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TARP and Stress Tests

TARP and Stress Tests

| On 15, Apr 2009

Jack Hipple

Reading TheWall Street Journal and listening to the business news the last few days makes me think we are in a cardiology unit. I have never heard the expression “stress test” used in a business context before, let alone so many times in a few days.

But let’s think about this.What is a stress test in a physical or medical sense? Someone with a heart circulatory problem is injected with a radioactive dye and then asked to run on a treadmill at an ever increasing speed while their system is monitored in real time to check to see if the blood flow is adequate. What an interesting analogy! In the banking situation, the government is going to synthesize an artificial situation and decide whether the bank can sustain itself under a financially stressful situation. If not, they will not be able to return the TARP funds (which many banks are attempting to do right now) and will have to remain under “care” of the government.It’s easy to run an organization under steady state, isn’t it?

When was the last time your company or product line was subjected to “stress”? A competitor came out with a new product? A new patent issued that blocked your entry into a new area? A merger occurred between two smaller competitors that now makes you #2 and not #1 anymore? A key executive hired by a competitor? An unfriendly takeover proposal arrived by certified mail without warning?

It seems to me that it’s a worthwhile exercise to create these kinds of stress artificially on a regular basis and see how your organization responds. This is no different than the fire drills you did in school or the emergency drills that I remember from my days in the chemical industry. It’s really hard to remember how to put on a Scott Air Pack if you haven’t done it in a long time and you’re rushing because you see a chlorine gas cloud coming.

Why not do business stress tests? At your staff meetings, make a list of potential wild cards (and of course now you would add to that list the unavailability of short term credit, wouldn’t you?) and announce that you will be having “drills” on these subjects in random order or that you will send out a “what if” note associated with a key business headline in that morning’s Wall Street Journal.Try this out in the innovation sense as well.

All of you have those yearly and quarterly plans for new product development and innovation. What could upset them? Change your R&D strategy overnight? This will help you determine if your organization’s thinking skills aren’t honed significantly. You then might find out that your people aren’t reacting but thinking about possibilities ahead of time and coming to you with ideas.Pretend you’re the Treasury department and put your organization under STRESS.