This is the sixth edition of my “New Regular” series. No one’s seen hide nor hair of normal – old or new – since March 15.
Today we start with two quotes. The first is from a certified genius, and the second … not so much.
“Compound interest.”
Reputedly, that was Albert Einstein’s answer to the question, “What’s the most powerful force in the universe?”
And now a maxim coined by your humble correspondent, from years of experience operating a small business.
“When it starts going bad, it all goes bad.” This is not hyperbole or meant to be pessimistic, just sobering.
“The Compounding Effect” is my term for that maxim, and it, too, can be powerful. Except, unlike compound interest, not in a good way.
It’s when the difficulty created by one disruption is compounded by another when they either show up at the same time or at least overlap. The compounding happens when that timing effectively creates stress levels greater than the sum of the disruptive parts.
Here’s a small and annoying example of The Compounding Effect: It’s 7 a.m. and you get an “I’m sick” text from your delivery employee. Ten minutes after you inform the warehouse manager he’ll be delivering today, he texts you to say the brakes are out on the truck. And, of course, this compounds into a very unhappy customer who needs what now is not going to be delivered on time.
Oh, by the way, that delivery was going to be C.O.D., and you need that cash for payroll.
And then there are Compounding Effect examples that transcend annoying to potentially existential: It’s 6:30 pm on a Friday. You’re working late on a proposal for a business loan you need – the appointment with your banker is already set for 9 a.m. on Monday. Then you get two emails that, as a pair, exist nowhere else, except in your inbox.
The first email is from your most important customer notifying you that they have a new plan, but unfortunately, you’re not part of it. An hour later, still reeling from the loss of revenue from that customer, the second email arrives. It’s from the state D.O.T, notifying you of road construction that, starting next week, will reroute traffic away from your storefront for the next 12 months. How are you gonna spin this compounded news in your loan proposal?
Out here on Main Street, when it starts going bad, it all goes bad. Even on the weekend.
“When” – not “If” – is the first word of the title of a professional CEO’s plan to deal with The Compounding Effect. Prior to 2020, your plan would be set in motion when any one of the usual suspects showed up, like an illness, an accident, or revenue interruption from a storm, power outage, cyber-attack, or a customer decision that goes against you.
Elements in that business continuation plan include cash reserves, retained earnings, strategic insurance, operational safeguards, organizational cross-training, and avoiding customer concentration. Believe it or not, that last one is often the hardest. Thank you, Mr. Pareto.
Alas, as we’ve now learned, sometimes the suspects, usual or unusual, not only travel in pairs, but they can make an ugly baby. Like this year, when The Compounding Effect manifested in truly brutal form.
The smartest among us did forecast the potential for a global pandemic delivering a deadly virus that could kill our loved ones. But even those geniuses didn’t predict the unprecedented political response to the deadly coronavirus.
As March dissolved into April, our troubles began compounding when federal recommendations and state/local government “mandates” effectively separated us from our customers. Even in Bizarro World, businesses were never “forced” to close and customers “ordered” to stay home. Consequently, no 2019 Earthly contingency plan anticipated such a compounded disruption.
In a recent article for MarketWatch.com, Steve Goldstein reported on the work of a team of analysts at Deutsche Bank. They projected a 56% chance that in the next decade planet Earth could be visited by one of these four: a major influenza pandemic killing more than two million people, a globally catastrophic volcanic eruption, a major solar flare, or a global war.
Six months ago, that warning would have been foreboding and scary. Having now paid dearly for being T-boned by the compounding of a deadly virus and a devastating economic shutdown, we’ll refer those researchers to what we’ve learned about the binary – possibly trinary – implications of The Compounding Effect: When it starts going bad, it all goes bad.
Which brings us back to that professional CEO designation.
In the New Regular of the post-pandemic economy, where the unimaginable and unprecedented have become our reality, every CEO from Main Street to Wall Street knows he or she must establish and fund risk mitigation in anticipation of the next close encounter with The Compounding Effect. Which is now more powerful than compound interest.
Write this on a rock … Buckle up and pull the straps tight. We’ve been warned.