It is the first budget season since COVID-19. Was COVID-19 a black swan? Does COVID-19 impact the budget process? Will black swans impact the budget process going forward? Keep reading and in less than five minutes you will know the answers to these three questions and will have a different view of budgeting.
The black swan theory defines a black swan as an event that:
- Is an outlier or a surprise to the observer
- Has a major impact
- Is rationalized in hindsight after it has occurred (Monday morning quarterbacking)
The term black swan comes from the statement of impossibility from London in the 16th century. Up until that time, all swans were reported to have white feathers, but then in 1697, Dutch explorers were the first Europeans to see a black swan in Australia.
The answer to the first question, “Was COVID-19 a black swan?” to me is obvious because:
- We were all surprised that COVID-19 occurred.
- The COVID-19 pandemic has had—and continues to have—major impacts on the global health, economy and way we live.
- To prove the last point, the inventor of the black swan theory, Nassim Nicholas Taleb, provided the evidence himself when he said COVID-19 was not a black swan because it was “compatible with statistical properties.”
Therefore, beyond doubt, COVID-19 was and is a black swan.
The answer to the second question, “Does COVID-19 impact the budget process?” to me is also obvious. There are three possible impacts that COVID-19 has on business today:
- Huge impacts on supply
- Huge impacts on demand
- Huge impacts on supply and demand
I know of no industry that is not undergoing one of these huge impacts but that does not also have a huge level of uncertainty about the path forward to the next normal, the next and beyond. Record levels of VUCA (volatility, uncertainty, complexity and ambiguity) exist globally and this has a massive impact on the ability to budget. Therefore, beyond doubt, COVID-19 has a huge impact on the budget process.
The answer to the third question, “Do black swans impact the budget process going forward?” is clearly yes, but the impacts go way beyond the obvious. The facts are due to the unprecedented level of VUCA, it is impossible to create a single budget. At the very least, all organizations need to create four budgets based on if:
- We have a second wave of COVID-19 without an effective vaccine
- We have a second wave of COVID-19 with an effective vaccine
- We do not have a second wave of COVID-19 nor an effective vaccine
- We do not have a second wave of COVID-19, but we do have an effective vaccine
Then of course there are other budgets with respect to the shape of a recovery, level of digital commerce, global trade war and more. The reality is, as a result of COVID-19 and many other economic factors that ripple from COVID-19, all organizations are forced to transition from an annual budget plan to optionality. We need to create a variety of options, carefully monitor how reality plays out and then—with agility—adjust from one budget to another to push forward while the ripples of COVID-19 continue to have huge impacts on the economy and how people live, work and play. So, beyond doubt, not only do black swans impact the budgeting process, the black swan of COVID-19 is forcing the total restructuring of how budgets are created and managed over time.
Unfortunately, many organizations are pursuing the same budget process that they have pursued in the past. The resulting budget will not be worth the paper it is written upon on the day it is approved. Due to black swans, COVID-19 and VUCA, the traditional budget process must be put aside and we must embrace optionality to create a series of budgets that are brought to the forefront as the year unfolds.