Nassim Taleb’s term “black swan” has been popularized in business to describe rare, disruptive events that are believed to be impossible to predict. However, over the last few years, practical applications of the black swan idea in international business operations have brought that belief into question. Companies with international operations, therefore, are less likely to accept as reasonable the explanation that a crisis was impossible to anticipate because they are subject to currency volatility and intense scrutiny from investors.
The role of finance has evolved from a focus on the recording of past results to the identification of early indicators of future disruption. This evolution does not seek to predict with certainty the failure of an organisation but to identify the potential for a disruption prior to it becoming systemic.
According to Oksana Malysheva, an expert in international finance, the major flaw of conventional financial analysis is its insular, retrospective nature. Most organisations concentrate on historical financial performance but do not look for weak signals (i.e., subtle fluctuations in market trends or anomalies in currency correlations or increasing volatility of adjacent sectors). Therefore, Malysheva believes that financial reporting should not only serve to confirm history, but rather, in an unstable economy, to identify the point at which an economic system’s behaviour becomes “abnormal.”
As organisations adopt forward-thinking (leading) indicators to detect signs of potential instability well before it manifests itself in profit or cash-flow statements, they will have to adopt a radically different method of approaching finance. No longer can finance be strictly used for control, but rather, finance will be used to provide strategic direction.
The Budget is No Longer a Plan
Periods of high uncertainty create greater stress on traditional financial models, thus leading to a growing number of organisations’ recognition of the drawbacks of a static annual budget in responding to sudden changes in interest rates, supply-chain disruptions, and regulatory-related changes. Therefore, organisations can no longer rely on a single forecast; rather, they must adopt multiple-scenario matrices that provide a financial distribution for all potential black-swan events.
“Companies will win in these uncertain times by preparing alternative plans and strategies prior to the occurrence of a black swan event, rather than by guessing what might happen now or in the future,” says Malysheva.
In order to use this approach, an organisation must not only possess a technical competence in financial forecasting but also the ability to straddle finance, strategy, and management. This may be even more critical in a multi-national company, where a decision may involve differing legal frameworks, regulations, currency restrictions, and expectations of international stakeholders.
Analytics = Trust
For companies with access to international capital, the quality of their financial analytics is essential for survival. Investors/lenders are less concerned about the results of an absolute performance metric, and are interested in identifying the ability of a company to manage uncertainty.
A financial model that demonstrates current results and the ability to respond to extreme events significantly reduces uncertainty for external stakeholders, particularly when changes in a company’s market occur more quickly than the company’s ability to adapt to them. Malysheva notes, “Investors are not generally worried about crises per se; they are most concerned about a company that has not identified how it will react to a crisis when it occurs.”
The transformation of financial trust internationally is not limited to the scope of traditional corporations; rather, greater exposure to diplomatic settings, especially with expatriate communities and foreign entities, provides an alternative viewpoint regarding accountability, transparency, and risk management.
As such, these very same principles will later equate with IT and technology-based businesses where technology is changing rapidly and reliant on international markets and venture capitalists. Therefore, it is no surprise that financial resiliency has emerged as a key topic of discussion at many of the industry’s conference platforms.
For instance, TAdviser Summit 2020 used the opportunity to host discussions about financial sustainability and the analytical approach to uncertainty; this conference collected together senior managers and executives from various IT firms. Therefore, the topic of more enhanced and sophisticated finance expertise required moving forward and offered by both the finance sector and company executives is being generated from the growing demand within the technology sector to better anticipate “black swan” events.
Consequently, the financial leader has transitioned from being a mere custodian of financial reporting to now being characterised more as a navigator who has the ability to monitor weak signals from the environment and turn uncertainty into a formatted process of development.
In this framework, the ability to anticipate “black swans” no longer represents just a metaphor for the financial leader, but rather represents the final product of systematic analysis that converges the leader’s experience, the data collected, and strategic judgement to develop a coherent framework for decision-making.
