The Unpredictable (Event) is Predictable: How Companies Can Prepare for the Next One
The COVID-19 pandemic has drastically changed nearly every aspect of our lives. Massive bailouts have been launched to rescue households and entire industries and economic activity – grounded to a halt by lockdowns across the globe – is just beginning to recover, due to the unprecedented nature of the global health crisis.
Reflecting on how so many people are heroically navigating these challenging times reminds me of just how often we have been faced with such turbulent periods in recent history and the need to always be ready for the next potential crisis to come.
I started my career in financial services more than 20 years ago, just before the Federal Reserve Bank of New York organized a $3.6-billion bailout to prevent Long-Term Capital Management from causing massive losses throughout the financial system. I remember vividly the shock in the system, and how many people were saying it was an extremely low probability event and “no one could have predicted that”. Since then, as the founder and chief executive of several companies over more than two decades, I have encountered many black swans – or those events that are ‘impossible to foresee’ – including the dot-com bust, the September 11 terrorist attacks, the global financial crisis and now the COVID-19 pandemic. And each time, the size of the disaster, its effect and required intervention were much larger. While each of these crises were different, in each instance, we have heard the same assessment – this is an unprecedented event, and no one could have been prepared for it.
But is that really the case? Surely, corporate executives, lawmakers and economists alike might not have predicted the exact circumstances of each unfortunate event. Yet, in reviewing the list I mentioned above, it has become evident that these types of global incidents will happen again. Black swans are not nearly as rare as we would like to think. The unprecedented event is commonplace every decade. In other words, the occurrence of the unpredictable event is highly predictable.
Against that backdrop, below are recommendations of what companies, and particularly startups, can learn from this latest crisis:
- Another global crisis will occur. It will be huge and … well … unprecedented! We will not know in advance whether this will be a health, financial event or a completely different area, but we do know an incident of some kind will occur. It’s the duty of business and government leaders to ensure that they are adequately prepared from a risk management standpoint when this day comes. Scenario planning and disaster recovery simulations of the type now mandated by central banks, should take place across industries and should be revised, particularly as business environments change.
- No one is immune from the impact of this potential event. The impact of these events is increasingly far-reaching and very real for everyone, regardless of the country where you reside or the industry in which you work. In an ever-interconnected world, we must recognize the extent to which these ‘surprising events,’ will affect all of us.
- Make sure you can sustain temporary shocks. Companies should therefore take more proactive and aggressive steps to ensure that they are able to navigate these crises when they occur. There is an old saying in Silicon Valley that companies should raise money when they can, not when they need it. During periods of expansion, companies should double or triple the cash cushions they believe they need and be mindful of the impact of hiring decisions, real estate investments, leverage and potential stock buybacks in the event of a significant downturn. Going forward, banks shouldn’t be the only types of companies that are required to maintain a stress capital buffer.
- Crises have a beginning, but more importantly, they have an end. During a crisis, it can be difficult to see the end, especially when dealing with financial difficulties that are impacting an organization, employees, and clients. However, you must remember that this situation is only temporary. It takes 2-3 years for corporations to resume growth. And while business might not return to previous levels, the immediate risk will subside. If you survive the first year, you are likely to survive, period.
- If your industry can be catastrophically affected by specific black swan events, protect and diversify. The potential for a pandemic already existed before our current crisis. Indeed, from 2002-2004, the SARS outbreak infected over 8,000 people worldwide, resulting in at least 774 deaths. Meanwhile, the Swine flu pandemic in 2009-2010 resulted in as many as 575,000 deaths. Examining the warning signs from these incidents should have been enough for business and government leaders to prepare for this type of incident. Some took notice. The All England Lawn Tennis Association, which organizes the Wimbledon tennis tournament, for instance, purchased $1.9 million per year in pandemic insurance following the SARS outbreak. This prudent decision means that the organizers are set to receive a $141 million payout. The streaming video business has become a bright spot for Walt Disney even as the entertainment company grapples with the closure of theme parks and the docking of cruise ships. Meanwhile, the strength of Apple’s services and wearables business has proved crucial even as its iPhone sales have struggled. Either through insurance, diversification or other means, companies must recognize the events that could really devastate their businesses and protect against those incidents well in advance.
- In the long term, sound business models win. Sudden catastrophes can devastate great businesses, and protections and planning can prolong weak ones. But over time, we need to make sure we have the right business models. The pandemic, while a terrible health and economic crisis, has accelerated trends – such as streaming movies, interacting with friends and customers through Zoom, and exercising on Peloton bikes in our homes – that already existed in the transition to an electronic world. There is no escape from these shifts, and we must embrace them.
The preparation for the next crisis starts now. Unfortunately, it’s coming. It will be unexpected to most of us, unprecedented and huge. At the same time, it will be predictable and survivable, if we make sure we are always prepared.
This article was originally published on LinkedIn on June 23, 2020. Click here to read the article in its original format on LinkedIn.