Managing Uncertainty

Managing Uncertainty

While uncertainty sounds like the scariest of the three root causes of business failure, it’s not necessarily the worst offender.  There are lots of tools and training available to teach us how to do a better job of managing uncertainty.

The good news is that we know more than we realize and we don’t always need as much information as we think to make an informed decision in an uncertain world.  The bad news is that we often rely on instinct and unreliable decision making tools that give us a false sense of security and lead us to take unnecessary risks and make bad decisions.

The truth is that our brains are not hardwired to work like computers; instead, they are designed for self-preservation (fight or flight decisions).  The problem is that few business decisions actually pose a life and death situation, so we routinely rely on experience and intuition when objective tools are required.  Even in situations where we make a concerted effort to obtain objective information our decisions are still at risk because cognitive human biases negatively influence the choices that we make.

The three subcategories of uncertainty include:

  1. How we make decisions.
  2. How we manage risk.
  3. How we plan for the future.

Decisions

Decision making is not a single act, it is a process and it touches every process in business.  Every person in every business is making large and small decisions that affect business success every day.  Does every employee know the overriding goal for every decision (vision/mission/strategy)?  If not, they are at best guessing and at worst making decisions that serve their own best interests rather than the organization’s.  Additionally, everyone’s risk tolerance is different, which results in overly conservative choices by some employees and overly risky options selected by others.  Together it makes for persistent chaos.  So, if you find yourself saying “I (we) seem to spend our days putting out fires!” then that a good sign that it’s time to evaluate your organizational decision making processes or lack thereof.

There are 3 consistent mistakes in business decision making:

  1. Failure to establish and follow an organizational decision making process.  Having a clearly defined decision making process that includes a debriefing session is one of the best ways to improve organizational results.
  2. Failure to identify and evaluate ALL available alternatives.  We tend to think in terms of whether or not we should do something rather than take a step back and consider a full range of options.
  3. Failure to consider how our cognitive biases may be tainting our decisions.  Two things we can do to mitigate this problem.  One is to educate ourselves about decision making biases, review our pending decisions against them and then adjust accordingly.  Additionally, we should include all stakeholders in the decision making process so we can address every perspective while there are still alternative options available.

Professor David Teece, of the University of California at Berkeley, makes several observations about decision making in organizations, in his 2007 article “Explicating Dynamic Capabilities – The Nature of Microfoundations of Sustainable Enterprise Performance” in the Strategic Management Journal.  For example:

  • The capacity to make high-quality, unbiased but interrelated investment decisions in the context of network externalities, innovation, and change is rare as decision-making errors and biases are ubiquitous.
  • Common investment decision errors include excessive optimism, loss aversion, isolation errors, strategic deception, and program persistence.
    • Evidence shows that decision-makers discount outcomes that are merely probable compared to outcomes that are certain, also known as the certainty effect.  It contributes to excessive risk aversion when choices involve possible losses.
    • To simplify choices between alternatives decision-makers generally evaluate options in isolation, which leads them to undervalue possibilities for risk pooling.  This approach may produce inconsistent preferences and decision biases (timid choices) that lead to outcomes that block innovation.
    • Committee decision-making structures almost always tend reinforce the status quo.  This often hurts innovation because someone will almost always feel threatened.  The result is ‘program persistence bias’ or the funding of programs beyond what can be sustained on its merits, thereby reducing the funds available for new initiatives.
  • Management needs to create an environment where individuals involved in decision-making feel free to offer their honest opinions, and look and objective data in order to escape from closed thinking.
  • Biases can be recognized ahead of time.  Enterprises can bring discipline to bear to purge bias, delusion, deception, and hubris.
    • It’s important to be alert to the incentives of the decision-makers.
    • Obtaining an ‘outside view’ through the review of external data can help eliminate bias.

I’m reminded that people in organizations are often ‘punished’ for decisions that have a less than desirable outcome.  Yet lost opportunities go unnoticed, even when they might have added tremendous value to the organization.  Having a defined decision making process could alleviate both situations but only in organizations where failure is tolerated, all major decisions are debriefed, and everyone is given an opportunity to learn from both the good and less desirable outcomes.

Risk

We tend to think of risk as a situation with negative consequences but good things do happen unexpectedly.  Of course, we’re grateful then good things happen, but we hunt for someone to blame (and punish) when we’re knocked down by the bad stuff.  Our fear of loss often blinds us to seeing opportunities for gain.  Therein lies a major problem.  In our fast paced world, we know that in order to survive our organizations must evolve, which means we must change.  Change comes with risk, including the risk of failure…  As long as we punish people for taking chances that might fail, we won’t get the creativity and innovation that we need to survive.  The key is smart risk management.

Organizations often leave managing risk to the CFO/Controller who buys various types of business insurance, maybe we maintain offsite backups of our data, a business continuance plan in the event of a disaster, and maybe the safety officer to avoid injuries, if applicable in our industry.  Sadly, that’s a woefully inadequate approach because there is far more risk out there than these traditional business practices cover.  Instead, we need to get everyone involved, evaluating our world from every perspective.

We need to expand the definition of risk to include anything that threatens the organization’s continuity.  Every business needs to define what is considered a risk, what is considered risk taking, and what costs it cannot afford.  Without clear definitions, employees essentially have a blank check.  Some employees will take on more or fewer risks than they should based on their personal risk preferences.  Some will ignore or overlook risky situations, while others will exaggerate the odds of failure.  Again, a recipe for continuous chaos.

Without actively managing risk, we are circumventing our ability to make dramatic advances.  Which is one of the reasons that 97% of businesses are in the shallow end of the revenue stream.  Identifying and acting on the right risks presents huge opportunities.

Future

Companies spend a huge amount of time building forecasts and running simulations.  One of the reasons that it’s such a big time sink is that models that are tailor made to fit your company take time to build, debug, and maintain.  Off the shelf products take time to learn and tweak to do the job.  Once the models are up and running, the number of scenarios that are run is endless.  Then of course, with each passing day new information becomes available and the process starts all over again…and again…never producing the exact results everyone is looking for…  The reality is that the further that you go out into the future, the more off-base traditional forecasts become when compared to actual results.  The entire process can be frustrating and exhausting.

In reality, organizations need to look into the future farther than the next 90 days or even the next 12-36 months in order to position themselves for success, particularly when infrastructure is required.  When it comes to predicting the future, we can all take comfort in the fact that no one has a crystal ball that guarantees success.  However, there are plenty of people who have had enough foresight to gain significant advantage in the market place.  The big companies with deep pockets can keep professional futurists on their payroll or pay big consulting fees, but what about everyone else?

Thankfully, organizations like the World Future Society, the World Futures Studies Federation, the Millennium Project, and the Association of Professional Futurists share some of their insights with the public.  Not to mention all the professionals around the world who are willing to share their insights with interested parties.  It’s said that whatever you’re interested in, someone somewhere in the world is most likely researching and analyzing it.  So don’t recreate the wheel, instead, reach out and collaborate because knowledge is the only natural resource that grows when it’s shared.

Every organization needs to incorporate futurecasting into their daily operations.  One approach is to incorporate questions like these into meetings, spend 5 minutes exploring the responses, and then take action as appropriate:

  • What is the most significant change on the horizon in our industry?
  • Predictions say the next big thing will be ____; how will it affect us?
  • The time when ___ is approaching.  How can we take advantage of it?
  • What advancement in technology will turn our business upside down?
  • How will the obsolescence of ___ impact our business now or in the future?

In his entertaining book Flash Foresight: How to See the Invisible and Do the Impossible, Daniel Burrus with John David Mann share seven triggers to flash foresight (don’t have time to read the book, check YouTube for Daniel Burrus’ equally entertaining speeches):

  1. Start with certainty (use hard trends to see what’s coming). Throw out everything that cannot be predicted with certainty and focus on what is left.  The certainties that are left provide plenty of opportunities with low risk and high rewards.
  2. Anticipate where trends are going (base your strategies on what you know about the future).  He outlines eight pathways of technological advancement that can help strategists anticipate the future by mapping the paths that the future might take.
  3. Transform (use technology-driven change to your advantage).  This insight banks on the increase in three digital accelerators: processing power, bandwidth, and storage.  Burrus states that the new Golden Rule in business is:  “Give your customers the ability to do what they can’t currently do but would want to if they only know it was possible.”  Does that sound like any companies that you know?
  4. Take your biggest problem and skip it (it’s not the real problem anyway).  The logic behind take your biggest problem and skip it is that today’s biggest problem can become irrelevant due to the speed of change.  Instead, leapfrog the current problem in creating new products and services and build off of trends that can be determined with certainty.
  5. Go opposite (look where no one else is looking to see what no one else is seeing and do what no one else is doing).  The idea here is rather than trying to compete where everyone else is focused, look in the opposite direction.  For example, Amazon took the opposite approach to traditional brick and mortar book stores and went virtual.
  6. Redefine and reinvent (identify and leverage your uniqueness in new and powerful ways).  We should avoid the commodity trap by leapfrog the competition by redefining anything and everything about our businesses.  Burrus states every product or service that becomes a commodity can be decommoditized by wrapping a service around a product or wrapping a new product around an existing product or any number of similar combinations, but we are reminded to stick to our core competencies.
  7. Direct your future (or someone else will direct it for you).  Our vision of the future is a self-fulfilling prophecy.  Our vision of the future drives our choices and our behaviors, which produce our outcomes and shape our lives.  We become what we dream.  Burrus stresses the importance for executives to manage their company’s futureview (the mental picture that we each hold of our future existence).  Otherwise, employees, customers, business partners, suppliers, and investors with doubts are likely to migrate to companies with brighter visions of the future.

 

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