Why our previous risk management approaches to systemic risks have reached their limits and why new approaches are urgently needed.
Note: This article was completed on 31/03/20 and reflects the state of knowledge at that time. Translated with https://www.deepl.com/
If anyone had described the current situation in Europe a few weeks ago, they would probably have been declared mad. But within a few days, many things were turned upside down that had previously been considered impossible. But we are still at the very beginning. We will probably not really understand what has been set in motion here for a few years. But what happens now? At the moment there are many more questions than answers and this is not likely to change that quickly. But one thing seems to be already foreseeable: The world as we know it will change dramatically. Here are a few systemic considerations and observations.
In early 2020, a new infectious disease spread in China. This was not the first time that an epidemic or pandemic, i.e. a transnational or worldwide epidemic, had its origin in China. However, these have always been relatively well contained and controlled. This time everything is different.
For the first time in Central Europe, people in the region were very interested when it was reported from China that within 10 days a complete hospital with 1,000 beds had been built up in order to maintain emergency care in the mainly affected region of Wuhan. Some planners in Central Europe must have been jealous. The massive isolation measures and the quarantine of millions of people often only caused a shake of the head here: “Something like this is only possible in China. How quickly reality can change.
Incorrect risk assessments
The World Health Organization (WHO) had to declare the COVID-19 pandemic on 11 March 2020. The first after the “swine flu” in 2009/2010. The relatively mild course of the swine flu in our latitudes probably also contributed to the fact that COVID-19 was long underestimated and played down. A fatal error, which has now cost the lives of many thousands of people in Europe.
Experiences and wrong derivations
They probably did not want to expose themselves again to the risk of being denounced for overreactions afterwards. In Austria, the purchase of flu masks in 2006 is still etched in the collective memory. The purchase procedure may well have been questionable. Fortunately, the protective masks were not disposed of without replacement after the expiry date had been exceeded, as was the case in Belgium. Because they are now urgently needed as a strategic reserve and are already being used.
Poor security communication
Unfortunately, in the past it has not been possible to convey to people the situation at the time, the basis for the decision and the sense of the measures taken at the time of the decision. Because in crises, decisions almost always have to be made under time pressure and with a lack of information. In retrospect, one is always wiser. This could also have been conveyed through appropriate transparency and security communication.
Therefore, the following phenomenon is often observed: If nothing happens, or if things do not turn out as badly as expected, then the measures are perceived as excessive. If things turn out differently, failure is immediately assumed. So, we are all part of the problem. In today’s environment, there is also the effect of social media, where things can easily be emotionally inflated. If classical media then jump up as well, a self-dynamic develops that is hardly controllable. This is also because most people lack the risk competence to classify certain things at all.
Organizations tend to quickly return to everyday life after events or exercises. “Lessons Identified”, if they have been documented at all, often do not receive the necessary attention. This is probably also because it would require adaptation and behavioural change, which often contradicts our human nature. We dislike change very much.
Therefore, it is now especially important that as much as possible is documented in a “(deployment) diary”, what works well in the respective area and what less, so that we do not have to repeat history. What is present today will be replaced the day after tomorrow by new impressions. This is why it is so important to keep a written record. Also in order to be able to understand and evaluate certain processes and connections better in retrospect.
Crisis communication is not PR communication
In the first days after the beginning of the crisis, the government used PR communication instead of crisis communication. In part even after that. This means that things are glossed over and not clearly addressed or treated with salami tactics. Information is only communicated in bits and pieces. This could become a boomerang and lead to a massive loss of confidence, as people are unable to adapt to longer-term developments. There is a subliminal sense that it could soon be over again, although quite the opposite is to be expected. However, this is already being hinted at. Of course, those responsible often do not know exactly how things will continue. But this is also part of good crisis communication: admitting what you don’t know. People are more likely to tolerate this than to feel that they are being taken for a ride, even if that is not necessarily true.
Transparency is necessary
Transparency and appropriate security communication would be essential here. Also, to reduce potential sources of error. After all, it is precisely in such an unbelievable networked crisis that no one can overlook all the dimensions. It would therefore be all the more important to look at the situation and also at the decisions from as many different angles as possible in order to be able to identify possible undesirable developments at an early stage. This is currently not noticeable. Instead, expert opinions are referred to without naming the experts and their background. Experts also only represent individual domains. Therefore, an interdisciplinary approach would be all the more important now. Otherwise, the operation was successful in the end, but the patient died anyway. This issue is not only about the future of individual groups, but of all of us.
The Austrian risk culture that has been lived up to now — ignoring risks as long as it is somehow possible — only proves its worth until the hard reality hits. In a networked crisis like the one we are currently experiencing, this leads to an incredible number of problems. At the same time. Nobody can simply duck away here any more.
Complexity arises from networking. The Internet, globalization or the global just-in-time flow of goods have created an incredibly complex system whose potentially negative side effects we have hardly thought about so far, even though there have been enough admonishing voices. However, these were often ignored or dismissed as pessimists.
Complex systems, where feedback and changes occur permanently, can only be controlled to a limited extent with the existing tools. In stable times, this works quite well, as we have experienced so far. But this has also led to wrong conclusions: It works anyway, but this is only true up to the point where a major disruption throws everything out of balance. This is why risk assessments were often inadequate, since extremely rare events cannot be treated adequately with the tried and tested methods, or one did not want to.
Often many interactions and dependencies remained hidden. Systemic risks have arisen that cannot be adequately captured by our risk management tools, which have been tried and tested to date. This is because systemic risks are characterized by a high degree of networking and many interdependencies. Inadequate system design can cause disruptions to spread rapidly over large areas. Feedback effects and time-delayed effects mean that small causes can lead to large impacts. This leads to massive dynamics that can even lead to the collapse of the system. The triggers and also the effects are often underestimated. Things that we now have to observe in many areas.
Follow-up crises and one-sided focus
Therefore, an avalanche was started with COVID-19, where we cannot yet estimate where it will come to a halt. A series of follow-up crises are looming on the horizon for which neither people, nor companies, nor the states as a whole are prepared.
The current focus is mainly on short-term developments in the health sector. This is important in order to avoid overloading the health care system. But this will be far from sufficient to cope with the expected follow-up crises, which would bring us back to the necessary interdisciplinary perspectives that are necessary both on a large and small scale, for example at company level. The earlier we adjust and adapt to this, the sooner we will be able to regain a foothold.
Because another characteristic of complex systems is irreversibility. This means that we will no longer simply return to a world which, just a few weeks ago, was perceived by many people as completely immovable.
Increasing dynamics, i.e. permanent changes, are another characteristic of complex systems if they are wrongly designed and feedback possibilities are not sufficiently dampened. Many of us have already been challenged and in some cases overstrained by the increasing dynamics in the world of work in recent months and years. However, the current and expected dynamics will probably overshadow many things. A small cause that leads and will lead to incomprehensible consequences and changes.
The collapse of complex systems
Let’s hope it doesn’t end in complete chaos. Whereby the collapse of complex systems is not a mistake, but quite the opposite, a design feature: This ensures periodic renewal and adaptation in nature. For example, with the seasons or the limited life span of living beings. All living things are organized in complex systems that interact with the environment. In order to prevent the damage from becoming too great in the event of a major disruption, “small-is-beautiful” has become the evolutionary standard. Cellular structures, i.e. autonomous functional units, which are usually grouped together in larger units (“organisms”), serve as the basis. For example, living beings that can interact with each other again, but still form self-contained units. We are rarely aware of this in this form either. For example, we know that microorganisms such as bacteria or protozoa can survive almost all external influences. The last relapse level.
Actionism is dangerous
At the beginning, politicians tried to convey that they had everything under control: „We are prepared for all scenarios.“ In the course of time this given self-confidence was clearly relativized. For in reality it often turned out that preparation had to be replaced by improvisation.
It is particularly important to note that “quick-and-dirty” solutions even run the risk of making things worse. For, as we know from systems and complexity science, apparently short-term successful solutions often lead to more problems and damage in the long term. Long-term successful solutions, on the other hand, usually require short-term cuts and sacrifices. Just think of change management.
Actionism is therefore dangerous, since any intervention in a complex system has many different effects at many different points and, above all, with a time lag. But not acting or deciding is just as dangerous. We have a dilemma here with the contradiction, i.e. ambivalence. There is no clear wrong or right. Therefore, a simple cause-and-effect approach is quickly threatened with failure.
Networked crises are underestimated
The possibility of a pandemic or a Europe-wide power and infrastructure failure (“blackout”) has so far been largely underestimated, even if they were included in the various risk matrices. In particular, precautionary measures have been implemented only half-heartedly or not at all. A plan is often equated with functioning processes, but this is hardly ever true. Only what has really been practised and trained will work. The best plan is only an aid. Finished contingency plans should even be at the end of a process chain and not, as is often the case, at the beginning.
Now we must act under enormous time pressure. The lack of precautions also means that we lack the capacity to act in order to deal simultaneously with the many dimensions of networked crises. There is therefore a great danger that we will only focus on what appears to be immediately acute. We know this, for example, from the emergency services, where without education and training we tend to help those who scream the loudest first. However, these people usually need immediate help least urgently. This danger now also threatens in the economic environment. It is therefore essential that far-reaching decisions also consider the potential and long-term side effects. What is currently not apparent or is not made transparent.
Increasing danger of blackout
With the current “lockdown” and the economic slumps, the danger of a Europe-wide power and infrastructure failure (“blackout”) is also increasing. The energy supply companies unanimously affirm that they are doing everything possible to maintain the security of supply and the ability of their own staff to act. However, there are a number of factors which, in addition to the potential illness of key personnel, endanger the stability of the system.
The economic slump, for example, has led to a drop in demand for electricity. This results in an enormous electricity surplus at certain times. However, due to the current regulatory framework, especially in Germany, electricity from renewable energy (RE) generation plants must be purchased as a priority. Countermeasures would be necessary quickly, but are not apparent.
Because what is good for climate protection, at the same time leads to side effects that receive little attention. On the one hand, these concern the rotating masses (generators), which ensure the immanent and system-critical stability and regulation of the fragile system without control interventions. This critical system service can so far only be provided on a large scale with rotating masses. Large battery storage systems can step in at short notice, but then flexible, quickly and reliably available power plants are needed again, which must be able to compensate for a deviation over a longer period of time than a few seconds or minutes. However, none of this is worthwhile in the current market environment.
Conventional power plants and thus the rotating masses are being pushed out of the market by falling electricity prices (merit order effect). If too little rotating mass is available, the entire European interconnected system could suddenly become unbalanced. A blackout would be the consequence.
Many conventional power plants cannot even cover their operating costs at the current electricity price. The economic consequences are foreseeable. In the short term, this may well sound positive. Both for climate protection and for the end customer electricity price. But that is not the end of the story. Because if there were to be a blackout, the social damage would be unaffordable. The low electricity price does not reach the end customer, as the rising costs of critical grid interventions (“redispatching”) are also passed on to the customers.
In addition, the construction of storage systems that are indispensable for the energy turnaround, such as pumped storage power plants or rapidly deployable, flexible power plants or large storage facilities to compensate for the volatile generation from wind power and PV systems, will be further delayed. These systems have not paid off so far and will do so even less under the current conditions. And when they do, it will already be too late, as infrastructure projects cannot be implemented overnight.
A dangerous vicious circle where massive regulatory intervention would be necessary. However, these would have to go in a completely different direction than before, which is not very likely. This increases the risk of blackouts in the short to medium term.
In addition, the European electricity supply system is one of the “too-big-to-fail” systems. Due to the primary focus on business management, in recent years almost only small-scale business management considerations have been considered. Reserves and redundancies had to be reduced as “dead capital” here as in all other areas. This also meant reducing the former cellular structure. This is reflected, for example, in the increasing cross-border electricity trade, which is even to be significantly increased. As a result, disruptions can spread much more easily and simply once they have reached a certain size.
Much of this has now been observed in the spread of the COVID-19 pandemic. The Austrian Armed Forces, as the supposed strategic reserve of the Republic, can hardly provide sufficiently qualified military assistance. Not because they did not want to, but because they lack the resources. The outcry of the former Minister of Defence last summer is ineffective. Now it is payday, even if soldiers have been deployed quickly and comprehensively so far. But as simple relief workers.
Another massive problem will only gradually become apparent due to the long transport routes. Delays and interruptions in the delivery of goods from China and probably soon also from other regions of the world, even within Europe, are foreseeable. While in many areas this will be of secondary importance in the short term, it can have dramatic consequences in the medical environment and in the supply of medicines. Much of the production of medicines and especially antibiotics is now taking place in China and India. India is the world’s largest producer of generic drugs and at the same time sources around 70% of its starting materials from China. India is also currently in a lockdown with unknown outcome. China is preparing for a possible second wave of infection.
In addition, when supply chains are restarted, far-reaching build-up processes are to be expected, as we know them from the well-known “Beer Game”. The whole just-in-time logistics is getting out of step. Not only empty warehouses, but also, as is currently the case in Germany, overcrowded warehouses pose a problem. The situation will escalate even further with the very heterogeneous procedures of the different countries and regions. In addition, it is to be expected that new infection cycles will occur in the coming months until sufficient herd immunity and robustness of the health care system can be established. As a result, overproduction and underproduction and massive problems in the supply chains will continue to occur. As is well known, a chain is only as strong as its weakest link. And there are plenty of them now.
Top risk supply chain interruptions
Interruption of supply chains has been one of the most feared top risks in companies for years. Hardly any risk manager could have imagined the current and still expected dimension. Not even in the worst nightmares. It is even less clear how the entire synchronization can be restored and how long it will take.
Mass unemployment is also already looming, and many smaller companies will not survive this crisis unless new and innovative models of thinking are quickly implemented. In Austria, alone, the number of unemployed increased by around 180,000 people in the first 15 days after the lockdown. In February, around 330,000 people were still registered as unemployed. A further massive increase is to be feared. Many large companies have already announced short-time work. All of this will still have enormous effects on the mood and psyche of the people affected.
But many large companies will also be shaken, not least because they are often dependent on many small companies. The entire economic and social system will come apart at the seams. In addition, we know from systems science that a system that can only survive through permanent growth is not viable in the long term. This is where a dramatic shakeout is taking place.
And that means we are probably in the middle of the biggest financial crash ever. If it was often said: “As long as the music plays, just keep dancing”, the party should now be over for good. Because there is no safety net here any more, even if billions and even trillions are now promised and pumped into the system. That may be a little reassuring in the short term, but it has little prospect of long-term sustainability. Certainly not in countries that have suffered massive economic hardship to date, such as Italy, Spain or France. The destroyed basic trust and the deep shock will not be so easy to overcome, or only slowly. Just remember the last financial crisis less than 15 years ago.
A dystopia could probably not be formulated worse. Only a few aspects were considered here. The real dimension is much larger and more multifaceted and was probably already exceeded many times over when this article was published. Potential further topics such as the surveillance state or a technocracy were deliberately left out.
How can things continue now?
It is still too early to make a serious assessment. However, one thing seems to be clear: a continuation as before is extremely unlikely. Albert Einstein already said that problems cannot be solved with the same way of thinking that created them.
Basically, there is a comprehensive know-how on how viable (complex) systems prove themselves and have survived in nature: “small-is-beautiful”, reduction of energy demand, decentralized functional units or error-friendliness are only a few important keywords that can help us. If we want to become a robust society, we will have to be guided by these successful design principles. Anything else would only make us more vulnerable.
If the financial system crashes, as indicated, we will have to take completely new paths anyway. This would be tantamount to a reset like after World War II. Only with the luck that no infrastructures are destroyed. On the other hand, the question will arise as to how we can ensure that the system continues to operate. On the one hand, if the financial means are lacking and on the other hand, if the components for permanent renewal (maintenance) are not available. Here, too, a reduction to the essentials could become necessary.
Who’s gonna do it?
Many people expect that someone “up there” will already know how to do it and that they will do it. It’s an illusion. Complex systems or a collapsed system cannot be mastered with a master plan or the previous thought patterns. And why should the very people who did not see the current situation coming or did not take the necessary measures in time now? What has happened to the supposed plans?
We are all in demand now. Because we will only be able to cope with further escalations, in whatever areas, through decentralized self-organization and bottom-up stabilization. That means in the neighbourhood, in the communities and regions. Small-scale preventive and precautionary measures. Regional economy. We do not yet know what will work and prove itself. Therefore, it is also about diversity, also an important robustness feature. Things have to be tried out and quickly adapted to the new conditions. We know this from the start-up industry, and we can learn this from it. Because the disruption has already begun.
Companies can be successful now if they can quickly deliver added value for society as a whole. Everything else will hardly be needed in the foreseeable future.
Leave no one behind
The enormous social challenge now is that we must not leave anyone behind. Many people have already lost their jobs and thus their previous livelihood. Many more will follow. If we do not quickly cushion the impact of these crises, they will be followed by even worse ones. Here, too, we will need new solutions to maintain social cohesion.
Resilience: ability to learn and adapt
For many, this may sound hard and exaggerated. Others will feel confirmed. Resilience means not only resilience, but above all the ability to learn and adapt. It also means being able to give up previously successful but now outdated knowledge and actions in order to make room for new things. The earlier we accept the new reality and get involved and try out new solutions, the faster we will regain new stability. There is no going back.
But there is also a positive outlook: after every serious setback and shock, things in human history have continued to improve in the long term. We now not only have an unimaginable crisis ahead of us, but also a great opportunity to question and reorganize previous things and courses of events (keyword: growth economy or consumer society).
In the short term, it is now important that as many people as possible increase their personal self-efficacy and ability to help themselves, should there be expected bottlenecks and interruptions in supply. The blackout precautions taken so far have been very helpful in this respect: being able to provide themselves with the most essential items for at least two weeks without having to go shopping. Let us hope that we will not need the whole range of further considerations. Nevertheless, we should not be naive. We all decide now with our behaviour and our activities how the future will look like.
This paper was written with Albert Einstein’s statement in mind: If I have an hour to save the world, I spend 55 minutes on problem presentation and analysis and the remaining five minutes on finding solutions. We tend to do the opposite. But if we don’t understand the problem, we will hardly find a working or suitable solution. I therefore invite you to take a much closer look now at what people, customers or society as a whole really need to regain security and stability. And whenever possible, we will also have to make certain advance investments. Otherwise, we will have difficulty getting back on track. In this sense: “It is as it is. But become what we make of it!”