Rethinking Operational Risk and Resilience | Deloitte Netherlands


Rethinking Operational Risk and Resilience

The War in Ukraine could shift multinationals’ shared services strategies

Until February of this year, a war would have been a long way down most organizations ’ list of significant risks. But that all changed on February 24th when Russia’s armed forces invaded Ukraine, which had been one of Europe’s fastest growing markets for shared services operations.

With an educated and capable workforce, and extensive infrastructure, Ukraine had been an attractive location for multinationals to locate share services for IT, finance, human resources and other corporate functions. Nestlé, Kostal, and AB InBev are among the Western European companies to have established operations in Ukraine.

But, as the conflict continues, the future of shared services in Ukraine is clearly now very unpredictable – this is truly unchartered territory.

One multinational agri firm has understandably put its plans to expand its shared services center in Ukraine on hold. Although it still regards the country as a good location for shared services, it fears a ‘brain drain’ as refugees flee Ukraine. Depending on how long the war lasts, it may be forced to revaluate its shared services location strategy.

The unexpected impact

Indeed, running a business in a war zone is very difficult. Let’s start with the immediate humanitarian concerns. If money transfer and electronic payment systems fail, how can staff receive their salaries? Has the business got enough cash to pay employees so they can look after their families? Should the company be looking to relocate staff and their families, perhaps providing them with temporary accommodation, schooling, insurance and other support? Is it feasible to employ refugees, assuming they have the necessary capabilities and language skills?

In cases where a business might have employees from opposing nations working alongside each other, it may be necessary to takes steps to avoid discrimination, increase awareness and ensure there is sensitivity and understanding: For some people, a war will be a life-changing event, rather than an ‘external crisis’.

Multinationals also need to consider how quickly the situation on the ground can change. Almost overnight, the streets of Ukraine’s capital Kyiv went from buzzing with life to being almost deserted. Now, as Russia regroups its forces in the east of the country, Kyiv is returning back to life. The Washington Post reported that the number of cars on Kyiv’s streets rose sixfold in the first week of April.

Working out the worst case scenarios

But war is highly unpredictable. While hoping for the best, you need to consider business continuity questions, such as what is the worst-case scenario and how sustainable is it to continue business in a country where other companies are withdrawing? What happens if trust in the financial system evaporates and the economy fails.

Even if the economy continues to function, rising prices could result in the delay of tenders and contracts elsewhere in Europe. How should the business deal with inflation, cost pressures and a potential economic downturn? It can take six months to pass an increase in cost on to a customer. As conventional financial rules and thresholds are abandoned, who will ultimately pay the bills?

Although the current focus is on crisis management, the conflict will ultimately lead many multinationals to rethink their shared services strategy. This kind of cataclysmic event highlights the inherent risks involved in creating a single center of expertise in a specific area, such as IT support, book-keeping or payroll.

Possibilities during unprecedented times

One way to manage those risks would be apply the lessons of the pandemic and ensure that employees can work from home or an entirely different location, if necessary. However, flexible working may not be possible in Ukraine or another country engaged in warfare – staff may be conscripted or have to leave their homes or be hit by the loss of key infrastructure, such as energy supplies or telecoms connections.

Some multinationals have been relocating staff from Minsk in Belarus, for example, across the border into Lithuania, to ensure they can continue to operate. The aforementioned agri business sent employees home or to safe locations as soon as war broke out. In the three months before the invasion, it developed contingency plans to deal with communications outages. The multinational has also established global, regional and local security committees.

In conclusion

As multinationals review their shared services strategy in light of the events in Ukraine, here are some questions they need to ask themselves.

  • Do we have sufficiently robust business continuity plans if our operations are suddenly paralyzed by events beyond our control?
  • Are we giving sufficient weight to geopolitical factors when choosing a location for shared services? In the case of Russia, many political and business leaders made a fundamental miscalculation – there was a view that economic integration would make war unthinkable, as everyone would suffer. But the invasion of Ukraine dramatically discredited that theory. Don’t be complacent!
  • If a conflict forces the closure of a shared service center, how do we view the responsibility to rebuild it, thereby helping to create jobs and rebuild the economy, in the aftermath of the war?

If and when a crisis occurs, it is important that the business is clear and transparent. Proactive communications are critical, as is flexibility – you need to respect employees’ personal decisions. It goes without saying, in the case of war, the physical safety and mental health of employees and their families has to be the number one priority and take precedence over everything else.

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