In 2007, former options trader and risk analyst Nassim Nicholas Taleb penned the Black Swan: the Impact of the Highly Improbable. The bestseller remains quintessential reading for anyone wanting to understand the nature of unforeseen events that expose the fragility of our systems.

According to Taleb’s criteria, a black swan incident is an outlier ‘because nothing in the past can convincingly point to its possibility’. Second, the impact of this event is extreme. Third, we try to make sense of these kinds of cases by coming up with explanations for its occurrence after it happened.

COVID-19 is a novel coronavirus, meaning it is part of the coronavirus family – along with SARS and MERS – but it is a new, extremely contagious strain. There is no way to treat those infected other than alleviating the associated symptoms. The only way to effectively stop the spread of the virus before we have a vaccine is to avoid human-to-human contact altogether. As journalist Donald McNeil Jnr writes in the New York Times, ‘if it were possible to wave a magic wand and make all Americans freeze in place for 14 days while sitting six feet apart, epidemiologists say, the whole epidemic would sputter to a halt’. Obviously, this is not tenable. As at the time of writing, the US, a first-world nation in every respect, is the global epicentre of the virus – a stark warning for developing nations.

In a declaration championed by decision-makers worldwide, President Cyril Ramaphosa announced a national lockdown on 23 March, giving companies and individuals 72 hours before the measures took full effect. The ramifications for companies were immediately clear, yet, somehow undefined. The true extent of the damage to the economy and society will only be evident once those who can return to work are able to so. Many will have to seek other means of employment.

Private and public sector companies must realise that COVID-19 is a catalyst for other risks, explains Christopher Palm, chief risk adviser at the Institute of Risk Management South Africa. ‘We’ll need new playbooks on how businesses of the future are run. Most of us have no idea what this new world will look like,’ he says. Strategies will have to be robustly reviewed and tested, and must include proper scenario planning.

Malcolm Fair, MD of investment firm RisCura, says they have been in communication with businesses in China to gain a glimpse of potential future scenarios for SA businesses. ‘One of their key take-home messages with regard to their businesses is that they realise now, more than two months into the crisis, they are at best only halfway through this. Even though the pandemic may have been controlled in the country, Chinese businesses have to navigate effectively to get back to normal,’ he says.

Drawing from their experiences with SARS and other natural-disaster events, Chinese decision-makers explained it is usually in the second half where mistakes are made. ‘In other words, keep some gas in the tank. This is going to be a long ride,’ says Fair.

‘The picture over the last three months has been completely dominated by the COVID-19 pandemic,’ according to Neels Kornelius, head of risk management at Willis Towers Watson. ‘We have not seen a single risk scenario that predicted a global lockdown due to pandemic spread, with the associated economic fallout. We are in uncharted waters.’

All existing business-continuity plans have been tested and activated, and businesses without these plans in place have been cruelly exposed. In these situations business-continuity management has been implemented on the fly.

‘The need to physically distance workers from the office and one another has accelerated a large part of the Fourth Industrial Revolution, with assumptions about where workers need to be, in order to maintain the company’s business activities, being completely overturned,’ says Kornelius. ‘The tools and policies being implemented now to facilitate remote working will remain and have a lasting impact on business for a generation.’

Yet the situation has also presented opportunities for businesses. Karl Hammerschmidt, CEO of SA online retailer RunwaySale, says the company is in a good position to weather the pandemic. It has continued to trade with customers, albeit with longer delivery times to accommodate and adhere to the lockdown restrictions. ‘We have actually seen a spike in our mobile traffic, with consumers browsing from home on their phones,’ he says.

One of the biggest operational challenges for companies has been managing teams from home. Hammerschmidt explains that communication tools, systems that encourage ownership and software that can be used from any location are hugely beneficial in helping mitigate risks in these uncertain times.

‘Our office already had an active and structured work-from-home policy in place for many years, which turned out to be a blessing as almost everyone was ready to work from home. We had tested working this scenario at full productivity,’ he says.

Not overextending the team, incorporating flexible work policies and embracing new technology have helped the company to weather the storm, he adds. ‘Watching the team come together, encourage each other, and push new ideas and opportunities has made for some of the proudest days of my working career. This was not an overnight accomplishment but rather years of looking after the culture and the hiring process.’

RunwaySale’s warehouse remains closed yet the productivity gains in the office have meant that up until now no cuts have been made across the business. However, for many companies, including the RunwaySale team, uncertainty remains the biggest problem. ‘Everyone is trying to build a plan of action, but without great insight into what they need to plan for,’ says Hammerschmidt. ‘This is no one’s fault, which is what makes this crisis unique.’

Doris Viljoen, a lecturer at the Institute for Futures Research at the University of Stellenbosch Business School (USB) and faculty member at USB Executive Development, says that companies may see a different workforce once lockdown measures are relaxed. ‘During lockdown, team members have to participate in digital meetings and make use of collaborative tools in order to keep operations running,’ she says. ‘During week one there was a steep learning curve, but now most people are quite comfortable with this way of working together, making decisions and sharing information.

‘People returning to the office after lockdown could have a much higher level of digital fluency and, with that, an increased willingness to try out new technologies and a deeper appreciation for efficient information systems.’

Deloitte Africa restructuring services leader Jo-Anne Mitchell-Marais says the businesses that survive this pandemic will be those that proactively managed risk and paid specific attention to cash-preservation and cash-flow management prior to the pandemic.

‘Being able to determine likely liquidity shortfalls before they materialise is an advantage when approaching funders – including shareholders and banks – as there is the benefit of time to critically assess the requirement,’ she says. Businesses will need to focus on balance-sheet strength to withstand similar future events.

Cash management and forecasting is critical during this time, says Mitchell-Marais. Traditional, business-as-usual cash-management processes must be replaced by a robust framework for monitoring, managing and forecasting cash.

It is critical, now more than ever, to understand your cash flows, says Stephen van Coller, CEO of EOH. ‘You need to understand your cash out and cash in. Every day, I receive a report stating how much cash the company has in every single bank account,’ he says. ‘We then put in a 13-week forecast and manage the business based on this.’ This does not happen overnight, he notes; it is a continuous process.

The next step is in understanding your customers. What do they need and want from you? Are you meeting your service-level agreements? Are they going to delay payment if you are not meeting these agreements? ‘Make sure you are on the right side of your customers because that’s your in-flows,’ he says. Based on these calculations and considerations, companies can start ‘right-sizing’ their operations. ‘It’s a process to fundamentally understand the cash flow of your business. Profit is irrelevant if you don’t have cash.’

The requirement to understand the entire value chain has also been highlighted by the pandemic, says Mitchell-Marais. ‘It’s not just your tier 1 suppliers that can cause supply-chain disruption, but also suppliers in tiers 2, 3 and 4,’ she says. ‘There will be far more interrogation of supply chains and mitigation where risks are highlighted, including the need to understand critical suppliers’ pandemic-preparedness measures.’

The so-called ‘new normal’ will challenge philosophies around exclusivity of supply, the role of global supply chains, just-in-time inventory management, and the need for robust, detailed contingency planning, she says. ‘Businesses will be paying far more attention to the wording contained in force majeure or material adverse-condition clauses in contracts, and the practical implications should they be invoked. The need to run a lean operation and manage costs tightly is a key lesson to be learned from this experience.’

The current crisis will cause an inflection point in how risk management as a discipline is perceived by corporates, says Kornelius.

‘The failure of most – if not all – risk-management frameworks to predict the COVID-19 pandemic, and especially the velocity with which the risk manifested itself, will either trigger an investment of time and resources into making risk-management systems and frameworks more robust, or it will trigger a lack of confidence in risk management as a discipline and cause it to be sidelined,’ he says. If managers go with the latter, what is the alternative, he asks. ‘What other method can be used to gain any form of forward visibility on the effects of uncertainty on business goals?’

Business leaders will need the maturity to recognise that a failure to foresee a single risk does not render the entire discipline worthless but rather provides a golden opportunity to learn, fine-tune methodologies and build space into corporate risk deliberations for those way-out, left-field scenarios, he says.

No one can question the extremity and severity of this pandemic, and few, if any, risk managers were able to predict this outcome. Taleb argues that it is human nature to try make sense of these events after the fact. At the moment, it is evident that it is human nature to also look for the solutions.

By Sven Hugo
Image: Harold Courchay