Black swan events are very much in management articles of late what with the pandemic and all. But sometimes, articles on black swan just rubs me the wrong way. Black swan events are often described as super high impact super low probability - the one hidden in the bottom right hand corner of your ERM matrix, usually coloured yellow. But is it?
The story of black swans is that a long time ago, people in Europe thought that all swans were white since they only had swans that were white in Europe. Until some explorers got to Australia and found black swans there, a phenomena that was not even under consideration until then. It is not like discovering Martians on Mars, because we could imagine Martians on Mars. It is more like discovering your dead uncle whom you have not seen for thirty years - on Mars.
So, it is not really the super low probability sitting on the extreme right end of the ERM matrix. It is not even on the ERM matrix since it is something that is dismissed as not feasible. If you can think of it when your ERM manager interviews you with their ERM tools, then it is not a black swan event. Basically, black swans throw ERM matrices out of the window.
So, why do people insist on treating black swan events on ERM matrices. Well, two reasons. One, people by nature, do not like things they cannot control, especially people like managers with hubris. ERM matrices are their way of bringing unruly risks under control (just saying it, not trying to undermine ERM, mine you - I have been a risk manager before). Two, and more cynically, consultants like problems for which they have a product. Not having the problem on the ERM matrix often means that their product does not deal with it. Annoyingly, one consultant gave a detailed step-by-step process to deal with black swans, which include scenario planning - umm, how do you scenario plan something you cannot even think of?
To make things more complicated, black swans are also relative. Meaning what is a black swan event to one may not be a black swan event to another. Take the 9-11 attacks. To building designers, it is a black swan event, as it is very unlikely any architect until then would have thought to design buildings to withstand an airliner crashing into it. The scenario incorporated into the building design closest to the airliner scenario would likely have done little prevent the building from collapsing. Now of course, the airliner scenario is no longer be a black swan event for building designers, particularly for high-risk buildings.
It is not, however, a black swan event for anti-terrorism planners. While there probably was no scenario planned until then for a crashing airliner, the specifics was not that important but they have planned for many scenarios with similar consequences - the nuclear device on board a cargo ship berthed at an American port, for one. Plans developed for such similar scenarios can easily be dusted down for use with some adaptation - which the American authorities did, with the nationwide airspace lockdown being one such adaptation (implemented with some hitches because it was never expected).
I hope you understand by now that black swans are by definition, unforeseeable. And so the question then arises, how do you plan for an unforeseen scenario? Basically, I see three prongs: catastrophe succession plans, flexible management methodology and building your buffers.here the airliner crashed and the plans do not provide for flammable liquids that flow from floor to floor. But in such an emergency, such plans will do as a starting point to adapt. Which brings me to an interesting story. Apparently, a fter the first airliner hit WTC One, one company in the other tower held an emergency meeting - and while they were waiting around for the meeting to start, the CEO popped his head in the doorway and shouted at them, "What the hell are you all doing here? Get out!" (Wonderful story, but sadly I am still trying corroborate it. Even so, notwithstanding the gruesome incidents it pertains, its a great story to illustrate the point)
I hope you understand by now that black swans are by definition, unforeseeable. And so the question then arises, how do you plan for an unforeseen scenario? Basically, I see three prongs: catastrophe succession plans, flexible management methodology and building your buffers.
Catastrophe succession planning differs from conventional succession planning in that it provides for who takes over when there is no time for the normal succession planning to take effect. Like in 9-11. Someone needs to make decisions, and there needs to be a clear line of succession to several levels. Such succession lines may not be static but situational, with different person (or types of persons) to take charge in different types of crisis. It doesn't just kick in for something catastrophic like 9-11 but could be for something mundane as who takes charge when the acting boss goes off on an emergency when the usual boss is on holiday. Or when the CEO and deputy CEO resign in the middle of a critical industrial action crisis. It doesn't mean that having a successor leaves everyone else waiting for the new boss to tell them what to do. As always, such things must be supported by the appropriate culture that empowers leaders, any leader, to step into a void to take charge. And there needs to be an environment that forgives such leaders who makes the 'wrong' decision, often apparent only in hindsight. As the medieval adage has it, 'A bad king is better than no king'.
Management can only have their best shot at black swan events if the management team is flexible, as a culture. Managers must be trained to understand not just what the procedures are but why the procedures are the way they are. This will enable them to determine which procedure to retain and which to adapt. Retaining as much procedures as possible reduces the burden of having to work out new procedures when time is short but retaining an irrelevant procedure could well be fatal, literally during 9-11. Again a management culture that rewards managers for willingness to step outside procedures while ensuring control objectives are met, could provide the necessary practice for manager-leaders.
In the last few decades, management had been enthralled by efficiency measures like Just-in-time, etc. Problem is that efficiency has costs - in terms of risk, which affects your risk-weighted returns (you don't get a free lunch). While I do agree with some observers who say Covid-19 is not a black swan event, but only insofar for public healthcare planners. For business planners, Covid-19 is as black swan as they come. While many would have planned for disruptions in the supply chains to be mitigated by alternative supply chains, I doubt if many have prepared for a total collapse of the worldwide supply chain, with no alternate supply chain. It looks like the only vaccine against the global supply chain collapse would be to stock up for such an unlikely (literally once a century) event. This though would have increased costs, driving down the returns monitored by CFOs but maybe not the risk-weighted returns. So the cost of savings on stock-holding is the possibility of loss of business, or loss of the business.
Black swan events are by definition unplanable (is there such a word?) but are we willing to overprepare our management culture and philosophy to survive it? I am not sure if many business owners would.
Note: I penned this just to explore how we plan for the unplanable. Would like to hear your thoughts on it.
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