A Black Swan Event

Up until a couple of years ago we often talked about black swan events. That language is almost obsolete now as, just like the image above, black swans and black swan events are far more prolific than they used to be.

Prior to the pandemic we needed to encourage entities to be more agile but in the age of disruption, we long for consistency and sustainability. We are still in an age of disruption though where the winners are the agile. Just as the phrase often misattributed to Charles Darwin says, “It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is most adaptable to change”.

The history of black swans and the use of the terminology is fascinating, as prior to their discovery in Australia in 1697 they weren’t even known to exist to the majority world, but after that, were acknowledged as rare exotic birds.

The term likewise has many variations, with some theorists differentiating between black, grey and white swans. Taleb, in his 2007 book, The Black Swan, helpfully notes the attributes of a black swan event as:

1. an outlier, an unexpected event.

2. Extreme impact.

3. Despite being an outlier, it can retrospectively be explained and shown to have been predictable.

The pandemic continues to occupy high level discussions as to whether it was a black or grey swan event, but that is not the purpose of this article. This is to help us understand how we prepare and manage for what appears to be an increase in black swan events.

We need to continue to be observant, adaptive and agile, but, more importantly, we need to have our operating parameters set. That means ensuring our strategic plans, risk registers and other informative documents such as PESTELs, SWOTs, Stakeholder mapping documents (which starts with your third party register documents) and historical and forecasting documents in place. Every CFO should have a folder on their computer which consists of spreadsheets of historical data where they have compiled previous year’s figures to understand trends and forecasts.

My articles 0n SWOTs PESTELs and Risk Management , and Why I am a fan of Weighted Scoresheets , addresses the principle of digging in to the necessary requirements for preparing information that will enable prompt decision making when needed. The importance of having information at the ready, to enable decisions in crisis or black swan events is further explained in my article on Preparing Material for the Cutting Room Floor.

The exploration / exploitation dichotomy is usually weighted to exploitation when in crisis mode which is why it is important for us to look more to exploration when the sun shines. This is the time to even consider in depth actuarial studies that evaluate our income streams and potential increased costs, as well as implementing sensitivity and stress testing on our budgets. One of my practices in the past was to prepare a strategic budget for some time in the future, assuming that income and expenses would be different from the current operating budget. The reality for most of us is that we annually prepare a bottom up budget based on previous year’s actuals, which may or may not be perfectly aligned to our strategic plan. Since we can rarely turn around a budget in a year, I found it beneficial to pick a date in the future to aim for a strategic budget, which enabled yearly operationals to slowly be modified and aligned to the ideal strategic budget. But to do this, you must firmly understand your parameters that are informed by your SWOT’s, PESTEL’s and your strategic plan.

Nearly a decade ago, I saw a great risk register which only had a dozen risks, but the last risk was zombie apocalypse. Its entry was presented light heartedly but was nonetheless presented to ensure we thought through a worse case scenario. Just as we need to have our blue sky planning days as we dream big for our entities, we also need to occasionally think through worse case scenarios, which enables us to prepare for pandemics, disruption politics, war, oil crises, changes in income streams or increased expenses, or any other potentially damaging event.

Black Swan events do seem to be more frequent. We may not be able to prospectively predict them in each instance, or completely future proof our organizations but by having all our preparatory documents up to date with the latest considerations to inform our decision making, we can be better prepared.