisis Simulations in Action

The path to creating a financial crisis simulation is simple to describe, but tougher to follow:

· Engage key stakeholders — A true financial crisis would involve the board (possibly represented by the executive committee), the finance committee, and senior leaders. It’s important that all three groups be involved in the simulation and debrief.

· Bring in a trusted outsider — You shouldn’t do this alone because you can’t facilitate a crisis simulation and be an active participant at the same time. It looks like you can, but you need someone with an outside perspective to set the scenario, ask the hard questions, and push the group to see the realities. I was able to facilitate our “fire bubble” exercise because I took myself out of the simulation by being on a cross country flight. There is not a clean corollary for a financial crisis. You need an outsider, likely a consultant, to be familiar enough with the financials to hold the group accountable. This helps avoid succumbing to the dreaded false-optimism.

· Give it the appropriate time and attention — This is the kind of thing that takes planning and shouldn’t just be an hour meeting. A half-day is ideal for the simulation and allowing for adequate time to debrief.

· Plan up front, and plan again — Tabletop exercises are really about two parts of planning. The first is in the lead-up, when you should provide the consultant with as much information as possible. The second comes after it’s done, when you take the results of the session and turn it into a crisis plan to be put into motion if needed.

A financial crisis simulation should provide board members and senior leaders with critical information and experience. It is much better to face your fears and make mistakes during a tabletop exercise than start trying to figure out what to do while you are in the middle of a crisis.