Uncertainty and Prediction

This past week the East Coast was hit by Hurricane Sandy. The devastation was largely centered in New Jersey and NYC, with several other areas experiencing dramatic effects. My heart goes out to those in Sandy’s path and to families who lost their homes and loved ones.

We started to learn of Sandy’s direction several days in advance, and over and over again we saw the projected track of the storm, pictured as a cone, broadcast on the news. The pathway was uncertain, and as the predictions extended beyond a few days, the cone width became wider and wider. This led governors and mayors to issue edicts to citizens who potentially might take a hit: Stay indoors or evacuate. It wasn’t until the storm was right on top of us that we had a certainty of its devastation.

There are some important parallels to how managers and leaders must run their businesses. Businesses operate in a state of uncertainty. The attempt at prediction of future events is an important function of a good manager and leader. I am surprised how infrequently managers and leaders plan or consider the possibility of events — good or bad.

Griffin¹ describes management as a combination of several functions: “Planning and Decision Making, Organizing, Controlling and Leading.” The process of prediction is integrated in all of these areas.

For example, businesses need to develop a set of goals that should be related to its vision and strategies for the future. Planning should not only include the setting of the goals but also how to achieve them. The old axiom rings true: Proper Planning Prevents Poor Performance.² But what is proper planning? I propose that proper planning has two components. One set of plans relates to what leaders know. That is, the National Weather Service knew Hurricane Sandy was coming and plans were set in motion based on “what is to be done when a storm is coming.” The second set of plans should consider what is not known. This is referred to as scenario planning or analysis³. This kind of “what-if thinking” is different in that it considers the full range of possible events and outcomes. For Sandy, the “what if” was focused on where Sandy would hit land and what destruction it might cause at that spot and nearby. Thinking about these issues caused even more government action to prevent death and injuries.

One business parallel is the yearly budgeting ritual. By this time of year, most 2013 budgets are well under way or have been approved. Each unit considers what was planned and budgeted for the current year, makes adjustments based on reality and supplements with expected needs. Emerging from this information is a budget plan. This type of planning is based on what is known and what is desired for the future. Leaders and managers, however, also need to consider the unknown. This second part requires “what-if forecasting,” and managers and leaders at all levels of the organization need to be involved.

Here are some ideas of how this could work in practice:

• Since the salesperson needs to achieve sales targets regardless of conditions on the ground, any potential roadblocks or barriers need to be considered and planned for. Imagine, for example, that a new competitor releases a competitively priced higher-quality product, and suddenly the best seller in your company's portfolio is no longer in the lead.
  
  
• A call center manager must consider the possibility of events that might destroy service. For example, what should the manager do if 50 percent of the staff is out with the flu? Customer satisfaction directly influences revenues and profits.
  
  
• Businesses often use outsourcing as a tool to focus on core internal strengths. What if a vendor shuts down (today)? It is always within the realm of possibility that a vendor is suddenly “padlocked.” Should this occur, what will the business do? This can have a huge financial impact.
  
  
• Some businesses require more planning than others. Healthcare facilities, for example, require much more attention to scenarios of risk. Consider that Bellevue Hospital was forced to evacuate during Hurricane Sandy.
  
  
• The Internet has created a new set of worries. What if negative publicity goes viral?
  
  

Therefore, the budget process is one method leaders can use to get everyone to consider potential events and consequences. Another approach is to construct a serious Enterprise Risk Management (ERM) process that is executed by a senior-level committee³. In such a committee, its members step out of their traditional roles to contemplate the inherent risks in the business. This should be an action-oriented process with required deliverables and results. A committee I served on maintained a list of all relevant risks (ranked by impacts) and we worked on either mitigation or removal of the risk. In some cases, we used the process to monitor known risks across the business. The article by Barton, Shenkir and Walker offers some guidance to start the process.³

It is not hard to imagine how deep the desolation would have been if some degree of planning had not taken place prior to Hurricane Sandy.

So far I have addressed the planning and decision-making components of management's responsibility should disaster occur. The organizing component is also required. One plan that needs significant organization is disaster recovery. Not only is a formal documentation of the process required, but all essential personnel should know exactly what to do should an event occur. For years I had a disaster kit at my home; it contained instructions of whom to contact and how. Disaster plans should be revisited annually.

The control component is also about planning. Planning creates some semblance of control by providing a set of actions.

The last component, leadership, is about inspiring the need for such plans and earning buy-in to practice and revisit such plans. Everyone will grumble until the plan is actually needed; this is when everyone suddenly realizes how good the leader was at having the foresight to be ready.

My family was fortunate in the hurricane. We lost power, but our neighbor allowed us to tap into his generator. I am thankful it was not worse and also pleased at what appeared to be a group of prepared communities and state governments up and down the East Coast.  The results were still awful, but I think without some solid plans in place, it would have been much worse.

Leaders must ask themselves one important question. How ready is the business should some unknown negative (or positive) event take place?

If you have comments, let me know.

References

¹ Griffin, R.W. (2011). Management (10th ed.). Mason, OH: South-Western Cengage Learning.

² Author unknown. This is also known as the 5 Ps. I recall this phrase being used when I was in a sales position early in my career. Wikipedia connects the phrase to a British Military phrase (7 Ps).

3 Barton, T.L., Shenkir, W.G., & Walker, P.L. (2001). Managing Risk: An Enterprise-wide Approach. Financial Executive, March/April, 48-50. Electronically Retrieved 11-2-12 at: http://shc-staffweb.hct.ac.ae/skhartabil/Skhartabil/TEACHING%20RESOURCES/Principles%20of%20Finance/Prin.%20Corporate%20Finance%28Brealey%29/others/body10.pdf