By Graham Ruddick, below, author of Risk Roulette: The surprising reasons why some businesses work, and others fail
Monday, August 28, 2023 was a particularly busy day at the NATS headquarters in Swanwick in Hampshire, southern England. NATS stands for National Air Traffic Control and this is where the skies above the UK are managed. The staff within this giant building are responsible for ensuring that planes enter and leave UK airspace safely and smoothly. From the outside the building looks exactly what it is – a giant control centre for something significant and other-worldly. Its architecture is distinctively early 21st-century architecture – lots of glass windows and silver cladding – and it is encircled by a car park, woodland, and a lake.
August 28 was the summer bank holiday in the UK. Thousands of flights carrying hundreds of thousands of passengers were due to leave and enter the UK. NATS would receive the flight plans for each of these aircraft ahead of their arrival in UK airspace and ensure their path through it was clear.
But then everything went wrong. According to an independent report on what happened next, the NATS computer system received a flight plan that, for a variety of different reasons, showed a plane that would leave UK airspace before entering it. This made no sense, so the system crashed and went into maintenance mode. Then the flight plan crashed the back-up system too. The UK’s entire air traffic control system went down.
An estimated 1,500 flights were cancelled on that day alone in the ensuing chaos. Of the 5,500 that did operate in UK airspace, roughly one in 10 were delayed. More than 700,000 passengers were affected, with an estimated 200,000 people stranded at airports and unable to get home, according to the Civil Aviation Authority, the UK watchdog. IATA, the industry body that represents airlines around the world, said the chaos cost travel companies at least £100 million in compensation they had to pay customers.
Martin Rolfe, the chief executive of NATS, said the event had been a “one in 15 million chance”. He added: “We’ve had 15 million flight plans pass through the system and we can be absolutely certain that we’ve never seen this set of circumstances before.”
But that was not enough to placate angry airlines. Michael O’Leary, the chief executive of low-cost airline Ryanair, said that “heads should roll” at NATS and that the disruption had been “unacceptable”. Willie Walsh, the director-general of IATA, said the management of NATS had “some serious explaining to do”.
This story is an example of how a seemingly low-risk event – a one in 15 million chance – can happen and have serious consequences. While some may be tempted to shrug their shoulders at such a random occurrence, small and medium-sized businesses cannot take the chance that a single event could lead to their failure.
Howard Marks, the wildly successful US investor and co-founder of Oaktree Capital Management has coined a phrase for this. “Never forget the six-foot-tall man who drowned crossing the stream that was five-feet deep on average,” he said. “Prudent financial management doesn’t get you through ‘on average’ – rather, it enables you to survive the low points.” In other words, understanding risk is about ensuring that you are not just protected against everyday scenarios but the rare outcomes that could kill you. The stream that is five-feet deep on average may be five-feet deep all the way across, or it may be one-foot deep at the edges and 10-feet deep in the middle, enough for a six-foot man to drown in.
Chief executives who have been through a big failure have a unique perspective on risk. Ian Shepherd was the chief executive of high-street video game retail Game when it collapsed into administration in 2012 with about 700 shops. Bankruptcy is like the Hemingway quote, he says, it happens gradually then suddenly.
“The business just had too much cost, it had too many stores and it had international operations which were not really making any money,” Shepherd says. “So it wasn’t in a position to weather a storm for as long as the storm turned out to last.”
Despite this backdrop, the staff at Game thought they could turn the business around.
“It’s kind of constantly bad news, but it feels like we have a plan. We’re growing these new revenue streams, we’re doing this stuff. It kind of feels like there is a light at the end of the tunnel somewhere. Then suddenly it begins to kind of crumble,” he explains.
“I have to be careful about using this phrase, but I used the phrase once that ‘business is a confidence trick.’ What I mean by that is it all works fine as long as everybody is confident in the future – the suppliers, the lenders, everybody involved in the infrastructure of the business. It’s one of those things that if you all think it’s going to be fine, then it probably will be. But the moment somebody loses confidence in the business and either a supplier stops supplying or a lender starts to get obstreperous about whether or not their loans are going to get repaid, then things unravel very quickly and you end up in this month or two of the leadership team locked in meetings, trying to reengineer things or trying to persuade people to have confidence again.”
Shepherd says we often misunderstand how a small change in sales can undermine a business, especially in retail and hospitality, and how few chief executives have a grasp of the cash going in and out of their operations until they really need to understand it.
“What people often fail to understand is this concept of operational gearing,” he says. “When quite a lot of your cost is fixed – you’re paying rent on the stores, you’ve got utility bills to keep the lights on – then it doesn’t take 100 per cent of your customers to leave before you end up in big trouble – it takes a much smaller percentage to leave you. Basically, you just have to get down to a point where you can’t cover those fixed costs anymore. So it might well be 10 per cent here, 15 per cent there, drifting to a competitor or stopping using that product altogether, or choosing to buy from online suppliers rather than from high street retailers. Whatever that trend happens to be, a relatively small shift can have a huge impact on the profitability of the business.”
On cash, he added: “I think a crude way I would summarise that is you can get quite senior in businesses without really having to think much about cash. I would have characterised myself like this on my way into Game. You’re a creature of the P&L (profit and loss account). You’re thinking about ‘How much we have sold and what margin did we sell it at?’ You’re not a creature of the balance sheet. And the balance sheet is, in the end, the thing that will make or break you. How much cash do we have? Who do we owe money to? Can we repay that debt? How is all that flowing through in the business?
“Before I went to run Game, my job at Vodafone was running a £3 billion P&L. But if I fell short on my targets, I got shouted at by the finance department. We were in no way going to go bankrupt, because that £3 billion P&L was a tiny part of a £70 billion public company. So the balance sheet just wasn’t a factor that we thought about a lot.
“When you’re in a standalone business as opposed to a subsidiary, like Game, cash matters a lot. It’s a different discipline of thinking about what are the risks, what are the opportunities and what strategy are we following? I certainly approach business with a different set of skills now than I did then.”
Graham Ruddick is author of Risk Roulette: The surprising reasons why some businesses work, and others fail, out now, published by Kogan Page, priced £13.94
