The black swan pandemic

If a good person is as rare as a black swan (Juvenal) then we must be witnessing a massive reconversion at the time of this writing because we may be, yet again in the middle of a Black Swan event.

The idea of a Black Swan event has been popularized by the author Nassim Taleb in his book-long essay on our blindness with respect to randomness and the extreme impact of rare and unpredictable events The Black Swan: the impact of the highly improbable.

The most simple presentation of his idea starts from the argument that ‘all swans are white’, an observation which has been considered as true until the first black swans were observed in Australia. One single observation of a black swan has rendered invalid the centuries-long confirmatory sightings of all white swans.

In the author’s words, a black swan event has three main characteristics:

“First, it is an outlier, as it lies outside the realm of regular expectations, because nothing in the past can convincingly point to its possibility. Second, it carries an extreme impact (…). Third, in spite of its outlier status, human nature makes us concoct explanations for its occurrence after the fact, making it explainable and predictable.”

By now you are probably beginning (if you haven’t started earlier already) to compare the covid-19 pandemic with a black swan event. It seems to have all three characteristics so is it a black swan?

Asking and attempting to answer this question is synonym with analyzing the past: by the time this article comes out, the conditions of the events which are rapidly unfolding before us will have already changed several times.

The originator of the idea never intended to predict or help increase our predictive abilities of such events by analyzing history. What we need instead is to build the necessary robustness to withstand these negative events and eventually exploit them.

So, in exchange, we invite you to look together at how we can act on building the necessary resilience to overcome or even maybe benefit from the current conditions.

The way this analysis is structured is as follows: first, we will take a look at a brief summary of what is being presented in terms of financial and economic impact of the covid-19 pandemic: the facts, as well as what is being proposed as a crisis response.

Then, we invite you to delve into a discussion bearing our own analysis and recommendations, divided in two parts: a philosophical, introspective approach, the THINKING section, and an empirical attempt at some recommendations, in the DOING section.

Economic impact

A bird’s eye view of the analysis and investigations written so far on the topic of the covid-19 pandemic and its global financial, economic and social impacts show that an enormous amount of energy is being invested in suppressing the actual virus while many urge for even faster or more rigorous measures. There is also, and some might say, luckily, a vast amount of energy expended in stabilizing the economy through public-policy responses. However, there seems to be some consensus that in order to avoid permanent or at least long-term damage to our livelihood, duration or timebox of the pandemic needs to be shortened.

A visual representation of the intertwining between the public health measures vs. the economic situation can be better observed in the figure below:

The upper panel represents the effects of the medical containment measures as indirectly proportional to the lower panel which depicts the severity of the recession. The figure clearly indicates the importance of trade-offs between the two.

Economic loss in our case is generated by an array of shockwaves, namely:

1. Medical distress: these represent the economic losses caused by sick workers who are no longer able to contribute to the GDP. On the graph above, this is equal to the bottom red curve
2. Containment impact: the slowdown caused by the closure of non-vital brick & mortar activities, bankruptcies and soaring (temporary but also structural) unemployment rates
3. Delayed spending: firms and households are in a wait-and-see state of mind which leads to a spending contraction

The industries hardest hit by the covid-19 pandemic may be: commercial aerospace, air & travel, insurance carriers but also oil & gas and automotive. We must also bear in mind the impact on all industries whose supply chains are disrupted, many which begin or go through the epicenters of the pandemic, like China for example. Such a disruption includes effects on production, transport, logistics and customer demand.

Financial Sector impact

On the financial markets, a first drop of confidence has been observed as of mid-February 2020: financial markets have witnessed a dangerously fast collapse of the stock markets due to the free fall of equity prices around the world, as well as a sharp decrease of oil prices. The current situation shows that stock markets have stabilized, however it appears that they remain extremely volatile, which increases the risk of a fallback.

Concurrently, a lot of households and institutions have seen their access to credits become severely limited which spikes the probability of potential defaults among households and corporates due to the inability of repaying interests and debts in time. Figures show that the private debt (households + corporate) recently reached an all-time record.

Central banks and governments rapidly reacted with various measures meant to restore confidence within the financial markets and avoid (or at least soften) a new global financial crisis.

Firms in the financial services sector worldwide are working hard to mitigate the COVID-19 impacts on their day-to-day operations. In the early stage of the pandemic, firms have intensively tested and are currently implementing business continuity plans such as working from home and rotating shifts for all their employees. In addition, many have taken measures in order to protect the health of their employees, by restricting business travels, meetings and large events. Many banks have even extended loans and are renegotiating credit terms for clients in a financial distress.

Similarly, from our research, a few general answers to this nascent crisis are emerging and namely:

1. Addressing the immediate effects on an organization’s workforce, customers, technology, and business partners as well as the substantial revenue disruption and potential liquidity crisis
2. Preparing for the near-term cash management issues and potential multiple quarters of lower revenue
3. As the situation evolves and its effects become clearer, a detailed plan for stabilization and return to business-as-usual can be envisaged
4. Reimagination and reinvention of the next “new normal”, whatever the implications of this paradigm entail for each organization

1.3.1 Thinking

The unbearable lightness of…the future

We have seen two opposite, quite paradoxical reactions in the world economy: rush and slowdown. We are slowing down every activity in an attempt to rush the extermination of the pandemic so that we can resume our normal lives as soon as possible. In the meanwhile, we are planning how to kickstart the economy and avoid such events from happening in the future.

We forget that our tools of planning and estimation, as well as our strategic future plans from a few years back to today, never took into account the happenstance of such an event but now, more than ever, planning for future avoidance is a key recommended “strategy” in addressing the pandemic effects, be it during confinement and beyond.

In his masterpiece “The unbearable lightness of being”, Czech author Milan Kundera, beautifully puts it: that which occurs in life occurs only once and never again – thus the "lightness" of being.

We will never find ourselves in this same exact situation again. A worse, more severe, unexpected version of it, yes. But one we cannot foresee or consider in our “planning”. In other words, as we react to the current events, we are turning this swan into a grey or even a white one but we will never encounter this exact black swan again.

It is admirable that most propositions and recommendations we investigated so far bear the label ‘estimations’ and we recommend to be weary of anybody proposing complicated mathematical and economic quantifications of the future pandemic impact on whatever global indicators.

One of the first important lessons we can derive from this is accepting that we can’t, however fancy our tools, predict the future. Or better yet, a personal favorite quote: to predict it is to create it. We also cannot rush the future, or the effects of a specific policy or event on the future. If we were to predict all of the actions, under given specific circumstances, then we would have two problems at hand: 1) we are talking globally, so the constellation of potential circumstances is almost infinite in its scenario multiplication and 2) we, humans, would no longer have such a thing called ‘free will’.

Which problem would you prefer to tackle first?

Lesson one: We are very bad at predicting the future.

The principle of externality

An externality is “is the cost or benefit that affects a third party who did not choose to incur that cost or benefit”. It can be positive or negative. It can be both at the same time as well, depending on who is bearing the cost and who is enjoying the benefit.

Public policy responses to relieve and support national or international economies has been massive and humane, because they provides a safety net of reassurance. Every Public Finance class in any well-respected Economics as a Science degree will include the topic of externalities in its curriculum. It is an immensely interesting topic with many ramifications and potential for investigation but it also bears strong resemblance to chaos theory, as summarized by Edward Lorenz: chaos is when the present determines the future, but the approximate present does not approximately determine the future.

Public policy responses are usually modelled with the infamous ceteris paribus in mind, implying that the economy is a deterministic system, that is, the output of a model is fully determined by the parameter values and the initial conditions, with zero randomness. But we should not forget that an economy’s major ‘input’ producers/consumers/demanders are humans, making our system a stochastic one. A stochastic system will lead to an ensemble of different outputs, even with the same parameter values and initial conditions because it possess some inherent randomness.

There will be externalities. Some expected, some completely unexpected. Most of them unpredictable. We should rejoice that such a public-policy response exists and aims at protecting the most unfortunate, but we should also bear in mind and prepare for the hidden consequences.

Lesson two: All models are wrong but some are useful (George Box)…to which we would add: but only if they consider the impact of randomness

Exponential growth

By now, we are all well-equipped to properly explain exponential growth.

As we plan for the uncertain future, we will find the exponential function coming back again and again to bite us in the derriere. The future is uncertain and the more uncertainty, the more error. The error rates of future events grow just as exponentially as the covid-19 virus. The way to simplistically understand it is that the future is uncertain, and the only thing we can do is to predict it. But a prediction is a forecast and thus has an error rate. The error itself is a prediction based on a prediction…that can’t be as reliable as we think, can it?

So, should we not be predicting? What alternative do we have? The act of prediction in itself is not inherently wrong. What is wrong is our complete and total confidence in a prediction and then our a posteriori explanation on its potential severe impact when its wrong. A lot of predictions turn to be accurate but when they don’t, their impact is more severe than we had ever imagined (assuming we even had the courage to imagine). In hindsight, it makes sense: the more complicated we make something, the more excuses we create for ourselves.

Lesson three: Almost everything left untreated has the potential for exponential growth.

1.3.2 DOING

Like other businesses, covid-19 is also impacting the consulting industry. Many consulting firms have seen their projects postponed or cancelled altogether with many consultants and internal supporting roles being placed in intercontact period. These kinds of decisions bear financial but also human strains on a firm.

According to some sources, the global consulting industry might suffer a 30-billion-dollar loss in 2020, which is roughly a 19% decrease.

But we prefer to see the silver lining in every situation, and we encourage you to see this period as an opportunity rather than as a contraction. We invite you to look at some strategies you could apply in your organization (consultancy or non-consultancy) in order to navigate this stage as beneficially as possible.

Firefighting core values

We think planning is important. And our attempts at deriving scenarios to help prepare a response are laudable. It is also what we should be doing in order to successfully weather the storm.

But that is not all we should be doing. Planning becomes crucial only when it’s followed by and accompanied by action. Deep action. The kind of action which spans across silos, procedures, processes, policies down to company and employee culture.

Turbulent times like these ask us difficult questions: what does it really come down to when we talk about our corporate culture and values? Is that as important now? Has it maybe become crucial?

While writing this analysis, we researched what firefighters in general hold as core values. The comparison is evident because these are the people for whom every situation is an unpredicted crisis which always demands the exact same response. It is built purely of randomness.

A study published on researchgate.net, entitled ‘Professional values of firefighters’, cites the following, most recurrent values (from a study among different firefighting squads from Hong Kong, Singapore, London, Toronto…): integrity, responsibility, courage, community, adaptability.

You may have read or seen some of these values displayed on a company’s website or walls but in conditions such as those of firefighting squads, these values take on a whole new dimensional meaning.

So the first step we can take in the DOING is to rethink and revisit our core company values:

Integrity is doing the right thing in a reliable way, without waiver. A firefighter must trust his fellow team mates to always have his back and vice-versa. This can only be achieved when trust is not only assumed but ingrained in a culture. This trust can take multiple forms in an organization and in a consultancy firm such as ours this translates into allowing our employees to be independent (but supported with whatever they need) enough to be able to follow through with their projects and in turn, we rely on them to always have both of our best interests at heart.

Responsibility has many meanings and definitions so it’s important to take the time and think about what this means as a value for your organization. Is it having control over your work, or your actual duties or maybe is shifts more towards accountability and accepting the consequences? Whatever it is, in times of crisis any organization should prepare for defining the scope of what responsibility entails for all its people.

Courage has many beautiful definitions and one of our favorites is actually the official Wikipedia one: the choice and willingness to confront agony, pain, danger, uncertainty, or intimidation. Pay attention to the use of words: courage does not mean accepting discomfort or pain but rather confronting it. For an organization and its people confronting the unknown is a skill which can only be built by practicing discomfort as much as possible: in a confined, safe way where it’s allowed to fail (and fast). It is said that true champions don’t win trophies: they just come to pick them up at competitions because the true winning has already been done during practice, away from the crowd’s soars.

Community is often overlooked, or its impact minimized because it is assumed that any gathering of people working towards a common goal or mission (such as an organization, regardless of its shape) constitute a community. But the notion of community invites us to think how one individual can make a difference in society. And how the sum of these differences come together to shape how a community looks like, what it does and what it stands for. In times like these, each individual part of an organization is invited to dismiss the all-too common “but I am just one person” and instead follow it with “…and that’s exactly why I should contribute”

Adaptability means finding a way to evolve with the environment. As we have shown in the THINKING section, our world is not a deterministic system. It has much randomness to it and by the law of exponential growth, the less we adapt the more we will have to change (change being more brutal and swift than adaptation is). The way an organization adapts is by constantly “injecting” doses of randomness into its activities: challenging the status-quo from time to time, taking on small but risky projects, encouraging fail-fast initiatives, stress-testing its core values. Whatever it may be, the secret is not to stay in place for too long and move before it has become necessary.

Busy no more?

The gift of time has been bestowed upon us and for once we can stop and dust off our most inefficient processes and procedures and build new, better, more productive ones. We can even use part of our temporary relieved personnel to conduct these improvement initiatives.

Still digitally challenged? Maybe it is time close the short-term gap and get ahead in your digital transformation projects. If the resources are tight or missing, there is always the possibility of external projects which can serve your short-term needs without putting much additional financial strain on your cash flow. Consulting firms have the expertise and resources to help with the much-needed acceleration of digital initiatives for example.

Remote teams do not just work remotely, they are evaluated as such too.

Once the core values have been reviewed and adapted to fit not only the business-as-usual but also the “unusual” part of the business, we propose to take it even a step further by redesigning your teams (all of them) to perform and thrive remotely.

We luckily have many tools allowing us to facilitate, organize, group, and deliver efficient, useful, and quick digital meetings or projects. And the industry around these tools and methodologies is sharply developing and improving.

The challenge every organization face is not necessarily the available technology but learning how to develop, preserve and grow a digital, remote employee culture. Any seasoned manager will tell you that culture change is long, tedious, risky and most of the time highly unsuccessful. But they will also share one other piece of valuable information: that it’s not about the method used.

Resistance to change is built through constant appraisal of respecting procedures, processes, preserving profits, cutting costs etc. All useful and important metrics for the health of every organization. But we come back to the same principle of injecting randomness into apparently stable systems: employee evaluation metrics must be reconsidered in the light of developing a strong and engaging remote-working culture. Such culture has a solid dose of resilience and hardiness because its actors are rewarded for innovation and finding new ways to do the same thing in a new environment. Innovation is not the same thing as invention so don’t worry about having to look too far: just take one existing process at a time and figure out a way to remove its current inefficiencies (hint: all processes have them) by making it remote. It’s common knowledge that an inefficient process turned digital will just end up being an inefficient digital process and nothing more, so the order of the steps is important here.

Culture is not what is being displayed on your walls or website as values or mission. Culture is what you reward in your people. That we will have to work remote has become a fact. That we must reward the people who are making it easier for us to do so is the next step.

Intrapreneurship as our best prediction tool.

Gifford Pinchot III coined and defined the term ‘intrapreneur’ as: “employees who do for corporate innovation what an entrepreneur does for his or her start-up”

Basically we mean people who are self-motivated, proactive, action-oriented and potentially outside-of-the-box thinkers working for your organization. Such people are the natural evolution of an environment which fosters firefighting values and rewards a culture which adapts to ever-changing, sometimes random environmental conditions. Intrapreneurs needs the conditions we described previously to exist and thrive so again; the order of the steps is of uttermost importance.

The idea of intrapreneurship is not new (it seems to have been around since 1978) but it seems to have been mistaken for incubators or internal think-tanks or other, often too rigid structures. The idea goes as follows: we will set-up a taskforce with the purpose of coming up with great ideas. It sounds a bit like when Christopher Columbus set out to find an alternative route to India and came across the New World instead.

Most notable discoveries are usually made when and where we are not looking for them (thus, random). We cannot plan or predict innovation just like we cannot plan or predict the next Black Swan. A mandated innovation taskforce will do little in terms of innovation and more in terms of project management and budget calculations.

While allotting budgets for innovations and research & development initiatives is suggested, developing the necessary courage for someone to become an intrapreneur is seldom a problem of financial allocations. Stretching a resource means building what we want (or a rudimentary version of it) with whatever we have at hand. If such a mentality exists in your employees, then its is a by-product of a solid culture.

Encouraging our people to fail fast in times of safety builds the necessary spirit and toughness to rise to the occasion when the future is here. By nurturing a flourishing community of intrapreneurs we invest in preparedness instead of prediction so that when the time comes, the only available crisis answer becomes one voice: “we got this”

These unprecedented times invite us to stop and think about how we want to respond and what we want to respond. We are invited to plan and for once, we may have plenty of time to do that by the book. Just remember that we risk turning planning & prediction into a fallacy instead of a tool in our toolbox when we get too rational about it: focusing so much on the minutiae of a plan instead of completing the work.

The people who give advice or help or coach or teach often feel that if what they tell people to do sounds too simple or is too simple, they will be considered irrelevant or not “expert” enough. So we over complexify and often add layers and layers of packaging on something obvious and forget that just because something sounds simple it does not mean it will be easy.

The way we respond to this pandemic, today, tomorrow or in the coming months, will not be easy. But responding is what we should be doing. And doing is simple: the most effective way to do something is to do it.

Andra Mertilos, Business Analyst Champion and

Cédric Everaerts, Junior Project Analyst