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Following up on the flock of black swans

To guard against
To guard against "black swan" events, companies can assess their global exposure to "resiliency risk."

Last week, I had a great follow-up conversation with Matthew Le Merle of Booz & Co., prompted by my post on a white paper he authored for the consultancy. The paper was titled "Are You Ready for a Black Swan? Stress-Testing the Enterprise with Disrupter Analysis" and it laid out a methodology for global corporations to mitigate the impact of "black swans" — unforeseen events that can have cataclysmic consequences.

One of the things that Le Merle pointed out was that disrupter analysis can reveal greater "risk concentration" in an enterprise than was previously known. I thought this was stunning:

Risk concentration shouldn't be a revelation. Risk ought to be something that professionals can assess if not completely quantify. If the risk crosses a threshold, then they can abandon the project, trade, whatever. They shouldn't have so thoroughly botched the analysis that a black swan looms.

Le Merle told me that what was really troubling to companies wasn't discovering greater risk but greater risk exposure. An important distinction: you know the risk is out there, like a storm, so the important thing is to have good enough radar to be able to vector your plane around it.

So what's raised this risk exposure? According to Le Merle, global businesses are exposed to "far-flung" parts of the world, which they know less well. There's also a "drumbeat" in large multinationals to increase efficiency, which can reduce flexibility.

This can lead to an exposure to what Le Merle called "resiliency risk." As an example, he pointed to technology and consumer electronics companies that have concentrated their manufacturing operations in southern Asia (Apple, for example, which as we know has contracted with Foxconn to build iPhones and iPads). "This can't make sense in terms of resiliency," he said.

When exposure to resiliency risk is analyzed, a corporation can prepare for various "What ifs" — "What if there's an environmental disaster in southern Asia?"; "What if a union movement of some sort rises and insists of improved working conditions?" — and then figure out if the exposure could be potentially more costly than, say, bringing production back to the U.S. or Europe to build greater resiliency into the enterprise. 

"Every single multinational [corporation] is worried about this," Le Merle told me. And well they should be!

So getting ready for black swans is only part of the process of being a global company now. You also need to engineer resiliency into your operations — or at least be aware of how much risk not being resilient brings to the table.

[Ed: Just so you know, it's not a "flock" of swans — it's a "lamentation."]

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