One of the most commonly abused and misunderstood term these days is "Black Swan". Just google "Corona" or "Covid" in combination with the word "Black Swan" and there are a whole host of links that appear with many calling the COVID-19 crisis a "Black Swan event". This is a complete fallacy. At best, one can probably get away calling it a "Grey" swan—a known-unknown.
In order to understand my assertion, I must repeatedly fall back on the author of the Black Swan theory —scholar and philosopher, Nassim Taleb. The very first fundamental premise of a Black Swan event is that nothing that happened in the past could have even remotely predicted the possibility of this event, or in other words, a total surprise. That begs the question—was it impossible to predict the occurrence of the pandemic and the potential impact of it? Was it really a surprise? Whatever, we tell ourselves, as excuses to shield the sheer lack of preparedness around the world, the answer is an emphatic—no.
In fact, not only was it possible to predict it, people had indeed predicted it. Back in 2015, Bill Gates said in a TED Talk (now with more than 23 million views) that "if anything kills over ten million people, over the next few decades, it's most likely to be a highly infectious virus rather than a war." Now, those calling the current crisis—a Black Swan event, may say that they missed the TED Talk while they were busy reading Taleb, forget that Taleb himself in that very same book, as far back as 2007 had written, "As we travel more on the planet, epidemics will be more acute ... I see risks of a very strange acute virus spreading throughout the planet." Therefore, it is no surprise that Taleb is fairly upset these days and calls the current crisis a "white" swan.
My fear is that, like many other times in past, we will not learn from history and are bound to repeat the same mistakes, only in a different context. We have a tendency to lock up the rare events and isolate them as aberrations. Yes, the event may have been unique, but how we deal with the impact of that event gives us valuable lessons for the future.
I would also argue that just because an event is "unprecedented" in its entirety, it still not necessarily be a Black Swan event. For instance, I believe that the COVID-19 crisis is indeed "unprecedented". While the world has seen many crises in the past, whether it be wars, famines, environmental devastation or for that matter the great depression, this is for the very first time since the ice age, that the world is facing a challenge so multi-dimensional in nature that is truly global in reach and no one shall remain untouched. However, that still does not justify our lack of operational and financial preparedness by calling this a Black Swan event. It was well within the realm of "normal expectations" that companies in India and may even around the world, could face a sudden operational or financial challenge.
Let me illustrate this with two examples, which may sound more "realistic" than a pandemic. We have a large number of corporations concentrated in Gurgaon on the outskirts of New Delhi as well as in Nariman Point on the shores of the Arabian Sea in Mumbai. Gurgaon is sitting in a high seismic zone and Mumbai is certainly regularly battered by torrential rains. How many companies have created operational redundancies if their building in Gurgaon falls down in an earthquake and their CEO is buried in the rubble or the Nariman Point office is swept away by a massive wave? Let's take another likely scenario—what if we are suddenly drawn into a massive war and the enemy is able to drop two lethal and powerful ballistic missiles in Delhi and Mumbai? What kind of financial challenges shall we face? Do our balance sheets and business plans even imagine these possibilities?
Like most things in life, we need to start with an acknowledgment of the truth. The world has to acknowledge that the extent of this crisis could indeed have been prevented and even if not prevented in its entirety, governments as well as private enterprise could have better prepared to deal with the aftermath of it. Having been an operating leader for a long time, I do ask for a bit of leeway on behalf of management teams and therefore, argue that that this swan may have a tinge of grey in it.
Why does this happen? What prevents us from taking active and firm steps to prepare for the unknown?
Well, it begins with the inherent problems embedded in our traditional linear risk assessment models, because of the way we "frame" the question, depending on the information we consider to take into account and also, in the way we try to assess risks using standard deviations and bell curves. Bell curves lead us down the rabbit hole of chasing what is normal. Given our past experience, we start looking for certainties even in our risk profiling. We focus way too much on what we know or what we think we know and spend almost no time in exploring what we don't know. It blinds us from the rare events that are truly Black Swans or in the present case, even the Grey ones.
We tell ourselves that we cannot build a bomb shelter for every possible war or a dyke for every possible tsunami. Otherwise, we will be so risk averse that we will not be able to walk on a carpet in the fear of tripping over a wrinkle. Fair enough. But what prevents us from preparing for the eventuality of losing a leg, irrespective of whether it got blow off by a landmine or from a fall down the stairs? Sitting here in April, I may not know when the monsoons are going to hit this year but I am certain that there will be a storm and when that storm comes, I better have my umbrella handy.
Now, P&L leaders or for that matter even political leaders also have to constantly trade off between competing demands for limited resources as well as costs and benefits linked to the amount of money spent on these risk mitigation measures. Having come from the airline and hospitality business, I am no stranger to these cost pressures. As business leaders we are praised for how "tight" a ship we run. Therefore, we are constantly optimising by reducing redundancies. The mathematical problem of doing this is that as we get sharper with our cost structures, we become even more susceptible to the slightest changes, whether it be sales numbers or traffic flows or fuel prices or interest rates, let alone the big rare unexpected events.
The other problem that business leaders face is that, more often than not, we measure benefit in terms of what happens as a consequence of the money and effort we spend. As opposed to also measuring what we gained when something did not happen. For example, by spending the right amount of money in a robust emergency response mechanism, an airline could go for years without a fatality or a hotel could build a stellar reputation of being a safe and secure place to stay at. Seldom do I see an equally attractive recognition and reward system that honours those toll gates and conscience keepers within the organisation who makes sure that either the unforeseen doesn't happen or help us brace for impact better than our competitors down the road. Having said that, in areas or businesses, that are highly risky, there should be not be any incentives or bonuses to drive short-term incremental gains. The reason is that it could lead to perverse behaviours such as cutting corners and ignoring the safety valves. For instance, in an airline you would not want to place a financial incentive to drive on-time performance and quick turns since someone could end up compromising on training and operational integrity leading to a catastrophic disaster.
I am going to sound like Yogi Berra but how do you recognise and reward for something that happens? Especially when you don't even consider the happening of that event a real possibility. How do we then turn the lack of knowledge or the predictability of an event into an opportunity and some real action items?
Business leaders, management teams, as well as boards of directors and risk committees have to wake up to this reality and get prepared to face the uncertainties even if we cannot predict them. The extreme situations which can massive impact. Which are futile to predict but important to prepare for. Again, way back in 2015, Bill Gates hinted at the possibility of an epidemic spreading due to an act of bio-terrorism and repeated this as a concern as late as last week. Will we better prepared the next time? Will we have enough ICU beds? Will we have enough quarantine facilities and PPEs? Will we have a strong bench of management and administrative talent? Will governments and corporations be willing to spend the millions today to save the trillions tomorrow? Will investors and the stock markets reward this new approach? Will boards hold management teams accountable for these risk mitigation strategies which will be very different from the ones deployed in the past?
The goal has to be to reduce the vulnerability ahead of time. Board members and investors need to realise that preventing the white swans; learning from the grey swans; and limiting the impact of the black swan events, not only gives us the ability to take on greater risks but also possibly enables us to lead the recovery and reap more of the benefits than our competitors.
Views are personal.
The author currently sits on the global board of OYO Hotels & Homes and was formerly the president and board member of the airline IndiGo for a decade.