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July 15, 2015 | by Nancy Green, CPCU, ARM, Executive Vice President, Strategic Account Management, Aon Risk Solutions

Managing Black Swan Events?

It is possible to prepare for a crisis situation

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A Black Swan event refers to a highly improbable occurrence with three characteristics: It is impossible to predict, it carries a massive impact and its shock value is stunning because people could never conceive of such an event occurring. Why does it matter? It can kill your organization if it isn’t managed well.

Some people equate the term “Black Swan” with “crisis” and believe that crisis management plans, effective public relations strategy, business continuity planning and supply chain risk management will enable their organization to successfully address any eventuality. While that may be true, not all Black Swans are crises (for example, winning the lottery is a positive Black Swan). Perhaps more importantly, not all crises are Black Swans, as is shown by the difference between a typical hurricane and a hurricane like Katrina. Typical hurricanes occur relatively frequently, so organizations generally know what to expect and have disaster plans to guide response, and operations can usually be restored to normal after a period of reconstruction. However, Hurricane Katrina was more than a crisis – it was a Black Swan because no one could have envisioned the size and scope of it, organizations were shocked by the overwhelming impact of it, and for many, the post-Katrina ‘new normal’ bore little resemblance to the past. A Black Swan event (or situation, if it’s a culmination of circumstances that have evolved over time) is a game-changer for those going through it or impacted by it.

So why are Black Swans such a hot topic in businesses and board rooms right now? The name puts a face on the type of event that companies and their boards fear most – the ‘Unknown Unknown’ that, despite all of the preparations that might have been made, still takes the organization by surprise and shakes it to its core.

The frequency of Black Swans may be statistically insignificant, but these events do occur, and often carry catastrophic consequences. There are many companies that either have struggled in Black Swan events or haven’t survived at all (Arthur Andersen and Lehman Brothers would be examples of the latter). If it is impossible to predict a Black Swan, how does an organization prepare for one? More importantly, is it just luck or fate that determines which organizations survive and which fail, or is there a key to doing well in a Black Swan event?

The key to addressing a Black Swan is not just mounting an effective response; it is mounting that response while simultaneously dealing with the psychological impact of being shocked by an inconceivable event of staggering proportions. Understanding the influence of survivor psychology provides great insight into why some organizations fail and others survive, or perhaps even thrive, in a Black Swan event. Understanding the nuances of Black Swan events, knowing how to counteract the shock factor and translating those insights into actionable intelligence is the focus of this paper.

 

To download the complete Aon Black Swan Whitepaper, please click the button above.