TLDR: How did people get caught by surprise by the biggest black swan of our lifetimes? They didn’t – they just weren’t set up to do anything about it. Time to fix that.
What we’re talking about: Various governments around the world are taking flak for reacting too slowly to the Coronavirus pandemic. But let’s also remember who else missed this – almost every business!
But it’s not as if nobody saw this coming or that they kept it quiet. People have been talking about this for decades. High profile people. Bill Gates. This still came as a total surprise to most companies even though they must have been aware of the possibility. The enormous industry of smart people trying to predict the next black swan did their job, including repeated predictions of a pandemic hitting the world. And even if companies elected not to act based on abstract predictions, by the time Wuhan and the surrounding Hubei province, a major global industrial hub, were locked down in January – the coming crisis was in full view. Was it certain that it would spread to other countries? No. Was it likely? Yes.
Similar to many other major events, it’s not like the experts necessarily got it wrong. It’s that nothing then happened in response.
The pandemic was not a black swan. It was what we call a grey swan. We maintain that musing about black swans is not where the value is. Value is found in two other areas. First, being attentive to when the high impact – low likelihood event turns into a high impact – high likelihood proposition. Second, having the capability to act in the right way at the right time in response. This type of capability has always been necessary and valuable. But in the era of globalization, companies could get away with just looking for black swans and not building the capability to capture value on the basis of black, grey, and white swans all the time.
Some companies built this capability. Some didn’t. But its only when the tide goes out that you discover who has been swimming naked.
Lessons to learn: So what does swimming naked look like? Here are our top four building blocks of a what a bathing suit would have looked like – they are still needed now.
1. Thinking: Method for prioritizing and contextualizing
The problem with black swan predictions, such as experts invoking the P-word, is that they are nebulous and uncertain. And it comes amidst a lot of other similar dire warnings with a varying degree of actionability. Energy grid cyber attack! WWIII! Nuclear meltdown! Yellowstone supervolcano!
Overload makes it hard to prioritize. And while data points are scarce, if each risk is appropriately put in context it is easier to track and prepare as needed. In this instance, we have seen viral outbreaks originating in China about once a decade - that can and should be incorporated into risk planning.
2. Framework: Ability to quantify risks and view them in combination
Anyone remember 2008? The lesson was that quantifying risk is great but we also have to see what’s correlated! To the extent we considered a pandemic originating in China a risk (doable, see above), we also needed the ability to 1) quantify the possible impact (roughly), and 2) add to other risks in our China portfolio. To the extent that signals indicating a pandemic occurred, that should quickly change how we see risk dynamics around the world.
With the baseline risks of a pandemic in China, we might have taken that into consideration among other risks to our supply chain such as the American trade war, or labor cost inflation. This ability is often missing. That means risks are ignored, viewed as isolated problems, and not able to be compared to your other options.
3. System: Readiness to act when the time is right
Most risk events, even black swans, evolve fairly slowly. COVID19 evolved rather quickly, but there was still room to act early. This is what we call the “grey swan zone” (more on that here). Governments are being criticized exactly for failing to act during the grey swan zone. The opportunity to act was when the pandemic moved from a black swan to grey, or said in a different way - blaring red. That was January, not March. Some organizations did this brilliantly – they recognized the grey swan opportunity, had people in place with the right thinking and the agility to take actions based on that thinking. Learn from them.
4. Organization: Organization-wide participation and structure
There are also organizational problems that we see all the time with clients. Two of the most common to point out are 1) lack of involvement of day-to-day executors – these issues are too often targeted only at the C-suite. And because of that, the awareness and knowledge of the issues is isolated to a handful of executives handling wide areas of responsibility. 2) lack of accountability – when something so unexpected happens how can you really blame anyone! Act of God is not usually included in your job description. If nobody is to blame then you’ll never have the incentives to prepare for the next issue.
In sum – sort out the thinking, create a framework, setup a system, and enable it organizationally. That’s a bathing suit.