Planning in an environment of uncertainty
Mark Thomas, FCIS, Chartered Secretaries New Zealand Inc
It is natural for people to seek out certainty: uncertainty is troubling; we prefer a predictable world, which acts according to the rules, where good efforts are justly rewarded. The human brain has failed to evolve as fast as the environment around us. It still works heuristically using experience-based techniques for problem solving, learning, and discovery that our early ancestors used – ie by ‘rule-of-thumb’ – and does not deal well with probabilities (which are becoming increasingly important in management science).
The same is true of managers and businesses: they are looking for a business environment that is predictable and where specific actions will lead to expected outcomes. Management science and economics are grounded on this premise, and much of what is written by academics, management gurus, and reports is based on the desire for certainty. Indeed, the discipline of strategy is often credited to Royal Dutch Shell in the 1960s (whilst also acknowledging the contribution of military strategy), but the business environment was significantly more stable and predictable at that time. It was possible and practical to develop a game-winning strategy for the next five years.
With the dawn of the twenty-first century, Strategic Planning entered a period of crisis as the stable environment of yesteryear gave way to growing complexity, shorter lead times, and increasing interdependence and globalisation. In short, ever-increasing levels of uncertainty.
In fact, one can argue the business paradigm shifted with the onset of the twenty-first century. Traditionally, organisations differentiated operational activities between processes (the systematic execution of repetitive activities) and projects (the execution of a one-off activity). Given the increase in competition locally and globally and the requirement for constant reinvention and innovation, there has been a shift in focus from processes and business process re-engineering to projects and Project Management. Perhaps this is something modern Strategic Planning is struggling to come to grips with.
Neither discipline has reacted quickly to meet this faster-paced, more fluid environment and tackle the issue of ambiguity and uncertainty. Strategic Planning appears to be in decline, whilst Project Management (a growth area) still relies heavily on traditional approaches, based on critical path analysis and Gantt charts.
In the strategy space, there are a couple of notable exceptions: Deloitte developed Strategic Flexibility (based on scenario analysis and real options theory) and McKinsey developed a ‘four-level framework’ – in effect, recognising the degree of uncertainty and change and ‘shaping and adapting’ strategies to match the prevailing environment.
The four levels of residual uncertainty
- A clear enough future: where the business environment is stable and there is little uncertainty. In this environment, it is realistic to develop a single forecast and use traditional strategic planning techniques.
- Alternative futures: where there are a number of discrete scenarios, one of which will occur. Managers need to develop a set of discrete scenarios and responses and use decision tree and probability analysis to help determine the focus of effort.
- A range of futures: where there is a range of possible outcomes, defined by a number of key variables, but under which there are no discrete scenarios. Organisations in emerging industries or entering new geographic markets often face this scenario. Similar to two above, managers need to develop a set of scenarios describing possible future outcomes and use trigger events to narrow these down as the market moves to one scenario or another.
- True ambiguity: in this situation, the business environment is so uncertain and unpredictable, not even a range of possible future outcomes is possible to forecast. In this environment, the levels of risk are highest but, as the maxim states, the higher the risk, the higher the reward. In an environment of true ambiguity, the strategic response is often qualitative, based on analogous occurrences and adaptive and entrepreneurial strategy.
Project managers and the Project Management discipline have shown little evidence or desire to move away from the ‘critical path mentality’ (that is tied to the obdurate and meticulous management against ‘the plan’) and use more iterative and adaptive tools and techniques to meet the particular environment. Should a project manager display more imagination and verve, they could borrow from the ‘four levels of uncertainty’ and apply it to the Project Management discipline.
The need for Project Management and development of critical path thinking arose from the need to manage complexity. There are two sources of complexity:
- Task complexity, which refers to the number of interacting and mutually dependent components that have to come together to complete the project. The development and integration of all the components, literally and from a Project Management perspective, are typical of aerospace programmes or a large building project. This type of complexity lends itself well to disciplined critical path techniques and traditional project management skills.
- Relational complexity, where there are conflicting interests that give rise to disagreements about the project priorities, goals, and outcomes. This is typically present in public sector policy development, particularly where high levels of public participation and consultation are required. In these situations, a good outcome relies on the relationship skills of the project manager and the ability to codify explicit deliverables and goals – and penalties for non-performance – and manage these against a contract.
It is important to understand that complexity in and of itself does not give rise to uncertainty – although it undoubtedly adds to it when uncertainty is present. Uncertainty is a state of having limited knowledge where it is impossible to describe exactly the future outcome – and obviously the greater the level of uncertainty the higher the level of ambiguity in the outcome.
In a situation where levels of uncertainty are low, as described in the first level above, A clear enough future, then traditional planning techniques are appropriate: the manager has to manage against the plan, coordinate stakeholders and suppliers, settle conflicts, and enforce obligations. The management style is one of coordinator or troubleshooter.
As the level of uncertainty increases and we move into a situation of alternative futures, or different but discrete outcomes, the manager will have to alter the management style and increasingly observe and understand the environment, looking for the need to trigger alternative paths on the decision tree. There will be a need to continuously inform and motivate stakeholders in order to cope with changes in the project.
The manager needs to become an orchestrator and networker in an environment of uncertainty where a range of futures exist. It is essential to continuously add in new tasks to the decision tree and continuously review the existing project plan, scanning ‘the horizon’ for signs of unanticipated influences. The manager needs to have the relationship skills to mobilise new partners in a network, who can help solve new challenges, maintain flexible relationships, and ensure strong communications.
In a situation of true ambiguity, an entrepreneur/knowledge manager is required – perhaps the antithesis of the traditional project manager! The successful manager will need to be au fait with markets and technology providers, develop close relationships with users and leaders in the required fields, and build long-term relationships in order to align interests. Planning will be based on hypotheses, which will need constant verification and refinement, while parallel solutions will be developed and winnowed down through iterative selection.
Although these techniques do not help us remove or master uncertainty, they do provide the tools to help manage it. Perhaps it is time to remember Ovid: Omnia sunt hominum tenui pendentia filo: Et subito casu, quæ valuere, ruunt – All human things hang on a slender thread: the strongest fall with a sudden crash.
The contributions from CSNZ members and guests are the opinions of the authors and content is not necessarily a statement of CSNZ policy.
NZLawyer magazine, issue 165, 29 July 2011