I am always sceptical when I find articles that claim to identify or eliminate the so-called “Black Swan” events. Primarily as they appear to be derived from not having read, nor understood, Taleb’s definition of a Black Swan event.
First point of definition, the event is outside the realm of regular experience and there is nothing in our past experience that convinces us it is possible. Of course, it is only a Black Swan if after the event we fool ourselves into believing it was predictable.
So perhaps the folks who promote the detection and elimination of these Swans are actually talking about addressing events that used to be Black Swans, but are currently not.
Not much help for those who actually got caught out when the event occurred.
Last week I read an article by Matthew Le Merle, in Strategy + Business (Issue 64, Autumn 2011) entitled “How to Prepare for a Black Swan“. The author is a partner at Booz & Company in San Francisco. Booz are the publishers of this magazine.
The article proposes a technique called “Disrupter Analysis”, which seems like it may be a worthwhile addition to the portfolio of resilience tools.
The article starts by outlining the extent of recent unlikely events, across the spectrum of risk domains – including;
- The obligatory mention of Japanese earthquake, Tsunami and Nuclear accident
- China limiting the export of rare earth minerals
- Euro-zone meltdown and potential collapse
- The ‘Arab Spring‘
If you are a “Black Swan Sceptic”, then the rest of the argument will be lost on you, so you should stop reading.
For the rest of us, these type of events can and will continue to pop up and surprise us.
You can go no further in addressing these events until you confront the limitations of Risk Management (or ERM if you must – adding the ‘E’ doesn’t make the process any different). Despite the purity of ideals, most risk management is limited by resources. So they focus more on the higher probability risks – which is appropriate.
Le Merle raises two more reasons why most ERM teams will not address Black Swan events.
- The sources of these events can be too varied to identify in full, and perhaps more importantly;
- The internal politics and culture (un)intentionally create “blind spots” that internal staff, using standard risk tools, will have difficulty addressing.
I make no apology for agreeing that there are a range of activities in this space that internal staff will always have difficulty undertaking properly – sometimes you need that outsiders perspective and independence.
The Disrupter Analysis does not seek to predict a Black Swan event (because that is not possible), it is intended to augment the current ERM efforts by considering additional risk events. The technique follows a four step process;
- Mapping the Enterprise
- Mapping various attributes of the enterprise such as;
- Geographic footprint
- Nature of Supply Chain, Channel Partners and Customers
- Industry Structure and Competitive dynamics
- Workshop these attributes to identify concentration risks
- Often these are hidden – sometimes in plain sight
- This was one of the attributes that caught my attention, I have found so many clients over the years with considerable levels of concentration risk that they had never considered.
- Create a disrupter list
- A wide-ranging catalog of potential disrupters
- Draw from a range of risk domains
- This may be a good place for imagination to be given some license
- Asking ‘What if?”
- Using the list of potential disruptive events and the mapping data
- The probability of the event is not taken into account, just the impact
- Implementing contingency plans
- This is the standard process of implementing controls or mitigations to reduce the impact if one of these events did occur
- This could involve strategic and operational design changes
- While the article argues for the first three steps to be completed by a special team, utilising external support, this step could be undertaken by the in-house team alone.
What I like about this article was that even if you use their technique, they still recognise that you can never be completely prepared for a Black Swan event.
Refreshing to see people offering ongoing levels of uncertainty instead of a false sense of certainty or security.
What a great idea – looking at BC as disruption-related risk! Where have I heard that before?
Are you aware of your companies concentration risks?
What forms of “what if” scanning do you employ?