The “black swan” concept was popularized by finance professor and Wall Street Trader, Nassim Nicholas Taleb around the time of the 2008 crash. Using references in philosophy he came up with the idea that there are extremely rare events with incredibly important consequences that are not predictable even though it seems obvious in hindsight. Events that are expected, but unexpected. The current COVID-19 crisis is a prime example. There was nothing remotely unusual about a viral outbreak – these have been occurring with regularity for years (avian flu, MERS, SARS, swine flu, Ebola, Marburg, West Nile, and more). What was unexpected and seemingly impossible to prepare for was a virus like COVID-19 that spreads so quickly and hides so effectively.
For many businesses the “black swan” of COVID-19 created a crisis. More accurately, the reaction to the pandemic created a black swan event—virtually no one anticipated a global business lockdown that would plunge every nation into a full blown recession overnight. Even without such drastic and dramatic events there are numerous moments for any business that can create a crisis situation. These can range from natural disasters that affect a key supply chain, the loss of a key customer, or even some kind of technological failure at an inopportune time. These scenarios are often expected and outlined in business continuity plans, but it is nearly impossible to predict when and how impactful the issue will be.
Responding to and preparing for a black swan event is essentially a four-step process.
Step 1: Inventory Vulnerabilities
Taking an inventory of vulnerabilities is likely the most time consuming and vital step in the process. What is crucial to the operation of the business in terms of personnel, supply chain, customer base, financial status, and business processes? What happens to the business if there is a disruption in any of these areas? It’s important that you recognize your vulnerabilities and understand the potential risks and impacts. Be sure you involve your management team as you gather critical information.
Step 2: Develop Backup Plans
The next step is to determine what will be done if one or more of these vulnerabilities are triggered. Can key people be replaced? Can a supply chain be altered or repaired? Can new customers be acquired? Is enough money in reserves or is outside financing in place to cover a financial setback? Are backup systems in place in the cloud or at a remote location so that people can continue to be productive in the event of a localized natural disaster? Depending on the size of the organization, it may be nearly impossible to implement contingency plans for every possible situation, which forces a process of prioritization. As you go through your vulnerabilities, consider the level of risk if there is a break down and the level of effort to have a backup plan at the ready.
Step 3: Test Response Plans
As you identify risks and alternative solutions, you also need to implement and communicate emergency processes so that your team knows who to contact and what to do in the event of a crisis. Business continuity plans should be documented and drills should be conducted to reinforce processes and ensure people know how to respond.
Step 4: Adapt to Change
While the first three steps occur as part of the planning process, the final stage comes into play after a crisis has occurred. Some contingency plans may be temporary, but there may be alternate processes that become permanent. Your ability to train and adopt these new processes becomes important for future success. You’ll want to think through the solutions that have benefited the organization and consider embedding them permanently. Reorganizing and diversifying a supply chain makes inventory more secure but managing the system gets more complicated. The current crisis has placed an even greater burden on technology than existed prior. Communication systems are now crucial for the simplest of tasks. Issues of cyber security loom as more and more work is done from home. Maintaining morale and teamwork becomes an immense challenge. Each of these factors puts additional pressure on systems and the adoption of the new processes.
Throughout the steps it is important to use advisors and experts that can help you evaluate with the clear vision of an informed outsider. They will ask the tough questions and challenge the answers you provide. Technology plays an enormous role given the access it provides to a host of resources and the ability to help identify the threats and challenges as well as the emerging opportunities that come with the process of adaptation. MarksNelson has the resources and experience to help you prepare for and respond to black swan moments. Give us a call to talk through how we can best support your business.
