Preparing for the unexpected (even when it’s actually expected)

It is a sad fact that COVID-19 has had disastrous effects on far too many lives, businesses and entire economies. But does it qualify as a quintessential black swan – an unpredictable event that carries extreme consequences and is often unjustly normalized afterwards?

Despite the implication of extreme rarity that the name itself lends, we’ve experienced a number of black swan events over the last century. On the one hand we have technological developments that are largely considered positive, such as the rise of the internet or the invention of the laser. Then there are political upheavals like both world wars or the fall of the Soviet Union. And more recently, the financial crisis of 2008, which is widely considered to be one as well. The aftermath of all these events ushered in extreme, and broadly unforeseeable, disruption. So what about the global pandemic?

It certainly checks the extreme impact box. As a point of comparison, the world economy contracted by 1.7% during the global financial crisis and by 4.3% in 2020, according to the World Bank. The resulting recession was in turn the deepest decline since the Great Depression of the 1930s.

But Nassim Nicholas Taleb, the scholar and former derivatives trader who coined the term, told The New Yorker in April 2020 the pandemic is no black swan given that researchers and health experts have been sounding the alarm for years. (To be fair, he has also questioned whether the 2008 financial crisis was really one either, though he admits fewer people saw it coming.) 

In fact, a few months prior, Mr. Taleb already coauthored a paper warning that our increased connectivity in the physical world would render conventional risk management approaches inadequate to deal with the coronavirus. And as we know now, he was right.

Adaptability requires investment

The fact that our world has become increasingly connected – physically and digitally – has opened the door to a wave of societal and economic benefits. But from a global risk standpoint, this higher degree of interconnectedness has proven to be a double-edged sword. While it has certainly facilitated the ease and speed with which we collaborate, it has also complicated our ability to adequately manage emerging hazards.

All this underscores the importance of adaptability and the critical role it plays in how effectively we cope with periods of high uncertainty and rapidly changing circumstances, color of the swan notwithstanding.

If I look back to how Siemens Financial Services (SFS) has been able to successfully maneuver through past periods of volatility like the 2008 financial crisis, I give as much credit to our robust risk management framework as I do our ability to adapt to dynamic circumstances. I wrote about our strategic approach to managing risk in November 2018, two years before the first human cases of COVID-19 were identified.

However, adaptability in and of itself doesn’t just happen; it necessitates deliberate investment. For businesses, I’d place a strong emphasis on smart technology investments that both support a flexible, yet rigorous risk management response as well as forward-looking business model innovation. For each of us as individuals, this could mean a commitment to lifelong learning to protect our professional marketability and personal resilience: an investment in ourselves.

As black swan events by their very nature imply that it’s what we don’t (or can’t) know that counts, the decisive factor is then not only to acquire pure knowledge, but rather methods and strategies to refine our mental flexibility and personal adaptability. Only by being well equipped in this way can we react constructively and perhaps even find a positive gain when confronted with an unforeseen or underestimated turn of events.

Let’s take a look at the upheaval experienced in the global manufacturing sector this past year as an example. For some – say in the aerospace industry – it was catastrophic. For others, like in pharmaceuticals, demand spiked. The pandemic turned supply patterns and consumer demand on their head virtually overnight.

In his opening remarks at the #SPSDialog a few months ago, CEO of Siemens Digital Industries Cedrik Neike talked about how companies that had already begun digitizing and automating their processes have weathered this crisis far better than others because it gave them the flexibility to adapt production as needed. 

Companies operating with aging equipment and systems are more likely to find themselves ill-equipped to pivot or innovate new ways of doing business quick enough to remain competitive in the face of emerging market pressures.

 Getting ahead of the curve

All this said, the challenges inhibiting investment can be considerable, especially in a climate of economic downturn. Recent research from SFS estimates that over the next five years, more than $550 billion in investment funds are needed for digital transformation in the global food and beverage industry alone. It also examined the future costs of not investing in agile, digital technologies. And while the study highlights the food & beverage industry in particular, the same assertions hold true for other sectors. For instance, the overall window of opportunity to outpace the competition under normal market circumstances has a “tipping point” of 5-7 years.

But as the research also points out, more opportunities are arising to pair the benefits of technology directly with financing in new ways.

Thanks to digitalization, the sheer quantity and quality of data we’re able to glean about a given piece of equipment’s performance and usage, both in the predicative and real-life sense, is accelerating at an unprecedented pace. This opens up more affordable ways for companies to acquire technology specific to their technical and budgetary needs. But it also supports the development of all new business models when it comes to how companies in turn get their products in the hands of their own customers. Both scenarios lead to increased fitness for the future, built with a strong backbone of intelligent financing.

In keeping with our manufacturing example, a trend that speaks to both scenarios here are servitization models like pay-per-outcomes or pay-per-use. Without the need to outright buy and own a new piece of equipment, companies can avoid an otherwise large upfront capital expenditure. The payments can then be offset under operating expenditures by the actual benefits, such productivity gains (x number of widgets produced) or sustainability factors like lower energy consumption or reduced waste.

In a similar way, SFS developed a vendor agreement together with B2B packaging equipment manufacturer TrakRap in order to support their new business model. In essence, we pay them for the eco-innovative machines they build upfront so they can, in turn, reinvest in their own growth. We then take care of the leasing side, enabling their end customers to spread the usage costs over the contractual period on a “pay per wrap” basis. I’ll be discussing this model and the technology involved in a panel on circular economy with TrakRap CEO Martin Leeming and SFS CEO Roland Chalons-Browne during this year’s Hannover Fair on April 13.

Where to go from here

Whether it’s breweries shifting production to consumer-targeted goods as patronage at bars and restaurants declined, offices equipping employees to work remotely, or loved ones adjusting to virtual-based family gatherings, the pandemic has been an unyielding teacher in the value of adaptability and technology. Those who can swiftly respond to minor bumps in the road as well as the big disruptions will be in the best position to do well when life suddenly veers sharply off its expected course.

The urgency for manufacturers to invest in technology that enables more digital, flexible and resilient processes has never been more evident – a daunting endeavor even under ideal economic conditions. But this is where having a trusted partner who takes the time to understand the specific business goals and hurdles can help ease the pressure – and assist through the entire digital transformation journey. Equipped with exactly the right technology to move ahead and the innovative financing to make it attainable, manufacturers can embrace the Fourth Industrial Revolution and be well poised to adapt to whatever challenges the next swan may cast their way.

So even if COVID-19 doesn’t qualify as a true black swan event for Mr. Taleb – with whom I also happen to agree – I’m curious to hear your thoughts. How do you see it? And even more importantly, what would you say is key to managing unexpected – or unexpectedly disruptive – events?