Planning for the next Black Swan


Companies have been through a lot over the past 10 years – 9/11, SARS, and the 2008 financial crisis to name but a few catastrophic events.   If you thought we were done with major global disruptions, think again.  Looming on the horizon are potentially new Black Swan events like a Eurozone collapse, a possible war in the Middle East  or a major Chinese currency devaluation.  All of these threats dramatically amplify business and financial risk for companies, their markets and their employees.     

Coined by Nassim Taleb in his 2007 bestselling book, a Black Swan is a major occurrence that is unexpected and generates a tremendous impact. In spite of its outlier status, human nature invents explanations for a Black Swan after the fact, making them explainable and predictable.   These low-frequency, high magnitude events can be triggered by any one or a combination of factors within the realm of  politics, technology, healthcare, economics, the environment or government policy.  Although they are very difficult to predict, Black Swans have occurred on a regular basis, somewhere on this planet, over the past 75 years. Many commentators believe that catastrophic events are becoming more prevalent due to issues such as climate change, poor regulatory oversight and increased political strife in weak states. 

Not only is the frequency of Black Swans increasing, but so is their magnitude. Dynamic such as faster communications, pervasive global supply chains, and ubiquitous social networking create conditions that increase interdependence, accelerate the pace of change and restrict management control. Disruption can come to a firm directly through its assets, customers and employees or indirectly through its partners, suppliers and regulators. As examples, the great Japanese earthquake of 2011 led to parts shortages in North American plants.  The 2008 collapse of Lehman Brothers triggered a global liquidity crisis. It’s no longer a question of whether a Black Swan will impact your firm, but when and how.  

Typically, large companies rely on enterprise risk management systems, or worse, management judgement, to predict potential interruptions to their operations.  However, standard ERM approaches are problematic when it comes to forecasting Black Swans.  For practical and budgetary reasons, these systems focus on the risks organizations typically encounter – around people, finances and business continuity – while ignoring the myriad of low-frequency risks beyond a company’s control.  Furthermore, these systems can not account for management bias which creates risk blind spots.

Boards and senior leaders have a clear responsibility to protect shareholders and other stakeholder from the effects of credible Black Swans.  What can be done to assess and mitigate the major business risk from these catastrophic events? Booz & Co., a consultancy, recommends that company’s undertake a Disruptor Analysis Stress Test.  Complementing the firm’s existing ERM approach, this test would be periodically administered by a senior team of risk managers and line of business leaders.  

The analysis includes a 4-step process:

  1. Understand the current state

To find vulnerable nodes in the business, it is vital to map the full operational profile – relationships, costs, revenues, capital deployed etc – of the firm including its suppliers, channel partners, stakeholders and customers.  This analysis should  go beyond direct relationships to key interdependencies like ‘suppliers of suppliers’ as well as market dynamics such as competition and industry structure

  1. Develop the disruptor list

Given the unexpectedness of Black Swans, managers needs to cast a wide net to identify potential disruptions to the operating model. To be comprehensive, this list should encompass every potential interruption across multiple geographies based on what could occur within a 1 year horizon.

  1. Asking “what if” questions

During this phase, the team would explore what would happen to the enterprise if one or a more of these events transpired.  This type of scenario development helps discover new hazards and drives further clarity around previously identified risks.  Moreover,  these activities can help uncover informational blind spots and bias while building internal knowledge. 

  1. Create contingency plans

Contingency plans are then developed based on the most likely to occur “what if” scenarios.  These plans would include financial, operational and human resource strategies for coping with the scariest Black Swans.  Though this planning is handled internally, many companies may choose to gain an independent, third-party validation of their thinking.

It is virtually impossible to produce quality contingency plans for every possible Black Swan.  Yet, impossibility does not mean senior managers should not try to minimize organizational impact by raising internal awareness, gaining cross functional alignment and making preparations.  Indeed, success favours the prepared mind.

For more information on our services and work, please visit the Quanta Consulting Inc. web site.

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