An Interview with Duncan Martin, Boston Consulting Group
A pandemic has been a ‘when’ not an ‘if’, for well over a decade. Therefore, is a pandemic a risk that companies should be writing into their balance sheets, along with ESG?
Also, why were governments, businesses and societies so ill prepared to tackle Covid-19?
All of my clients have given substantial thought to a flu pandemic in terms of contingency planning, so it’s a bit unfair to say all governments and businesses were ill prepared. It would be fairer to say that there was a very broad range of preparedness.
At a country level, wealthier nations that border China have managed the epidemic well so far: Taiwan in particular, Hong Kong, South Korea, Singapore and to a lesser extent Japan. Their higher levels of preparedness were largely due to awareness. In particular, because of previous viral outbreaks, they see China as a sort of enormous boiling cauldron of genetic recombination.
There are two major threads to this:
The first is rural China, where there are still many households with people living upstairs and pigs and chickens living downstairs. This is a perfect Darwinian environment for species hopping viruses. For example, avian flus, which jumped from chickens to pigs to humans.
The second are the wet markets. These are high risk environments with dead animals, stressed out live animals, and humans with sharp implements in close proximity. Such environments provide many opportunities for interspecies transmission.
In a little over 20 years, Covid-19 is China’s fourth large outbreak of something that is based on a zoonotic organism.
The countries that neighbour China have been living with the consequences of these threads for a couple of decades.
It started with SARS, which had a massive impact, then there was a H5N1 outbreak, then an H7N9 outbreak. In addition there was MERS, which went through the Middle East. Furthermore, there was a gargantuan swine flu outbreak in China, which did not affect humans but led to the slaughter of hundreds of millions of pigs. This was not broadly reported in the West.
Generally speaking, the West passed through these outbreaks with only minimal awareness. We had a bit of a scare with SARS in 2007, which we took seriously (I know this as I interviewed the person who was running UK pandemic preparedness for my book.) Since then the lack of bad news has led some governments to question the value of their “insurance policy”. So, in the West the perceived threat of a pandemic gradually faded away. In the wealthy frontline states, where they faced fairly frequent viral emergences, they stayed focused.
So distance from China is one variable that has driven differences in response, and another is wealth.
In the middle you get some interesting outliers, such as Australia and New Zealand, which seem to have managed their outbreaks reasonably well.
Why? Probably because they’ve always been a bit paranoid about biosecurity. After the episodes with rats, foxes, rabbits, cane toads, myxomatosis and so on, and they are super keen to prevent alien species gaining a foothold and hence, preserve their unique flora and fauna. As a result they had high standards in place and they were on [Covid] early.
At the other extreme is the US, where many branches of government seem to have been caught by surprise and in some cases, had actually taken steps to weaken their pandemic preparedness. I think the UK was between the two: there were plenty of people in Britain who understood pandemic risk, but pandemic plans were defunded and the NHS has been designed to run without much spare capacity.
How important do you think cultural differences have influenced the management of the current pandemic?
It’s fair to say that there are high levels of deference in East Asian cultures, so if the government says you must do something, you do it. Behaviours have also been mediated through the various outbreaks in the past 20 years. I observed massive changes in behaviour in Hong Kong either side of SARS. People were not just doing it because they were told, they were doing it because they wanted to. It became the norm in East Asia to put on a mask, and if you are sick, stay at home. The key message has landed – for pandemic protection, we have to protect society from ourselves.
This is completely different to the kind of traditional Anglo Saxon view of ‘there’s nothing wrong with you, get up and go to work’. Going forward, I’d expect Anglo culture to align with Asian culture in this respect.
Should a pandemic feature more heavily as a risk in companies’ planning for the future and sit alongside ESG?
I think we should take it up a level and say that routinely, every year or two, all organisations should consider what extreme events might befall them, and one of those extreme events should be a pandemic. They should also think about their exposure to physical events, for example flood, fire, pollution or terrorism. They should think through all these extreme events and then work out potential responses.
For ESG this could vary a lot depending on which sub-domain of ESG you are talking about. Climate change is what everyone was talking about until February. The issue with climate change is that it is very hard to figure out what actions to take when most business’ planning horizons are only three to five years. You can say you are going to set up an internal task force to try to reach carbon zero, but the time horizons in which climate changes are unfolding mean that the catastrophic outcome is a very long way away and as a result, when you run those kind of exercises, climate change slips down the priority list and often doesn’t even make the top ten.
More broadly, our advice is to distinguish between events that are naturally occurring and those that are man-made. For example, responding to a flood would be different to responding to a terrorist attack. You can also distinguish between events that are “rising tides” versus those that are “sudden onset.” The task is then to create a contingency plan for each combination of manmade/natural and rising tide/sudden onset, and then adapt them at the margins to the specifics of whatever threat you’re facing and customise them to your specific organisation.
For instance, if you are a global mining company and you have onshore assets in Mozambique, historically you might have been worried about physical dangers or perhaps HIV. These days, you might be worried about not only a pandemic, but also terrorism. So you’d add terrorism to the list of extreme risks to be managed, and would go through the standard process of risk assessment and contingency planning. As a risk, pandemic flu should be slotted into this framework and treated in the same way.
From an ongoing risk perspective, as opposed to liquidity, and in terms of the situation we are currently in, what are the key short-term measures businesses should be taking to ensure business continuity?
As Warren Buffet famously observed, “You don’t know who is swimming naked until the tide goes out!” There are a lot of companies, in the US in particular, that have combined high leverage with low liquidity on the premise that everything was going to be fine. Businesses with high leverage and low liquidity are now faced with an existential threat.
In general, our advice to clients has been:
draw down your lines of credit
figure out who you are going to delay payment to and who you can accelerate payment from
cut costs to conserve cash
evaluate government support plans and regulatory developments
stay in touch with your banks and other creditors
“Part of your business planning today should be to prepare for a second wave”
From a BCG perspective, I would not rush to reopen offices. We can work well remotely for the most part. More broadly, my understanding is that in the UK for example, 5-10% of the population has had Covid-19. This would mean that 90-95% hasn’t had it, so there’s little herd immunity. So it seems likely there is going to be a second wave. I would be rushing to make sure that the things that were improvised the first time round and the corners that were cut in order to get things up and running, were firmly in place and able to operate robustly for the next 6 months.
In other environments, facilities will need to reopen. For example, in a factory, you’ll have to change the configuration of the working environment to enable social distancing. The canteen and other social facilities will need to stay shut (or perhaps be run with an elaborate booking system). Shift patterns will likely have to change. Protective equipment and testing may be required.
What are the opportunities businesses can take from the Covid-19 crisis, in terms of the future ways of operating or managing risk?
My sense is that, on the whole, the management of risk is not going to change very much as a result of Covid-19. Most of my clients had pandemic plans and activated them. Time will tell if the plans have worked and if not, there will be another round of refining and reactivation of the plans. Businesses that did not have pandemic plans, or that failed to activate them, will have more work to do, but that’s another story.
I’m very interested as to what extent face-to-face interaction is really necessary for many businesses. The received wisdom of my generation is that it’s very difficult to sell high-value business-to-business services remotely. My sense is this will remain the case until the technology improves substantially. Really high-value, high-touch situations are still not supported.
There is definitely an opportunity presented by this crisis to go to the next level in terms of remote working. There are certain types of interactions that work fairly well remotely i.e. a weekly staff meeting chaired by one person with a set agenda. All attendees know each other, one person chairs the meeting and it’s sequential. The inverse doesn’t work well, the many-to-many interactions with no agenda where you need creativity and spark. Moreover, if the technology doesn’t work well, it’s worse than a waste of time.
Culturally businesses may be comforted by returning to ‘normal’. Those businesses already accustomed to remote working haven’t suffered with these imposed changes.
In terms of ways of working going forward, I think part of the increase in remote working is here to stay. Separately, companies will take a greater interest in employee health and hygiene, for example hand washing and sanitisation. Norms around face masks and other protective equipment will likely change, with big companies mandating and/or providing them. As we discussed, norms around staying home, working and travelling when ill will change. Overall, I foresee both a demand for and acceptance of a more paternalistic corporate culture with respect to health. There will also be an impact on privacy and data sharing, although it’s too early to tell quite how.
From a more global perspective, which countries, if any, are ‘unlocking’ business in the right way and how are they doing this?
I don’t think anyone has made much progress in unlocking so far. China is furthest along, and I understand it is going reasonably well. The thumbnail I’ve heard is:
the supply side is pretty much up to speed and businesses are producing again, but
the demand side is not. People are not buying in the same quantities, retail is pretty dead
Regarding travel, I think there will be a transformation equivalent to what we experienced following 9/11. Following SARS, In the late 2000’s/early 2010’s, flying around Asia, it was routine to have temperature screening and other measures. I expect this will become routine everywhere, along with mandatory health passports supplemented by random viral testing.
People are getting very excited in the UK media saying countries like Singapore and Germany are handling it better, what is your opinion on those countries?
Singapore, Taiwan, Hong Kong, South Korea and also Germany -have very intensive testing, tracing and quarantining regimes. This means ensuring sufficient sample density to find almost everyone with the virus, and then very aggressively tracing and isolating those that carriers would have been in contact with.
There are three conditions to unlocking: sustained reduction in case counts, spare health care system capacity, and, as above, sufficient resources to support aggressive testing, tracing and quarantining. Italy, Spain, France and the UK now all have the Covid reproduction number down less than 1, so the key decisions for politicians are around testing and tracing and healthcare capacity.
Is anyone unlocking in the right way?
I would say no-one is really unlocking yet. The country that is furthest ahead on unlocking is China, but they are being really cautious about it. Even in Wuhan, only a small minority of people have had it so, lots of people could still get it.
If you were advising the UKgovernment on a plan to unlock what would that plan look like?
Firstly, I’ll say the NHS has done a first order job of creating extra capacity. Everyone expected the NHS to be totally overwhelmed and my understanding is that only a couple of hospitals ran out of capacity of a couple of days. We have run out of PPE in some instances but that is a better problem to have than people dying on trolleys in corridors.
We cannot unlock just now as I am not convinced we have enough testing and tracing capacity. In South Korea, they have tens of thousands of testers and tracers and have leveraged IT extensively through apps and AI. As far as I can tell, we in the UK have nothing approaching this. You could compress the training and development but optimistically you are still looking at a few weeks and I would not entertain any form of unlocking until I had that problem solved.
Mass transit, with everyone travelling in and out of city centres at the same time, is now a mass problem.
Once we have enough testers, the first cut would be geographic as there is a very different prevalence in different parts of the country. For example, London has high prevalence. I therefore, would unlock more in isolated rural areas with low prevalence, and less in densely populated places where people rely on mass transit, as it seems particularly difficult to control spread where mass transit is ubiquitous.
At the other end I would very strongly encourage older and higher risk groups to keep isolating. That will probably require some level of support financially and logistically. A firm message of ‘if you’re over 65 and/or have one or more of the following conditions… diabetes, heart disease etc., then stay at home … we’ll take care of the testing, the equipment, the food and the drugs’.
So a geographic cut, then demographic cut, and then a third by industry. For example, white collar workers in professional and financial services should continue on their current operating model and not return to the office.
I’d say don’t go back to the office, it’s working well so far, do it for another three or six months, whatever the number might be. If you physically have to be there – if it’s a construction site or a factory or a restaurant – then look to physically reconfigure the workplaces so that you can have safe social distancing. Every workplace will have to impose a deep cleansing regime.
Canteens and other social spaces will need to be closed, extensively reconfigured, or used quite differently (for example with staggered arrival times,). Stress the seriousness of it; if employees want to come back to work and earn money again, these are the minimum conditions acceptable. I wouldn’t anticipate much resistance at this point.
In parallel, I would try to obtain the appropriate personal protective equipment (PPE), for example masks and hand sanitizers.
I don’t think cruise ships will sail anytime soon as they can’t reconfigure their product and they’re skewed towards older clients. You could probably configure restaurants so that every other table is empty or something like that. Likewise, on airlines, you could have every other seat empty. I’m not sure the economics of that would work for either industry for very long though.
For now, the fiscal calculations have been focused on how much money this is going to cost and not on how much tax revenue has been lost.
From a government perspective it’s better to get the planes back in the air and people earning, even if the government pays 50% of the wages, it’s better than paying 80% and on the other 50% there’s tax being paid.
I think mass events are going to be really tricky. I understand that the Bundesliga is planning on reopening behind closed doors. However, if you have just one asymptomatic carrier present then everyone on both teams and all the support staff might have to self-isolate. I imagine they’ll have to have a ferocious testing regime.
What might be applicable to supermarkets going forward?
My perception is scheduling will become more important. We currently have to queue to get into supermarkets as they were being rigorous about social distancing. I wonder if we could schedule our retail experiences offline as we do online, so shop during pre-booked slots.
So if I want to go to Tesco, let’s say, I go onto a booking app and I book a slot and I go in that slot. Their app tracks you around the store and you use the app to scan food as you go so you don’t have to go through the check-out. My sense is that you can do that more broadly for more retail experiences, so that there would be no crowding or queueing. It would take the spontaneity out of the retail experience though.
Before a vaccine is found, it appears the new norm will be monitoring outbreaks, locking and unlocking. Therefore, do you see a two-tier world where travel between more developed countries with a more robust healthcare infrastructure is allowed but not allowed from developing countries who will struggle to both monitor and control their outbreaks?
The short answer is “yes.” For example, Australia and New Zealand are talking about a “travel bubble” of reciprocal pandemic control. For this to work, Australians need to be comfortable with the NZ regime and vice versa. I’d expect more rigmarole at airports, but the big benefit will be that travellers won’t have to go into quarantine for two weeks when they arrive. Over time, as more “bubbles” are created, fewer quarantines will be imposed.
So countries will not be closed exactly but entry will be mediated by quarantine requirements and also by serological tests. If somebody can come up with a test that indicates you’ve had the infection and you have the antibodies, you remain immune for some period (say, a year), and a government authorised app that logs that status, you’d be clear for entry.
More generally, my thoughts are that countries will be open for business. However, for now, if you are flying in from a ‘non-compliant’ country, then first, you must work your way through the visa process, and then second, you’ll be invited to spend the first two weeks of your stay in a secure facility next to the airport.
How do you think the West’s relationship with China may change going forward in the short and medium-term?
Longer term, I expect some “de-globalisation” of supply chains. This started four or five years ago as wages in China had reached the point where it wasn’t that advantageous from a cost point of view to have things manufactured in China, but Covid (not to mention the broader geopolitical environment) will accelerate the shift.
You will see some directed investment accelerating this for PPE. This is because, going forward, not only healthcare workers and first responders, but also every other contact employee — teachers, bus drivers, receptionists, shelf-stackers, servers, shop assistants — and everyone using public transport are going to want a face mask, gloves and hand sanitiser. There’s going to be a massive spike in need and it’s going to have to increasingly be made locally so I would encourage the reallocation of resources.
I think you’ve seen the best and the worst of dictatorship coming out of China, so the worst would be “don’t make waves, good news only, let’s not tell the boss there’s a problem because they don’t want to know about problems.” The best would be the lockdown in Wuhan. As far as I can tell, it was pretty airtight. Try to imagine doing the same thing in New York. It’s just not possible, it could not be done.
People now recognise China’s a completely different system of government that’s not converging on the West and as a result companies do not want single points of failure in their supply chain that’s China centric. Ian Bremmer of the Eurasia Group talks about beyond G2 as “G-Zero “. Specifically, his view is that geopolitical polarisation will increasingly lead to economic and technological polarisation of the world. That feels right to me.
If you take how people feel about a ‘Made in China’ label – a few decades ago it was a joke but then it became prolific and then it became about great quality, cost and efficiency. What will now become of the label?
My sense is at least in strategic decision making, we’re past that point. People realise everything being made in China is a problem, and not just for economic reasons.
Recent events have highlighted the awareness of China, its culture and ways, to consumers and there’s now a growing feeling that many don’t want to be associated with a brand that associates itself with China.
The Huawei and UK tie-up is a good example: the British government were going to agree the deal and I think they may change their minds. In as much as GCHQ were comfortable with it, I was fine with it. However, with the whole information gathering and sharing piece is more problematic: I wouldn’t be comfortable having my entire life on Alibaba or other such integrated Chinese technology, internet, and e-commerce platform.
The views and opinions contained herein are those of Duncan Martin and do not necessarily reflect the official policy or position of The Boston Consulting Group or Hoggett Bowers.
Duncan Martin, biography:
Duncan Martin is a senior advisor to the Boston Consulting Group (BCG) in London, where he was a partner and senior partner for ten years. For the last twenty-five years, he has focused on risk, governance compliance, specialising in regulation, crisis management and analytics as both a consultant and practitioner.
Duncan is the author of “Managing Risk in Extreme Environments” (Kogan Page 2008), a review of risk management practices in environments where life and death are at stake.
 Duncan Martin is the author of “Manging Risk in Extreme Environments,” Kogan Page 2008.
 The term G-Zero world refers to an emerging vacuum of power in international politics created by a decline of Western influence and the domestic focus of the governments of developing states. It aims to explain a world in which there is no single country or group of countries that has ability and will, economically and politically, to drive a truly global agenda.