Step 4: Initial Diagnosis

Look for Recovery Leverage

Throughout the diagnosis, the recovery leader should look for the problems that have the most recovery leverage. These are problems that:

  • Can be solved or mitigated for a reasonable investment
  • Offer a significant return on that investment
  • Will provide a return soon enough to help stabilize situation in the short term, but without causing big long-term problems.

The diagnosis may also reveal problems that demand longer-term solutions, without near-term payoffs. These findings can be held until later in the recovery process.

Engage Others in the Diagnosis

Involving others in conducting the diagnosis brings additional perspectives into the process. Employees often have good ideas about where the problems lie and how to deal with them. 

Involvement can also relieve some of the unease associated with the recovery process. It removes some of the mystery around the process and promotes a sense of “doing something” about the situation. 

Finally, involving others creates a deeper and broader recognition of the problems faced. This can help increase support for strategies to address those problems.

Forecasting is Essential

There are two types of forecasting that are important during a forecast. First, a short term forecast helps make sure operations can continue as planned for the coming months. During a recovery, a short-term forecast, is focused on ensuring the government has a viable cash position.

A longer-term forecast of three to five years into the future is important for helping people recognize the true nature of the problem. Will a modest economic recovery solve your government’s financial challenge or are there deeper structural problems that need to be addressed for a full recovery? A credible forecast will foster a common definition of the problem and help participants in the recovery process better gauge the size of the problem that must be overcome. Of course, long-term forecasts are inherently uncertain, especially during a financial crisis. Scenario planning can be used to show multiple different and plausible futures. The government can then develop strategies to respond to a variety of possible futures.

Develop a Financial Health Model

The diagnosis will be better if it is guided by an explicit financial health model. A good model:

  • Guides the diagnosis so that it is complete
  • Gives stakeholders confidence that the diagnosis is thorough
  • Resonates with a broad audience, not just financial experts
  • Often uses a metaphor to convey meaning
  • Often focuses on the fundamentals. In distressed situations, there are often opportunities in the fundamentals. It also helps engage and educate non-experts.

Below is an example of a financial health model which is likened to the foundation and legs of a stool. Each major element of a fiscal health model should be supported by detailed diagnostic issues and questions.

Learn more about each element: