Chris Clearfield, author of Meltdown: Why Our Systems Fail and What We Can Do About It, talks to FM magazine senior editor Drew Adamek about how the coronavirus pandemic is exposing complexity in global supply chains, trade, and economies. Clearfield offers advice on how finance professionals can improve their strategic decision-making in the face of this complexity.
What you’ll learn from this episode:
- How complexity in the global system amplifies risk.
- How to identify places of complex risk.
- The short- and long-term risks that the coronavirus pandemic poses to organisations.
- Why the coronavirus pandemic may impede effective decision-making.
- Structuring decision-making to hedge against complexity.
Play the episode below or read the edited transcript:
For more news and reporting on the coronavirus and how management accountants can handle challenges related to the outbreak, visit FM’s coronavirus resources page.
— Drew Adamek (Andrew.Adamek@aicpa-cima.com) is an FM magazine senior editor.
Drew Adamek: The rapid spread of COVID-19 has upended global supply chains, cratered stock markets, and imperilled national economies. What may have started as a novel, but isolated, virus in a single city has in three months’ time become a global pandemic touching nearly every facet of modern life.
That coronavirus could have such a globally catastrophic impact even on places not yet infected is a stark reminder of how complex and interdependent the world economy has become. While pandemics like COVID-19 have long been predicted, organisations of all types are finding that they need to make deeply consequential strategic decisions about human resources, supply chains, cash flow, customer and vendor relations, and a whole raft of other issues quickly and under constantly shifting circumstances.
For years, Chris Clearfield has been researching and writing about complexity, how it unintentionally leads to failure, and how organisations should be making decisions around complexity. Clearfield, co-author of Meltdown: Why Our Systems Fail and What We Can Do About It, is also the founder of risk consultancy System Logic, and a contributor to the World Economic Forum’s Global Risk Report.
I’m FM magazine senior editor Drew Adamek and I spoke to Clearfield recently about how organisations looking to unravel the complexity of coronavirus can make better decisions.
Chris, pandemics of this kind have been on the World Economic Forum’s list of major global risks for years. Was a virus of this type with the kind of spread we are seeing predictable?
Chris Clearfield: That's a good question, and I certainly don't know the answer.
But a motivating factor for us in writing Meltdown was this idea that you don't necessarily need to be able to predict the specifics to make a statement about how resilient your system is or isn't. The very simple analogy that we use is that it's a little bit like driving a car. You don't know what kind of accident you might get into, but you wear a seatbelt, you have airbags, and you have a crumple zone no matter what.
I think that we have been running a lot closer to the edge than we might think. The answer is that I don’t think you could have predicted in December 2019 that this thing was going to arrive. But I think we generally knew that we were closer to the edge than we might otherwise be comfortable with.
Adamek: How is the spread of coronavirus exposing the complexity of the global supply chains, global finance systems, global economies in your mind?
Clearfield: When we think about complexities, we think about interconnection and unknowability as two of the big indicators. From the perspective of interconnection, we're seeing things that you never would have necessarily put together before being connected. Some of that are the supply chain shocks that we haven't even really seen yet because of delayed action in the supply chain space. You know, freight takes a while to move across the ocean.
I think the idea that something halfway around the world would affect our ability to deliver goods and services is a very, very modern view and very tied into the complexity of the world. The other aspect of that that's really true is just the how hard it is to understand, how hard it is to predict the specifics.
Adamek: In your mind, how prepared are organisations to deal with this kind of knock-on effect? And are you seeing organisations that are well prepared, and, if so, how are they dealing with this type of complexity?
Clearfield: That’s a great question, but I think there's a bigger question underlying that, which is: How prepared and how well set up are these organisations to make these kinds of decisions in the first place? One of the things that we see in my work with leaders is that decision-making about crises tends to be a little bit ad hoc. They don't really have the kinds of things in place to enable effective decisions.
I was working with a very sophisticated risk management company recently. They had this big conference that they were putting on that they had been planning for six months, and they cancelled it at the last minute. It was probably a very reasonable decision to make, but what was interesting to me was how ad hoc the decision [to cancel] was.
When we think about crises, there's a bunch of different ways to think about them. One thing is planning ahead and having specific touch points that give you indications of, "OK, here's when we should you know start cancelling things." Determining those things in the abstract, even if you don't have the exact answers, and thinking about what's important and what your indicators are going to be, can be a really powerful way of approaching these kinds of decisions.
So asking not, "Should we cancel this conference?" but instead, "What would have to be true for us to cancel this conference?" or "What would have to be true for us to keep this conference going?"
And even just take your decision-making team and sort of split them into two groups, one that argues for it and one that's the red team that argues against it. I think all those things can be really powerful ways to structure decision-making.
Adamek: In your view, what are the major short-term and long-term risks that coronavirus poses for organisations?
Clearfield: I think the short-term risk is two-sided. It's the loss of productivity. There is something important about people being together in the same room in terms of doing creative work.
Then you look the closing of companies like Amazon, Microsoft in my region, all shifting to remote work. There's definitely a cost to that. That's the kind of the short term.
The long term that we're going to be seeing. I think people for a long time have maybe not necessarily priced in these kinds of risks into their supply chains, for example, or even in the organisational structure of their companies in terms of where people are in specific areas of the world.
One of the things that this might give us some sense of is the fact that we haven't really priced those risks in. The fact that offshoring and getting the cheapest price for something may win most of the time, but when it's not the winning strategy it might be very costly and very disruptive.
When we work with clients, one of the things that we go back to is we're not going to blow up the whole system. What we can try to do is to build some resiliency. If we have identified these vulnerabilities, then we can find leading indicators that we want to start to pay attention to. We can try, even if it's not very efficient on the front end, contract with additional suppliers, for example, as a hedge. Then we can ramp them up when things start happening.
The longer-term effects I see, assuming we all get through this in some kind of reasonable way that leaves most things intact, is I think a shift in planning to how we think about the costs of and the benefits of those kinds of hedges.
Adamek: This might be a slightly esoteric question, but what role does short-termism versus long-termism play in these kinds of reactions?
Clearfield: I think it changes our optimisation time frames. We tend to be optimising for a more short-term time frame in a lot of instances. And the supply chain is a great example. If nine years out of ten keeping a super-optimised supply chain helps you stay competitive but that tenth year blows back on you because of some big external shock, from a rational company perspective, and even from a societal perspective, it probably make sense to go with that optimised supply chain.
The other interesting thing that we've done some work with a major manufacturer of white goods — refrigerators, washing machines, dishwashers, that kind of thing. And they're at a really interesting time as a company because they've gone from their principal task of bending metal and putting motors in stuff — and they're really, really good at that — but now they have this whole other set of organisational activities and strategic activities.
There's a couple of really interesting things that come up in this context of coronavirus. They're just not able to move forward on a lot of strategic stuff that they’ve been working on because to set a strategy they need a process of getting people together in a room and getting them to have these sort of interesting and challenging conversations to build trust.
It’s really interesting, I know Zoom, the videoconferencing platform, has been doing really well these past couple of months. But I am still very sceptical that it is a substitute for the kind of hard work that we need to do to really set strategy.
Then the other side of that is just to look at that company and what they're doing. They have people that show up at factories every day to put things together. But that's exactly what you don't want. You don’t want to have a bunch of people concentrated in a space for a long time together.
So I think that you can talk about the sort of far-reaching supply chain, but also you can think about, you know, like in Michigan and Kentucky, there’s lots of places that we're talking about that are right here in the [US]. That to me is just a really interesting challenge when you think about how do you flex a response to this whole thing.
Adamek: What lessons should finance and risk management professionals be taking away from this experience, or is it too early to say?
Clearfield: I think it is too early to say. There are some specific lessons that will come from this that will apply to the next outbreak, for example. But I think there is a lot we can say about lessons and how to think about it.
One example is just being able to talk and to make decisions as a team about something like this. I think that is hugely important. If your decision-making in this process has ended up looking like a bunch of people sort of struggling and not feeling like they had the data to make a call and not being able to articulate the data that they did see, that can be a wake-up call for a lot of people, particularly those in the risk space who have to talk and think a lot about uncertainty.
This can be a way of trying to upskill people's ability to talk about uncertainty, which will not only help you know in the next pandemic flu or the next coronavirus outbreak, but will also help when thinking about, "Well, you know what market should we go after next?" "What strategies should we pursue?" "How should we think about this stuff?"
And I do think that there's really an element to all of this where one of the things that we can fundamentally see is that the way that people make decisions is a real skill and one that needs to be practised in a different way than it often is.