In the well-known Tchaikovsky’s story, the Sawn Lake, the black swan appears to deceive Prince Siegfried, confusing him to select Odile over Odette, which led to the outcome that resulted in the death of Prince Siegfried and Odette.
In this story, Prince Siegfried could not predict that Odile would present herself as Odette leading to the known tragic results presented by Tchaikovsky’s story. This story indeed described what a Black Swan Event is in Risk Management. A rare event that is beyond the reasonable expectation of occurrence that, when occurred, produces a significant impact or consequence. In simpler words, these are events that were not imagined to occurred and produced a significant impact in terms of health, safety, damage, and financial loss.
To understand how Black Sawn Events look like, consider the events of the 11th of September of 2001, where a series of coordinated terrorist attacks by the Islamic terrorist group al-Qaeda against the United States took place. During the World Trade Center design stages, an event of a plane impacting the building was never a scenario of concern. Therefore, the towers' structures were not designed for that event. Nevertheless, the event took place collapsing the two towers, resulting in a significant number of fatalities and an economic effect in the USA.
Considering Black Swan Events in Risk Management
Knowing that these events are hard to predict, how are we consider them in Risk Management? And how are we sure that we are not ignoring them by deciding that a scenario is not credible?
As these events are rare and hard to predict and imagined during a risk assessment, the Risk Management Process should acknowledge the possibility of Black Swan Events and implement recovery elements that strengthen the resilience of the organization, increasing the likelihood of a successful survival when these occur.
One of the leading Management Elements that need to be in place as a defense against a Black Swan Event is an Organizational Crisis Management Plan and Process. This plan establishes a crisis response structure, plans for the event, and defines diverse activities to overcome the effect of a Black Swan Event.
This Crisis Management Plan goes beyond the typically Emergency Response Plan (ERP), as it defines strategies and plans beyond a well-known potential event as the ERP. Additionally, the Crisis Management Plan can include other events and scenarios not generally covered in the ERP, for example, financial and business-related events. For example, most recently, the pandemic due to COVID-19 has surprised diverse organizations, affecting their operations and business. In other words, the recent COVID-19 pandemic could be considered as a Black Swan Event for many organizations, as they did not consider an event like this during their business operations.
Another aspect of the Crisis Management Plan is the crisis financial aspect. The plan should establish strategies to fund the implementation and hold the organization finance during the crisis. For example, many organizations chose to redirect some percentage of the revenue to a crisis fund that would be used during the crisis to reduce the financial burden.
There should be synergy between the organization’s Crisis Management and the business continuity principles or plans. A plan should be in place to reactivate other areas of the business that can produce revenue while the impacted area is in recovery, additionally should consider the mobility of personnel to other business units or other locations to maintain operations. However, moving people to different business units or locations requires proper planning as moving people brings particular challenges, as appropriate competency and training on other company’s activities. Additionally, a proper definition of authorities and skillsets should be in place to be able to quickly move personnel to other activities without impacting quality and business performance.
In summary, dealing with Black Swan Events is based on recovery rather than prevention because we cannot prevent something that is not predicted. This recovery should focus on strengthening the resilience of the organization through the use of a Crisis Management Plan, which should be aligned with the Organizations Business Continuity Principles and Management System.
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