Black Swan Event: Preparing your Business for the Unexpected

Herbert Prokscha

If you are responsible for a business with less than $10 million in revenue, your business will experience at least one Black Swan Event during any 5-year period.The term itself refers to the fact that up to 1697, it was presumed that all swans were white. In that same year, black swans were discovered in Australia. After that, it was obvious that the occurrence of black swans should have been predicted.A “Black Swan Event” comes from Nassim Nicholas Taleb’s, book on the Black Swan Theory.  He popularized and explained this rare phenomenon:

Identifying a Black Swan Event

  • The event is a surprise (to the observer).
  • The event has a major effect.
  • After the first recorded instance of the event, it is rationalized by hindsight, as if it could have been expected; that is, the relevant data were available but unaccounted for in risk mitigation programs. The same is true for the personal perception by individuals.

Having experienced Black Swan Events first hand, and knowing that each event can mean the death of your dreams, I recommend three different resources that at one time or another played a major part in the survival of one of my companies.

The Insurance Agent

The most often overlooked and yet a most useful resource across all your operations is your insurance agent. You want an agent with whom you can freely discuss your plans and whom you can call when the unexpected happens. This means that you want someone who checks in with you, not only once a year during renewal time, but also every couple of months. Invite your agent to walk the floor of your operation. You want your policy based on coverage, not price alone – and you want their expertise!In 2004, my manufacturing plant in Orlando, Florida was directly impacted by three hurricanes. The third one resulted in a power outage that lasted several days. I purchased 500 pounds of dry ice and put it in the freezer (there was no longer a working back-up power supply). My insurance agent suggested the use of a battery-powered temperature log – if the freezer temperature went up too high, the insurance company would cover the lost inventory. If the temperature held, the USDA would accept the log as proof and I could use the inventory. I was able to ship product the day after power was restored.

The Facilitator

As odd as the term sounds, having access to a person who has contacts outside your circle is essential. For example, in the restaurant business, it would be somebody who knows where to get anything and everything – from building permits to someone who can repair a broken oven two hours before service, or who knows how to solve a plumbing problem at 10:30 PM on a Saturday night. In particular, my facilitator was the owner of a local food distributorship – Mr. B.A computer error in the accounting department of the power utility at 2:30 PM resulted in my power being cut off. After futile phone calls to the utility, I reached out to Mr. B., who told me he would see what he could do.The utility company advised me that their error would be corrected in 48 to 72 hours–a delay that could have severely damaged my business. Mr. B. spoke to one of his contacts. At 4:00 PM, a power truck pulled up and a few minutes later and we were back in operation. When I tried to thank the supervisor of the crew, he just said, “Give my regards to Mr. B.”, and left.

The Mechanic

I can tell you that during a five-year period, you will have a critical piece of machinery fail during the weekend – and you will need it working on Monday morning, in order to ship to your largest customer!Cultivate your service suppliers from day one. Look for the companies that care about you and get to know you. Involve her or him in what you are trying to accomplish and make sure you give them regular business. When the worst happens, they are the ones who will do whatever it takes to get you back up and running.

Survival

It is ironic that “Black Swan Events” happen to a small business more frequently than to a large business. I agree with the author of the Black Swan Theory – the best defense is a non-structured flexible system that adapts.  Small business owners need a close and transparent relationship with all of their resources to supplement the company’s structure and to give it the diversity in thinking necessary for surviving a Black Swan Event.