If your business would struggle to continue functioning after a disaster, you’re not alone. It turns out that numerous companies are woefully underprepared for the so-called “tail risks” that could come their way.
What do we mean by tail risks? Essentially, it’s everything that regular risk appraisal distributions rule out. The pandemic is a good example, as are global food supply disruptions and even the situation in Eastern Europe.
Companies often use the wrong type of risk models to work out whether they could continue. Insurers, for instance, believe that they can cover normally-distributed losses because these assumptions are baked into their models. Banks do something similar when considering their portfolio risk.
Even individuals have a “normality bias,” where they expect the future to be some variation on the past, not something fundamentally different.
Given these tail risks, what should a firm’s approach be?
The best approach is to do what Nassim Taleb suggests and become antifragile. This approach ensures that when disaster does occur, your businesses can be in an even better position to deal with it.
What does that mean in practice? Glad you asked. Here’s how to substantially mitigate risk and ensure your business can continue through the most catastrophic events.
Check Your IT Systems Are Distributed
If your company relies on information technology networks to function, ensure they are distributed across various platforms and geographies. Use an IT infrastructure audit checklist to check every aspect of your IT operations to see where any weaknesses lie.
What you want to avoid is a situation where one system or area goes down and that prevents you from doing business. For example, you don’t want to keep all your files on a single external server, just in case there’s a power cut or an act of sabotage. You also want to avoid keeping data on a single hard disk without any backup. Again, that puts your firm at risk.
Diversify Your Activities
Another way to ensure business continuity is to diversify your activities. Instead of focusing solely on your main product, you branch out into other areas.
You might think your core offering is safe, but technological innovation can occur in surprising ways that people simply don’t expect. Hardly anyone at Kodak imagined the digital camera could destroy its business, but that’s precisely what happened. People couldn’t imagine the scale of change that might occur once digital technologies became sufficiently powerful.
Imagine The Worst Happening
You can also ensure business continuity by getting into the habit of imagining the worst. Statisticians might tell you that it’s unlikely because it never happened before, but large tail risks would indicate it is more likely than statistical models would predict.
When you start imagining the full extent of what could go wrong, it helps you to prepare for it better. You are in a much-improved position to respond to any crisis and ensure it doesn’t wind up engulfing your entire enterprise. Having backups and alternative strategies you can switch to immediately is enormously beneficial.
