Managing Risk & Uncertainty
The ancient Roman army was so well organised that it had to be attacked three times before it was defeated.
The Romans’ battle formations were such that if the tightly packed vanguard were driven back, it would interlock with the second line of defence to create a larger body which provided a fresh onslaught. If that unit in turn were repelled, the rear guard would receive that unit as a whole: all three units then combined to create a single body to re-enter the battle.
The Romans were able to successively regroup in battle and had to be beaten three times before they were properly defeated; with this ability facilitated by progressively looser configurations.
The punchline: risk management systems should allow for multiple challenges, and successive mitigations should become progressively more flexible.
This is the first in a series of Strategy Snippets® to help managers deal with risk and uncertainty. Decision trees are based on a left-to-right branching logic in which a sequence of chance events are articulated and ‘unfold’ into a range of possible outcomes.
The attached graphic shows a hypothetical decision tree for a construction company deciding whether to proceed with a particular project, with all combinations of possible outcomes. Each has its own ‘pathway’; options for action by management (recruit more staff? defer marketing? etc.) could also be added, so that the decision tree captures both events outside the organisation’s control, and those within it.
Even a simple decision tree like the one shown can help give management a clear pathway forward in an uncertain environment.
Many managers overlook the foundation when setting goals and priorities: taking stock of previous 𝘱𝘦𝘳𝘧𝘰𝘳𝘮𝘢𝘯𝘤𝘦; specifically, how performance 𝘤𝘰𝘮𝘱𝘢𝘳𝘦𝘥 𝘵𝘰 𝘭𝘢𝘴𝘵 𝘺𝘦𝘢𝘳’𝘴 𝘨𝘰𝘢𝘭𝘴.
This oversight means you don’t gain insight into your ability to produce results, or what has and has not worked for the organisation, and why ... all of which are critical to managing risk.
Knowing strengths and weaknesses is critical to responding to a changing environment … and a review of past performance highlights those strengths and weaknesses.
The attached graphic, with a worked hypothetical example, uses a template you can adapt for your own review.
So: revisit last year’s goals, and how you performed against them. Then do a strategic scan of your environment. 𝘛𝘩𝘦𝘯 set your goals and do your risk management planning for this year.
There is so much uncertainty in management and business: what will happen to prices, take-up rates, or funding? Typically such uncertainty is dealt with via sensitivity analyses, but so often there are multiple variables with multiple uncertainties!
Computer simulations are a powerful means of dealing with this: all the different possibilities can be input to one big mash-up. The computer can then generate thousands of scenarios using random generated numbers, providing a full spectrum of results … and 𝘩𝘰𝘸 𝘭𝘪𝘬𝘦𝘭𝘺 each is to eventuate.
This form of analysis, known as Monte Carlo simulation (because of the use of random numbers, as at a casino) is a powerful, but under-utilised, risk management technique.
Small-scale pilots and business experiments are great ways to collect information, iron out bugs and manage down risks
My three key observations on pilots and tests are these…
- Pilots and tests are easier to implement than most people think, and are massively under-utilised
- They are best used in operational and tactical contexts: it is generally not feasible to test a major change in strategic direction or a merger or acquisition ahead of time
- When running a pilot or test, always ensure that the results can be compared to a pre-defined baseline or control group.
