Updated: Jun 22, 2020
Illustrate the impact of COVID on a Financial Services business by applying Systems Thinking and Systems Dynamics techniques
I want to concisely summarise the basic premise that I will follow for this Blog, Business Influences; what are the 'text book' business mechanisms required to affect the performance of a Business - I can go into the detail of "Business Influences" in another Blog.
The high-level influences can be summarised as follows:
To put this into context, I have produced a balanced Systems Thinking model to illustrate the well-functioning Business (starting with an uptick in Leadership):
A balanced organisation based on standard Business Influences
Impact of COVID
Okay, let's apply some influences, caused by COVID. I've used the following thinking to observe and apply the forces I want to evaluate:
The Business is already a high-performing organisation
The disease itself directly impacts the Human Resources of the organisation
The Penetration (of the population) is caused by COVID
Business Influences: COVID Impact
Very quickly we see the devastating effect, mimicking what is being felt by so many Businesses around the world - the effect is significant whether one equates a single second to a day, week, or month. We'll get on to time-bound simulations when we cover Systems Dynamics later.
This led me to try and understand what counter-measures an organisation might take - obviously there are countless simulations we could run, in the interests of time, I focused on trying to influence the most impactful response. I had considerations - promoted through critical thinking and inversion; evaluation, analysis, and explanation:
The Leadership will remain the same; status quo
Location; unlikely that the Business will physically re-locate 'bricks and mortar'
Resources; COVID will have a direct impact upon Human Resources - don't go head-to-head with COVID
Focus on the quality of the Product; retain and acquire Clients above all else!
It is clear from the model that the pressure of COVID is over-whelming; the counter-measures I had put in place to try to re-balance the decline in Quality was ineffective. As before, this provides a canvass on which we can simulate specific, direct and indirect, influences - in the case of COVID, I wanted to evaluate and analyse further to see if I could quantify the losses.
This led me to look at some Systems Dynamics tooling; I found a cool start-up called Sheetless.io, a company founded by John Hill. This platform is one of the - if not the - slickest simulation tools I've used to date (I'm no expert, and have only scratched the surface of the tool's capability - anyone good with Mathematics and, or, Excel, will gain immense gratification).
Quantifiable evaluation; this was my aim. What happens when... based on inputs of...?, for example? I've produced a Reference Card that identifies what I've considered to be the Key Inputs and Assumptions of the System.
The Blue Base represents the position as of January, 2020. The model plays out 36 steps, each step representing 1 month, giving us a three year projection across four different scenarios.
Everything remains constant (Base); then COVID causes economic impact, simulate the following scenarios:
Client Acquisition decreases; from 300-600 to 120-150
Attrition Rate increases¹; from 5%-10% to 20%-30%
Revenue per Client decreases; from £350-£750 to £250-£350
¹ Attrition Rate increases; the rationale for increasing to 20%-30% was to mimic what economic commentators have expressed as the predicted scale of economic impact caused by COVID.
The following video walks through the Systems Dynamics' model of a Financial Services organisation (operating under the conditions stated in the Reference Card - Base).
Systems Dynamics: Financial Services Organisation
I'm sure you'll agree that the model provides illuminating insights into the financial outcomes. By applying ranges to the data inputs, it is possible to add the random behaviour of Client Acquisition and Attrition, among others.
While this is an example, it's not a quantum leap to re-state the Base with real financial figures and further adjust the key inputs, based on the cadence of one's Business.
Reflecting upon the model I had created, I was surprised by the results. I had intuitively, not rationally, predicted that the Business would most likely fail due to the impact of the much greater Client Attrition (20%-30%).
Financial Management Dashboard
Key Outcomes' Table
Applying some of the 8 Critical Thinking Elements; reflection, analysis, information, creativity, structuring arguments, and decision making, I've deduced that:
Client Acquisition is going to be very challenging with the impact of COVID. However, if the organisation can maintain the Client Lifetime Value and maintain Client Acquisition, then absorbing the increase in Attrition is the prudent thing to do.
This would be heavily caveated with the inclusion of a revised Client Lifetime Value flow - the initial synthesis has already highlighted that this will undoubtedly be impacted and not addressed in these projections .
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