The COVID-19 emergency action shows us the limitations of contingency planning for extreme events. The actual outcome of any event is dependent on the real-time resolution of unknowns that, by definition, cannot be pre-planned. However, COVID-19 also shows the need, in such circumstances, to have structures in place for fast and binding decision making at business level, at firm level and throughout the ecosystem shared with partners and competitors. COVID-19 is the first real crisis of the post-globalisation age; the 2008 crash was sector dominated while SARS was regional. Today at least a quarter of the world is in lockdown. A useful exercise in these days of enforced home working is for key players to revisit their extreme scenario contingency plans, not so much to confirm how they would deal with knowns, but by seeking to populate their action plans with a segment that defines the scope of their ecosystem and also the options to bring in effective decision makers for extreme events whose rulings all parties legally commit, in advance, to accept.
The reality is that too many contingency plans are tested triumphantly in benign conditions and gather dust between periodic reviews even if the markets they relate to are subject to exponential change. A contingency plan needs to be one hundred percent perfect in all areas of certainty. But these are limited. As an example, the ability to switch to a contingency site is important if one’s main site is compromised, but that has no real value if we experience a World Trade Centre scenario where the supporting infrastructure and that of one’s main counterparties are similarly disrupted. Contingency plans need to take in the entire firm ecosystem and understand where are the weakest links and how to compensate for them. Too many contingency plans assume a cataclysm will lead to market suspensions and thus resolve the issues, but suspensions do not overcome all problems; they merely create a new set. The World Trade Centre scenario may not prevail and the worst world could be one where a subset of the ecosystem fails but not sufficient to create a suspension of markets. The scenarios are multiple but planning needs to consider them all and have a critical pathway of action needed by each firm, by the authorities and commercial partners; as well as their input into such action. The Big Brother state, unpalatable perhaps for many, has a major role to play.
Capacity will also need scrutiny. Telecommunications is an atypical area of the problems of this phenomenon. The world is interconnected and communications technology is key. But connectivity creates its own set of challenges. There is the question of the capacity of the operating networks. There is the fact that no operating network is an island and there may be potential third-party single points of failure attacking them all. And there is a question of hardware, the amount of replacement stock held and its accessibility. And there is a question of prioritisation in the event of outages. Will financial firms be included in the first wave of access or how will that prioritisation, if needed, work? And capacity within firms needs not only to look at the redundancy against peak daily traffic but the redundancy against accumulated historic traffic if there is a multi-day outage that needs processing as the system recovers. What processes are most urgent and which can wait? Normally a cost of money driven prioritisation is used, although that exposes firms to legal and regulatory risks.
Our supply chains have also become much more complex. We share space in the cloud. We share infrastructures with others. We have sole front to back style facilities with clients. We may have clients using us as sole providers but linking us to a validator who checks all data. We have clients with multiple suppliers in our space. We use different infrastructures and often for the same purpose. All of this creates the connectivity risks I have already mentioned but many more as well. Have we a contingency that is more than theoretical that allows us the ability to move from one supplier to another? Are we too big to move? Are we too complex to move? Is the solution so bespoke that any move could not be undertaken in a timely fashion? Whose decision is it in firm wide contracts to renegotiate for the exit from one or multiple suppliers? And, as we have learnt from COVID-19, commercial decisions may be politicised in a world of “America first”, “EU barriers” or “Global Britain”; how could we deal, as global businesses, in each component of our supply chain, in a prioritisation of local versus international clients? All of these scenarios need to be assessed for likelihood, but we also need to remember that low probability does not mean no probability as many learnt from the statistically “impossible” events that drove us into the 2008 financial crash.
I suspect, post the crisis, that many firms will be revisiting their supply chains and testing them for reliability as well as resilience. Globalisation is going to come under scrutiny, as will outsourcing, partnering, concentration risks and many other scenarios. We should also take this opportunity to consider more home working, for we have realised in the COVID-19 world, that home working as part of the standard work package for many is a socially valuable, albeit technically challenging, opportunity. However, we would need major enhancements to home environment technical security, an agreement by all parties for monitoring that may be akin for some to snooping and an acceptance that blended home and office working requires a different office as well as home structure. And we should not automatically reject some jobs for home working; there is still a paper-based mentality in a world that it screen-driven and needs to be more so. A further issue will be automation and I am surprised how few firms are not using the enforced downtime to bring on automation projects that may make marginal or no commercial sense in normal times but would enable greater workplace flexibility simply by creating fully automated processes.
Some of the early successes of COVID-19 include the opening of new pop-up hospitals and, although such actions were most likely reactive rather than planned, they showed the importance of planning in a crisis on the hoof outside the box. The early failures of COVID-19 have included the availability, for a variety of reasons, of adequate testing and the challenge of getting hold of protective equipment, chemicals and oxygen. That again shows the need to carefully plan for exponential short term increases in demand and to revisit the reliability of one’s supply chain in a world where cost may be secondary to accessibility. For have no doubt, COVID-19 will change the attitude to contingency from regulators, clients and suppliers; and we could be about to see a transformation of the ecosystem throughout the financial sector.