Black Swans - A Different Take on Resilience
Posted By Rob Millard - 0 Comments -
Those that regularly read my material or work with me will have noticed a common thread. Strategy, I firmly believe, must focus on making firms resilient to the unexpected. The world we live in is too complex and dynamic to plan for all eventualities. Even following detailed scenario analysis, unforeseeable events inevitably arise.
One of the new terms that the war on terror has introduced to the strategists lexicon, is the 'black swan.' Nassim Taleb, writing in the New York Times (free registration required) defines this as "an outlier; an event that lies beyond the realm of normal expectations." Most people [except Australians, of course, where real black swans are common] expect swans to be white. Their experience tells them to. "A black swan is, by definition, a surprise." Today's world, clearly, is more full of surprises than ever before.
In the past few months, we have seen a mere cartoon give rise to unprecedented and widespread anger. As John Robb points out in his posting Al Qaeda's Black Swans, if the attack on the Abqaiq Oil Facility in Saudi Arabia had been successful, we could conceivably have had oil at $100 a barrel. We seem more vulnerable today to shocks than we were a few years ago (when the dot.com bubble burst, another black swan, taking down several premier US law firms.)
The very unexpectedness of black swans helps create conditions for them to occur. Had the World Trade Centre attack (a classic example) been a conceivable possibility on 10 September 2001, it would never have happened. Fighters would have been scrambled; cockpit doors would have been armored and locked; passengers would have been subjected to greater scrutiny. Just like now, afterwards.
Our inbred risk avoidance mechanisms were designed for simpler times. Modern man has been around for about 500 000 years. The period since 1900 occupies only 0.02% of that time. Our tendency to learn from experience and specific events, not abstract generalities, may have been fine while we lived in caves or even through the second millennium. It is not enough for the 21st Century. There are three fatal flaws in our current thinking, all of which can be addressed:
Excessive Specificity. We try to foresee and plan for every eventuality and characterize all others as "acts of God." With them, we think, we are powerless. Focusing on what we can conceive diverts us from preparing for what we cannot. The antidote is to take a more general view of resilience. Our firms need to be fit to meet as many challenges as possible. Besides the obvious issues like financial conservatism, retaining one's stars and bulletproofing key client relationships, this also involves developing a culture of self-organization, loyalty, enthusiasm and communication. The case of the USS Palau is a good one of where an unanticipated crisis was successfully managed because people were focused on solving problems in general, rather than only specific pre-identified ones.
Hindsight Distortion. History runs forward but looks backward. When we look at black swans in hindsight, we tend to overestimate the degree to which they could have been foreseen. (Witness the witch-hunt that followed 9/11 and Katrina.) We make the mistake of overestimating negligence and indulging in a 'blame game' that does nothing constructive. The solution is to focus on solutions and the way forward, rather than blame mongering except where undeniable fault exists.
Flawed Reward Systems. Our reward systems are inherently focused on the foreseeable and on rewarding or punishing specifics. Yet avoiding an unexpected "bad" event or trend is every bit as valuable as achieving something positive. The problem is, it is often almost impossible to identify a disaster averted. It simply ..... doesn't happen. Correcting this entirely may be therefore impossible, but by introducing more generalized, broader metrics like peer reviews and input from clients, it is possible to develop a system that is more attuned to preventing black swans or at least reducing their impact.
Another way that black swans can be tackled is to creatively brainstorm possible worst case "what if" scenarios. Such brainstorms are usually far richer when outsiders are included, to provide perspectives outside of the familiar thinking patterns and experiences of the firm. Once a set of off-the-wall disasters have been conceived, the firm's strategy, systems and culture can be measured against them. The wider the range of conceived eventualities that are considered, the more likely that the firm's overall resilience will be such that it will be able to prevail over an unforeseen one.
The point with a black swan, remember, is that because it is by definition unforeseeable, you cannot plan for it specifically. The question is: what can you do to systemically make them less likely, and to ensure that the firm is resilient enough to bounce back from a black swan that does 'happen,' whatever it is.
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