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Ethos Issue 4, Apr 2008
Managing Complexity and Uncertainties
Lam Chuan Leong
We act like a hive of bees, with each bee tending to his individual cell and depending on the actions of thousands of his companions to succeed as a colony. Through some self-organising principle, this arrangement succeeds remarkably well. Indeed, so widespread is this fragmentation process that it is a tribute to human organisation that failures are relatively rare. However, as complexity increases, we must expect that the risks arising from fragmentation will increase. We must, therefore, adopt an approach that caters to such risks rather than assume that they cannot occur. This calls for a different mental model in the management of complexity.
Most of our current mental models assume that with given starting conditions, we can reasonably predict the outcome of management actions and therefore choose a set of actions or strategy that brings us to a desired outcome. Studies in complexity clearly indicate that such precision of prediction is impossible for any reasonable period into the future. We need to replace the current mental model that says, “If we do such and such, then an outcome of such and such will result.” The new model is that “If we do such and such, then probably such a range of outcomes is likely to result”. In fact, we have to be prepared for outcomes that are totally unexpected and perhaps thought of as “crazy” before the fact. Such mental models do not become us easily because it is the job of many formal education systems to teach predictability and knowledge of a form that is deductive, i.e., that input A invariably leads to outcome A.
RISK MANAGEMENT AS POLICY
It has been said that good execution of a mediocre strategy is better than a brilliant strategy poorly executed. Yet many managers tend to assume that execution is something that can safely be left in the hands of other, usually more junior, staff. This is also an outcome of a linear mode of thinking, i.e., that once the key input parameters have been set in the form of the strategy chosen, the outcome must inevitably follow as night follows day. But if the outcome is uncertain and the unexpected has a fair chance to happen, we need to pay more attention to execution.
In particular, management has to accept the need to be prepared for surprises at all times. It should:
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cultivate a mindset that anticipates or at least prepares for “wild card” scenarios; |
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accept the need to build and manage an effective risk anticipation and management system; and |
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accept a certain cost to “insure” against low probability but high impact outcomes, e.g., choosing a strategy that yields slightly less value than the “optimal” strategy if doing so takes into account a low probability but high impact (or loss) outcome. |
Adopting such a way of thinking is not without challenges. Practical leaders seldom want to waste time thinking about low-probability future events. They have their plates full with current problems. Incurring current costs to insure against future events may seem fruitless, particularly if fast and mobile managers would have moved on to new pastures by the time any adverse impact happens, if at all. But for those who have long-term and total responsibilities for the whole organisation, risk management and the associated costs cannot be avoided.
BEYOND SCENARIO PLANNING
Amongst the many tools of risk management, scenario planning has been advocated as a major tool to combat future uncertainty and to address the problem that the future is inherently unpredictable. Scenario planning is extremely useful in creating awareness of risks and the possibility of unexpected outcome. However, to fully realise the benefits of scenario planning requires a better understanding of the underlying process between scenario painting and the formulation of strategies.
Both analysis and practice show that the gap between scenarios and strategies cannot be bridged directly. One can see this with a simple artificial example of a stock market. The scenarios are simple. For a certain time horizon, the market is either up, down or flat. Knowing these scenarios does not at all help the investor in coming to a strategy. It is impossible to create a strategy that will be robust under all scenarios. The strategy of staying out of the market or having a fully diversified portfolio will earn close to zero returns over time.
What scenarios can do is to start one on the process of thinking about the possible range of outcomes and to develop leading indicators or “trip wires” which will add more knowledge to those outcomes that are more likely to result. Developing such indicators calls for great domain knowledge, extreme skill and judgment, and the ability to read so-called “weak signals”.
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