In Business

When to panic: dealing with unknown unknowns

Businesses must plan for threats they can see, but accept that there are 'unknown unknowns'

PUBLISHED : Wednesday, 21 May, 2014, 10:24am
UPDATED : Thursday, 22 May, 2014, 1:11am

When is the right time for businesses to press the panic button?

Do they really need to wait until rioters are outside the factory gates, as in the case of Chinese-owned businesses in Vietnam? Or could contingency plans have been made and evasive action taken?

It is tempting to believe that companies can foretell the future, or indeed be able to forecast all contingencies.

Although an increasing number of advisory companies are out there claiming they've got the tools for this job, the truth is that it is impossible for businesses to be prepared for all external threats.

The truth is that it is impossible for businesses to be prepared for all external threats

Indeed, even when the worst is staring you in the face, companies can be reluctant to accept that things are as bad as they look.

Veteran Hong Kong businessmen know this better than most, because many of them had companies on the mainland in 1949 and clung to the belief that China under the control of the Communist Party might somehow permit business as usual.

It didn't take long for them to realise that this was a fatal illusion; the businessmen who waited too long to leave suffered considerable losses.

This is perhaps an extreme example, but I rather doubt that a single one of the Chinese-owned firms now evacuating staff from Vietnam really believed that this low-cost and seemingly foreign-investment-friendly country carried quite the kind of political risk that has now become evident.

No sooner has this happened than so-called experts pop up and airily explain that even if Vietnam is written off, there is no problem shifting production elsewhere, say to Myanmar, Cambodia, Bangladesh or maybe Thailand. Setting aside the losses that would be incurred by such a shift, look carefully at this list and consider whether the words "political stability" apply to any of these countries.

The blunt facts are that the scramble to reduce production costs generally entails going to places where worker's rights are minimal, where the rule of law is not to be relied on and where underlying political tensions can erupt at any moment.

Yet, on balance, these risks are judged to be acceptable, right up to the point when they prove to be otherwise.

Political risk is one thing, but what about other kinds of risk that you have never even heard of until they arrive on the doorstep?

I vividly recall what happened at the end of 2002, when the outbreak of Sars started as a profoundly worrying medical problem and turned into a far more widespread disaster.

This experience is seared in my mind, because as the Sars crisis developed, it was touch and go for the survival of my companies and many others, particularly in the food business, where daily turnover is essential.

Things were particularly bad for my company, because most of our business involves contract catering, which meant that we risked being in breach of contract by suspending services, whether or not there were any customers.

Could we have anticipated this problem? Should we have been better at taking evasive action?

Even with hindsight, the answer is no. Sometimes things happen that are so far beyond your control that all you can do is batten down the hatches and hope that the problem will pass.

Businessmen pride themselves on their ability to maintain control and pre-empt problems.

Yet omnipotence is rarely, if ever, achieved, and although there is always scope for damage limitation, only fools believe that they can control the external environment.

Decisions about risks and rewards are no different from those in every aspect of life. At home, you may be able to avoid all risks by remaining in a darkened room without contacting the outside world, but practically no one will go that far.

So risks have to be taken, and they can emerge from out of the blue. I never really understood why Donald Rumsfeld, the former US defence secretary, was so widely mocked for saying: "There are known knowns; there are things that we know that we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns, the ones we don't know we don't know."

It's down there among the unknown unknowns that pretty bad things happen, and even the smartest businesses cannot be immune from a smack around the face by an unknown risk.

Some things are beyond control. That's life.

Steven Vines runs companies in the food sector and moonlights as a journalist and broadcaster