Connection vs Contagion: A digital world amplifies risk and opportunity when the going gets tough

As COVID-19 erupts with unprecedented speed and scale and immediate health concerns hold centre stage, concern grows about economic fallout threatening millions of livelihoods.

This crisis will be different

The coming economic crisis will be very different from any that has come before. 

One reason is the nature of the trigger – impacting both production and consumption, disproportionately affecting activities involving physical human contact and generating real fear.

But the coming months will also highlight ways in which underlying changes since the crisis of 2008/9 have created new areas of risk, both for individual businesses and for the economy as a whole.

The world has changed

The last decade has seen exponential change in four aspects of business across the world:

  • Globalization:  the relentless growth both of global businesses – from manufacturing to professional services – and global supply chains
  • Digitalization: the evolution of businesses to models dominated by the collection, processing and use of data and the deployment of artificial intelligence and other digital technologies
  • Virtualization: increasing focus on "core competencies" with businesses relying on outsourcing and strategic partnerships for "non-core activities"
  • Personalization:  specialisation and the data insights driving increasingly bespoke solutions both in B2B and B2C relationships.

Business risks are different

These changes mean that, in the emerging era of financial stress, businesses will face risks significantly different from those of previous downturns.

In the old world, business typically owned and controlled physical assets and definable intellectual property. Their external relationships could, given time, generally be replicated with relative ease.

The new normal involves businesses operating in complex interdependent networks of economic relationships which are individually designed and in which data flows are a key value driver.

For individual businesses, and their funders, this has important implications including:

  • It is vital to understand the complexity of the relationships which underpin the business. The interaction of the legal structures and terms of those networks can produce unexpected results.
  • Data is a genuine intangible. If your supplier, customer or strategic partner stores data which is critical to you in the cloud, there is likely to be a high risk you will not be able to access that data (or it may be deleted) if they run into financial difficulty.
  • Equally, if third party data powers your analytics, your business needs to be capable of responding if you no longer have access to that data.
  • Replacing key relationships is unlikely to be straightforward when they have been designed and constructed in a "personalized" way.

This raises new legal questions

The evolution of business risks generates a host of new legal challenges. In particular, it brings into question the effectiveness of many conventional legal responses to financial distress.

  • Reviewing force majeure, termination or similar clauses will be of limited value without a deeper understanding of the surrounding contractual nexus
  • Analysis of retention of title or property related clauses intended to safeguard interests in essential assets will be of limited value in an intangible or data driven environment, where concepts of ownership and control typically have radically different consequences
  • For public companies, there will be additional challenges for directors grappling with already difficult market disclosure decisions over the business risks  

Looking beyond individual companies into the wider business environment, these effects are likely to generate significantly increased risk of rapid, and often unexpected, contagion between businesses as signs of distress start to emerge.

Managing new challenges requires a 3600 view

From a technical perspective, these new commercial and legal challenges arise from an unprecedented degree of complexity and interdependence and the fact that law and practice are well behind the emergence of new digital asset classes.

If it is always true that it is "too late to act when insolvency strikes" suppliers or customers,  that maxim is all the more true when the value in those relationships is often no more than contracts indirectly relating to intangible assets often not under the direct control of your counterparty.

It is therefore essential to think through this complexity and, in particular, your strategy to deal with valuable data in third party hands, early in the downturn.

This is not, however, solely a technical crisis. At its heart it is a human crisis, so any risk management strategy should inevitably start by thinking about the impact on the people involved – customers, workforce and management – of the business itself and its suppliers, customers etc. How they react and how you engage with them will be as important as any technical analysis.

Potential opportunities

Any downturn inevitably raises the potential opportunities for those with capital who are willing to take advantage of others' distress, panic or of depressed valuations.

In principle, this scenario is no different particularly given the build-up of "dry powder" capital in the hands of financial investors. What is different is the shape of some of those opportunities.

The importance of interdependent networks in the new economy means the value of many challenged businesses will be maximised in the context of a successful network. That will present opportunities for particularly insightful investors to deploy their capital to build stronger and more profitable networks, not simply individual companies, [from]/[in] the [ashes]/[aftermath] of what has gone before.

And it is likely we will see Governments prepared to take quite dramatic steps to support business. The potential for that support will, itself, create some investment opportunities and investors should be considering how to engage with Government.

Three notes of caution however:

  • The complexity and interdependence which will generate opportunities will also make transactions difficult to plan and execute in the face of a very dynamic environment (and this will particularly be the case for potential trade buyers grappling with challenges of their own)
  • Many of the most dynamic businesses of the last decade have used digital technologies to build radical new business models which ask difficult questions of regulators. Inevitably, navigating deals involving those businesses will require real sensitivity to those questions
  • Whilst some buyers, particularly financial investors, may be in a position to move quickly, the same is unlikely to be true of sellers or target businesses grappling with the crisis itself.


Looking back at 2008 it has been possible discern the conditions within the financial system which laid the groundwork for such a dramatic shock in the years before.

The last decade has seen equally dramatic changes in the operation of the "real economy" driven by every greater connectivity and interdependence and the headlong rush to digitalisation.

Those changes potentially create conditions which risk amplifying the already massive shock of current events. Business and investors need move quickly to get ahead of the curve if they are going to manage those risks.

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