the power of long-term thinking: how to identify and avoid single points of failure
The Irish potato famine and Silicon Valley Bank's failure are two examples of how overreliance on a single key resource can create a single point of failure for your business.
Silicon Valley Bank depended on a single type of firm - venture-backed startups - for most of its deposits. At the same time, it depended on a single type of financial asset - long-term U.S. Treasury securities - to park the bulk of the money it didn’t loan out. When business fundamentals changed for startups, and they all started withdrawing deposits at the same time, Silicon Valley Bank got squeezed from both ends and ultimately failed.
Overreliance on a single key resource - a single point of failure - is a risky situation. But it’s nothing new.
Take the Irish potato famine in the mid-19th century, for example. Irish farmers grew just one type of potato, the "Lumper.” It was cheap, easy to grow, and could feed a lot of people. But since Lumper potatoes were all genetically identical, they were equally vulnerable to the potato blight that swept through the country. Widespread crop failures led to food shortages that took a million lives and forced the migration of at least a million others. If farmers had diversified their crops with different species and varieties, the impact of the potato blight may not have been so severe.
Silicon Valley Bank relied on a niche market for sourcing depositors and the most protected instrument in the world for saving excess cash. Irish farmers relied on what seemed like the best, most productive crop. But by not hedging their bets, they failed.
As a business leader, you can learn from these mistakes so you don’t repeat them.
Whether it's a single customer, a single financial asset, a single product, or anything else important, putting all your eggs in one basket can create a single point of failure for your business, which can prove detrimental to your operations.
A single point of failure is any aspect of your organization that, if it fails, could cause the entire enterprise to collapse. This can include equipment, employees, revenue streams, suppliers, or marketing channels. While it's tempting to focus on cost-effectiveness, ease, or efficiency by limiting the number of such elements, you might inadvertently create a single point of failure. Doing so, while potentially attractive in the short term, can leave your organization vulnerable to a range of potential hazards, including financial loss, operational disruptions, reputational damage, decreased productivity, or even complete business failure.
You can gain a competitive advantage in the market by proactively anticipating, avoiding, and addressing single points of failure within your organization. You’ll be reducing the risks of potential disruptions and helping to ensure continuity of operations.
The first step is to identify any key equipment, processes, or people that, with their failure or absence, could bring down your operation.
Then, find ways to reduce the risk of reliance on single points of failure, such as introducing redundancy or diversification.
Here are some examples.
Relying solely on one critical employee → cross-train your staff to ensure others can step in if needed.
Storing customer data on one system → back up critical information on additional servers or in the cloud.
Using a single power supply → set up backup electricity like a generator.
Depending on a sole customer or funder for most of your revenue → target new relationships to diversify your income streams.
Obtaining key parts from one supplier → secure a backup option to protect from price fluctuations or issues in the supply chain.
Building a brand entirely on Instagram → collect emails and add a second marketing channel to shield from algorithm changes, paywalls, or outages that could hinder your connection with your audience.
Sometimes redundancy and diversification just aren’t possible. They can be too expensive. In that case, insurance can be a valuable tool to protect against unexpected events that could derail your business. I’ve experienced this firsthand.
As the saying goes, "everything that can break, eventually will break." Well, sometimes “eventually” comes sooner than you think. Our restaurant's single ice machine malfunctioned in the middle of a hot DC summer. We didn't have the space or resources for a backup ice maker. But we couldn’t go without ice, even for one day. So we had to buy bagged ice, which is much more expensive. Six months of repairs and thousands of dollars in ice bags later, we were back to making our own ice. Turns out, the ice machine had a rare and expensive-to-fix problem involving valves and coils. But since we had equipment breakdown insurance, we didn’t take the financial hit from repair or replacement, which would have meant significant losses for our low-margin business.
Even after eliminating and mitigating risks of single points of failure in your organization, big things can still go wrong. Then it’s all about how you react. For some inspiration, look at restaurants that survived the pandemic. Many local governments banned indoor dining, and many customers were afraid to eat inside even when permitted. Instead of letting their empty dining rooms serve as a single point of failure, innovative business owners adapted to the new context. They reinvented their operations by ramping up takeout and delivery in partnership with technology companies, providing meal kits and hosting virtual cooking classes, establishing online marketplaces to sell pantry essentials, and lobbying those same local governments to set up “streeteries” so restaurants with no outdoor seating of their own could serve customers in new pedestrian corridors. Now that we’re on the other side of the pandemic, many of these adaptations are here to stay.
Ambitious leaders may want to do some scenario planning while everything seems fine. What kinds of game-changing events could turn core business elements into single points of failure, and how might you respond? This exercise can lead to process improvement, product innovation, and organizational flexibility that doesn’t need to wait for the next catastrophe.
Solving for single points of failure is not a one-time event. It is an essential risk-management habit that requires ongoing attention and a commitment to long-term success. While you can’t eliminate all risks, a focused and proactive practice of anticipating, avoiding, and addressing single points of failure can help you develop a more agile and innovative business model that can withstand unexpected challenges. The next crisis won’t look the same as the last. But if you learn from how others have managed - or mismanaged - single points of failure, you’ll be ready to steer your organization through a changing landscape, whatever it may be.
