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 / Autumn 2011 / Issue 64(originally published by Booz & Company)


How to Prepare for a Black Swan

This stage of the analysis often produces surprising results. Revelations can include greater concentrations of risk than were previously recognized, more severe and unexpected consequences, and, sometimes, seemingly obvious mistakes in how an enterprise has been shaped. The widespread adoption of offshoring strategies has spawned one example. At first, offshoring spread out the exposures and risks of operational disruptions because large companies were expanding their ranks of partners and their geographic footprints. But more recently, new exposures have arisen: Offshoring has created greater concentrations of risk in far-flung locations, where high-magnitude, low-frequency risks are often more varied and where the likelihood of rapid recovery can be much lower. Consider what might happen to the world’s consumer electronics and apparel industries, for example, if the recent labor unrest in southern Chinese factories develops into a disruptive labor movement similar to what the West experienced during the early 20th century.

4. Implementing contingency plans. Typically, the analysis team systematically generates mitigation options for each major “what if” insight. It looks for options that address multiple risks, and prioritizes them by the magnitude of risk exposure as well as the expense and ease of implementation.

Sometimes companies complete this final step on their own, using their ERM departments. The ERM staff usually participates throughout the analysis and is the most logical and effective group to shore up any major exposures. However, sometimes internal complexities warrant third-party involvement. Also, most boards prefer to involve an external, objective set of eyes, especially when recommendations include critical strategic and operational issues.

No company can be completely prepared for every possible black swan event. But the board, the executive team, and the ERM staff can complement the day-to-day work of the ERM function with periodic disrupter analyses. These analyses can ensure that the com­pany has adequately focused its attention on high-magnitude, low-frequency events, performed stress tests on its fitness in the face of such events, and prepared itself for unexpected catastrophes.

Reprint No. 11303

Author Profile:

  • Matthew Le Merle is a partner with Booz & Company based in San Francisco. He works with leading technology, media, and consumer companies, focusing on strategy, corporate development, marketing and sales, organization, operations, and innovation.
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