Tailoring Business Continuity Plans for Black Swan Events

Sometimes, a financial crisis or a pandemic can cause what is called a "black swan" event.?The term is used to describe an unpredictable and rare event that has significant and far-reaching consequences. These events have the potential to change business landscapes and affect business continuity. For example, in March 2023, Silicon Valley Bank (SVB) in the United States collapsed suddenly. The failure of the California-based lender marked the largest bank failure since the 2008 financial crisis and sent shockwaves across global financial markets. Such a financial crisis forces everyone to look at their business continuity programs with a new lens.

When black swan events happen, business leaders must ?start thinking about offshore strategies and evaluate their concentration risks across geographies. In the case of the SVB crisis, the bank mainly catered to the startup community. The bank collapse is alarming for service providers in the startup community, as they may have exposure to some of these accounts, ?Their funds may be frozen and they may need to scramble to raise working capital to fund existing growth. However, other companies may be unaffected.

It remains to be seen if these events will alter the landscape, but in the short term, there may be a flight to safety, with customers shifting their banking partnerships or relationships from startup banks to larger, better-known, and capitalized banks. The Federal Reserve has taken action to address fundraising concerns for startups and prevent a run on other smaller banks. The regulators have moved quickly to contain the situation, but banks that survive may still be under pressure to start raising funds, which could impact their operations.

Risk assessments are a key part of planning

Accounting for systemic risks has become a part of annual planning. Management teams must be vigilant and monitor events closely to plan effectively. Proactive steps should be taken to mitigate potential risks and reassure stakeholders, such as clients, analysts, shareholders, and employees. Integrated risk management is critical, as seen in the case of SVB's asset and liability mismatch, which caused problems with long-term investments when interest rates increased. Organizations must consider creating tabletop scenarios and have them modelled into planning exercises to address these systemic risks.

It helps when one prepares for worst-case scenarios. It’s helps more to have risk management standards that outline a specific set of strategic processes. It helps establish the organization's objectives and identify and mitigate risks using best practices. These standards?are often developed by collaborative agencies to promote shared objectives and ensure high-quality risk management procedures. The ISO 31 000 standard is an international example that provides principles and guidelines for effective risk management.

Although implementing a risk management standard offers benefits, it also presents challenges. The new standard may not seamlessly integrate with existing practices, necessitating the adoption of new methods. Additionally, the standards may require customization to align with the unique needs and requirements of a particular industry or business.

Think globally to plan locally

Business leaders must recognize that nothing is isolated in the current globalized market, and events happening elsewhere can still have an impact on businesses globally. Therefore, management teams must stay aware of global events and reflect on how they may affect their respective units. Management teams must think and plan globally while acting locally.

If a black swan event overwhelms existing plans, companies will need to use judgment and discretion to make after-the-fact adjustments, says Harvard Business Review. To ensure fairness, directors can work proactively to create rules governing these adjustments. While these rules can stem from war gaming, some principles can help ensure fairness, including upward or downward risk adjustments, preserving pay/performance relationships, ensuring transparency through clear communication with stakeholders, and considering the long-term impact of any actions taken. Full transparency is critical in communication with investors and executives.

However, it’s essential to understand there is no one-size-fits-all approach in handling unexpected situations. The key is to quickly assess its effect on your company's top or bottom line and take measures to minimize the impact. It could involve ring-fencing your locations.

For instance, during the pandemic, we prioritized our employees' safety, health, and welfare. During a financial crisis, we may ring-fence contracts with clients to ensure we can deliver without any hiccups. As for the fallout from the SVB crisis, we communicated with our stakeholders that we did not have any exposure to the crisis and that we were keeping a close watch.

By taking a calibrated response approach, companies can ensure they are prepared for unexpected events and minimize any negative impact on their business and stakeholders. While resilience takes time to build, with a long-term approach and planning, companies can navigate black swan events to emerge stronger than before.