Wednesday, October 6, 2010

Keys to Crisis Management - Expectation Setting

This is a first blog post in a series of posts about key skills that crisis managers need to have in order to successfully manage crisis.

Two years ago to the date, the prime minister of Iceland made a television address to the country, telling everyone that Iceland was about to go through a very difficult financial crisis that would have severe consequences. He ended the address with “God Bless Iceland”, a sentence that set the stage for people’s mood for the coming weeks.

The whole nation was in shock, but very few understood how serious the situation really was. Not only were all of the banks in Iceland doomed to end in bankruptcy, but the central bank had also run out of all foreign currency and it’s gold deposits were kept in England which was putting Icelandic banks on the terrorist watch list in order to freeze their accounts.

If it hadn’t been for personal contacts with JP Morgan bank, through which currency trades could be made, the country would have been closed to all foreign currency transactions and basically not be able to import food, fuel and medicine to name a few.

For the country which had experienced the highest standard of living in the world, this was a terrible setback. That high standard of living had been made possible through loans that people could not afford to pay back. Everyone was living in the dream-state that there would always be a solution to pay things when the loans were due. This was true both in the business world as well as for families.

With the initial television address people’s expectations had been reset. In many ways it was a cold gush of water thrown in their face. The next few weeks everyone watched as each bank tumbled and the currency was halved in value. Politicians were helpless and didn’t know what to say to people other than “there is a crisis”.

People became restless and demanded change. They took to the streets and protested. And after a while the politicians listened and we had elections. Those parties that were in power lost seats while those that were in opposition got more seats than they had before – why did they get those seats – because people expected that they would run things differently.

But now two years later, how did it all go? The banks were resurrected with help from the government and although many companies have gone bankrupt, then many of the large companies have been taken over by the banks. Those companies are kept alive while they are be “restructured”.

Many people have lost their homes, but a much higher number has been kept on “life-support” by lowering their monthly payments while extending their debt way beyond the original loan periods. This holds true for both car loans and mortgages.

But where the government really failed was in expectation setting. By dragging their feet to face the consequences of the bad loans and the beyond capacity lifestyle they have gotten people to believe that they would get through this without loosing their houses or cars. They made people believe that they would need to cut down their spending on luxury items for a few years, but after that everything would be fine.

At the same time the legal system, after almost a 18 month process, ordered that large portion of car loans in Iceland were actually illegal. They had been tied to foreign currency rates, but that practice was illegal by law. After judging the loans were illegal people were left in a vacuum all summer long while the decision what interest rate to use to recalculate the loans went again through the legal system. During this whole period people were given the hope that actually they might not owe very much in their expensive cars that they couldn’t afford in the first place to buy and maybe they might be able to keep them.

In the meantime the government has not done much to address the needs of those who are going to loose their housing. Their message has always been that they will “help the families”, but always pushed any action towards the banks. And if asked what was being done they always said the banks were offering many options. The truth of the matter was that the banks were actually only assisting a very small portion.

So what can we learn from all of this?

The main lesson is that when your ability to deal with the situation is limited then you have to set expectations low. You have to brace people for the inevitable and help them get through those times in as good way as possible. Yet you have to make them understand that they will not have the same kind of life as before.

If you however set their expectations too high and tell them that everything will be alright then you are bound to fail. A golden rule is to set expectations low and then deliver more. That way you keep people satisfied with what you are doing – because even if we wanted to then we can’t perform miracles.

But this is something politicians have a hard time doing, because it is seldom good for votes to tell the truth and explain to people what has really happened and what they are really going to face. Instead it is much better to make promises that underneath you don’t know if you can keep, but at least you have 4 years to try and people are good at forgetting what you said 4 years earlier.

This is something that many crisis managers however understand and after a disaster strike they very often warn people that things might get worse than they actually will get. “We might get strong aftershocks”, “The flooding might get worse before it gets better” are sentences you will hear from crisis managers while “we hope the worst is over” and “we will get you back home as soon as possible” are sentences the politicians will be saying.

So if you are ever faced with making public statements during or following a crisis, make sure you set expectations low. If things get better than you expect then you can always claim that it was due to the good work of your people. If however you set expectations high your job is on the line – just like the current government in Iceland is feeling the heat (literally as protesters light fires outside the parliament).

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