Stage 1: Recognition

 


Stage 1: Recognition


When afflicted with financial distress, the first stage is recognizing that real problem exists. This is usually done by someone in a position of authority. This person must:

 

1. Make a Rapid Determination of the Problem 2. Consider Deeper Questions about Financial Distress 3. Enlist the Aid of Others
  • Where do our revenues stand and what can we expect for the next six months to a year?
 
  • To what extent is the problem structural versus cyclical? Will an economic recovery solve the problem or just lessen it?
  • Demonstrating a convincing understanding of the situation to inspire confidence
  • Are our expenditures within budget? How much can we rein them in? What are the most important causes of revenue decreases or expenditure problems?
  • Are constituents willing and able to bear additional taxes? Will higher taxes and fees harm economic competitiveness?
 
  • Preparing immediate generic treatments for near-term relief and to stave off panic
  • What are reasonable expectations for future growth? Will growth provide additional revenues or additional costs that make the situation worse?
  • How big of a problem are unfunded liabilities like pensions and infrastructure maintenance? How do we better size and shape government to deliver the most important services with the money we have available?
  • Generating preliminary ideas about how and where to cut costs or find resources as the recovery process moves forward.

 

 

Strategies Used to Gain Team Recognition

Oftentimes more than simple presentation techniques like budget-to-actual reports or year-over-year comparisons are needed. Maybe your audience doesn’t believe the situation is that bad, that an economic recovery will save the day, or that government can just cut the fat. The following techniques can be used to help with tougher audiences:

 

Engage the Audience

The leader should create a two-way conversation about the situation. Rather than just telling others what the problem is, listen to their concerns, ideas, and perceptions. Ask direct questions to elicit opinions if they aren’t being volunteered. Finding a common definition of the problem is an important first step to reaching a common solution.

 

Visualize the Data

Financial data can be difficult to understand or simply not very compelling to some audiences. Graphics can enliven the data by revealing trends and relationships that are easier to grasp. Here are three tips to utilize in order to help your audience visualize the data:

1. Interactivity is Powerful:

  • Show changes in key variables and prevent discussion from getting stuck on the value of one variable
  • Allow viewers to participate in choosing scenarios
  • Make the presentation more convincing by showing the magnitude of the problem under a range of possibilities

2. Credibility in Forecasting is Vital:

  • Forecasts are essential when trying to convince others of the gravity of financial distress. However, even when there is a sense of urgency the recovery leader should ensure the forecast’s credibility before presenting it publicly. A forecast released prematurely can become counterproductive when stakeholders quibble over forecasting techniques and assumptions rather than assess the big picture the forecast is intended to convey.

3. Consider Games:

  • Financial recovery will require hard choices. A budget simulation game can be used to illustrate the difficulty to stakeholders. A budget game challenges participants to allocate limited resources among a portfolio of valuable services. Such an exercise gives participants a better appreciation of the difficult choices that must be made. Here is a simple example for a city budget. Here is a more sophisticated example for the federal budget. A simulation game can quickly give participants a sense of the problem and the consequences of not addressing it.

 

Use a Crisis to Your Advantage

The leader of the recovery process can use special events that are viewed as crises by stakeholders as a tool to drive change. Such crises might include: bond rating downgrade, closure of major employers/ taxpayers, change in elected or appointed leadership.

1. Risks are Associated with using a Crisis:

  • A crisis can mask the depth and breadth of the true causes of distress. A crisis is frequently just the most visible symptom of distress, rather than the root cause.
  • The nature of the crisis can color the responses people will want to take to recovery. For example, the closure of a major employer could lead stakeholders to focus on economic development issues, when in fact the current fiscal distress is caused by an unrelated factor.
  • People might adopt a siege or bunker mentality, making change and innovation less likely. 
  • Overplaying a crisis may reduce confidence in management if stakeholders perceive that the crisis was avoidable or at least foreseeable. 

2. Framing Perceptions can Reduce Risk:

  • Carefully analyze the crisis event. If the recovery leader is knowledgeable about the crisis, then he or she will be a more credible interpreter of what is occurring. The leader can then frame the crisis as a call-to-action, and others will be less likely to interpret it as a panic-inducing disaster.
  • Share information about the event. Making information available can reduce feelings of uncertainty among stakeholders and constituents. 
  • Provide information in a structured, guided format. This makes it easier for others to understand, allows it to reach a broader audience, and increases leader credibility.

 

Bring in Outsiders

Outsiders can be used in to confirm or validate that there is a problem. Often perceived as more neutral or detached, outside experts may bring additional credibility to the table. They can also bring new and valuable perspectives to bear. Experts can be found in the local business community, nearby universities, or a consulting firm. One particularly good role for experts is to validate key financial forecast assumptions, thereby making data visualizations more convincing.

Outsiders also offer the opportunity to present a citizen perspective and thus provide political momentum for making difficult decisions. For example, a special citizens committee might be able to talk openly about seemingly obvious structural problems that are otherwise difficult to talk about or sometimes even to see by people inside the organization.

 

Present Economic Data

Economic data from outside sources can temper any unrealistic expectations of salvation by future revenue growth. Command of economic data can also improve the credibility of the Recovery Leaders message and increase the perceived validity of long-term forecasts. 

  • Universities often issues economic forecasts focused on the local area.
  • The GFOAs long-term financial planning blog compiles a variety of national statistics.

 

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