Embrace uncertainty for better business in 2016

Many business plans read like bedtime stories. They have heroes, villains, interesting plots and nearly always have a happy ending. The process of creating a plan makes us feel safe and warm: but it bears little resemblance to the world we live in.

Many traditional management interventions have demonstrably (and anecdotally) failed when applied to reality. We know our overly-engineered plans and processes don’t really work – we get frustrated by them every day.

Most people candidly acknowledge their skepticism, but choose to 'muddle through' on personal merit.  But why have we taken so long to accept a challenge to the old ways?

Going Back to School
The management many were taught at university is based on a theory of management called “Systems Dynamics.” At its heart, systems dynamics has a mechanical metaphor. In mechanical systems there is generally a known relationship between cause and effect.

We can deconstruct mechanical systems in order to find out how they work. We can improve parts of the system and have incremental improvements on the whole. We can copy the parts, reassemble them and re-create the system.

Because these situations are knowable and repeatable, we can codify and describe the processes which make them work. We can find broken components and critical processes and identify bottlenecks. We can accurately model the systems to understand the effect of change. Improvements in computational power allows us to be precise and design to extremely fine tolerances for great efficiency. This gives humans a great sense of power and control.

But there is a problem. Most of the work in our current age isn’t with mechanical systems, or anything looking like it. Many people are working in service businesses or fast-moving markets, using relationships to co-create value. Relationships are not mechanical – they are complex. Complex systems are non-linear and cannot be dissembled into component parts like machines.

To understand how to operate in complex systems requires moving away from systems dynamics and the mechanical metaphor. We must move towards complexity management because it is driving the business revolution of the future.
 
Fig 1: The Changing Management Paradigm

(Click to zoom)

What is Complexity?
Most businesses operate as complex adaptive systems. Rather than having components and a strong link between cause and effect, a complex adaptive system is instead made up of diverse factors acting in an interconnected way.

The elements in the system have the capacity to change and learn from experience. These interactions give rise to the qualities and outcomes of the system – which makes these outcomes “emergent,” rather than planned.

Examples of complex adaptive systems include almost any self-organising group of humans, brains, ant colonies, stock markets and online collaborative networks. This system is literally greater than the sum of its parts.

The concept of “emergence” means getting unexpected results from reasonably simple beginnings. This also means small changes in starting conditions can give rise to unexpected differences quickly. This aspect has become more apparent in efforts to solve social problems or avoid ecological disasters caused by human actions.

Planning in a Tractor Factory
Let’s imagine we are making tractors in Soviet Russia. This is a very mechanical system (and is a perfect fit for the systems dynamics approach taught at University).

The Soviet government’s Five-Year Plan tells dictates how many tractors are needed to this year and stipulates the raw materials available. Factories are laid out so that raw materials enter in one end and tractors exit the other. Specialisation of labour is used to ensure each task in the production line can be easily repeated.

Each person doing a task does not need a huge amount of training. Nor do they need to understand the system as a whole. This system can be modelled accurately and rules applied to manage it.

This business plan is prescriptive and detailed. Each process is simplified, clear and unambiguous. Its job descriptions and HR practices are equally prescriptive. To manage this system requires ensuring everyone and everything conforms to the plan. The success for managers is that it meet targets, reduce costs and manages non-conformance.

This process works well in a highly stable, constrained environment. In a Soviet tractor factory, it is probably legitimate to believe that detailed research and assumptions around cause and effect will result in good evidence to make sound decisions.

But it will not work outside of these situations. When operating in a dynamic market, or managing people who aren’t performing strict task-based roles, or working by relationship rather than orders, this approach quickly crumbles. Detailed business plans become quickly redundant, job descriptions bear little resemblance to reality, and processes become impediments rather than guides.

This method of business planning trades our present certainty for an idealised future, and (such as the planned economy of Soviet Russia) will fail in a changing world. The risk of applying a similar systems dynamics approach is that new business will almost certainly be operating in a complex adaptive system, rather than fitting into a mechanical metaphor.

Most people in organisations realise this: dreading planning days, rolling their eyes at “culture change plans,” and pushing “delete” on data gathering exercises such as engagement surveys. They intuitively understand that these approaches are inauthentic.

Our Inbuilt Fear of Change
Why do we stick with inauthentic approaches, remain beholden to information we don’t trust, and follow authority we don’t respect?

The answer may lie in the human psychological condition. In his book Escape from Freedom (1941) psychologist Erich Fromm put forward arguments about why humans might select conformity, authority, and prescription over freedom and responsibility.

It seems that even when given the opportunity to advance their own thoughts and challenge barriers, people often prefer to give freedom up. The tradeoff is simple. To abdicate responsibility also means avoiding the fear and uncertainty that comes with it.

This happens in organisations. They are often reticent to abandon organisational hierarchy to promote different interactions. People don’t like to swap functions around to see if whether they’re good at things outside of the “job description.”

Often people need to be taken offsite and reassured by management in order to challenge dominant thinking. To exercise freedom of thought in a normal day would be to promote delving into uncertainty and fear of the unknown. It is much easier to succumb – to devolve our responsibility to “the company,” or the “boss.”  This trait seems to manifest more strongly when organisations are more constrained and layered (i.e. bureaucracies).

People may also be aligning to existing structures and processes due to agentic behaviour. In his famous experiments, psychologist Stanley Milgram demonstrated that when people were instructed to complete a specific task, they often continued with it even when it was against their better judgement (in this case, giving people electric shocks!).

This is known as agentic behaviour – the person’s self-view is that they are acting not as themselves, but as an agent for someone or something else (it's the “I was just following orders” defence).

Likewise, this behaviour (without the electric shocks!) appears throughout organisations. People pretend to follow business plans they don't believe in. They carry out processes which don't make sense (or at least appear to carry them out, while actually working around them to get the job done).

They communicate messages to internal and external stakeholders they know aren’t really true. How many times have we used phrases which make us feel like service drones, rather than what we really are: a complex networked environment of individuals, each with a myriad of legitimate perspectives.

Planning in the Real World
Unlike in our Soviet tractor factory, the future isn’t predictable in the real world. People don’t plan fastidiously for the future, working instead with others to co-create value that doesn’t currently exist.

Markets change quickly and shocks are frequent. Rather than engaging in more research or better planning, remaining agile is preferable, and creating the ability to take advantage of opportunities. Below are five ways of doing this in practice.

1. Set ‘fuzzy’ goals
Have goals that define a goal, but don’t constrain options. Hard metrics can be included but don’t let these impede innovation. The primary objective of fuzzy goals is to get collective understanding about the direction the business is going to travel not to rigorously define a point of success.

2. Increase strategic sensitivity
Being able to detect early signals of change provides both opportunity and insulates against market shocks. This means moving from dependence on data-based analysis to primarily using market narrative. Anecdotes and stories collected at source (for instance, from staff) is an extremely effective way to collect fine grained data that is timely and rich in information. It’s best to avoid the phrase: “well, that was the word on the street for a while…”?

This narrative information can come from any level at any time, and using it should involve regular discussions of emerging opportunities and risks based on anecdotes.

More formal information sources should then be used to cross-check market narrative. This already occurs in an ad-hoc manner within most organisations. The change is to formalise the narrative process and recognise its value.

3. Collective Commitment
As stated above, goals should focus on creating a collective understanding of where the organisation is going. Collective commitment is about creating conditions that allow plans to come to fruition. This is different from the commonly-used term ‘alignment’ – which implies a linear focus on a stated goal.

To be successful in a complex business diverse opinions should be encouraged, and conflicting points of view embraced. Collective commitment isn’t about reaching agreement. If two or more people think they have the answer, then get them to test it. Let the right decision emerge from interacting with the network. Don’t get locked into decision paralysis based on the need for analytical proof.

4. Promote Action – Focus on NOW

The greatest loss of time is delay and expectation, which depend upon the future. We let go the present, which we have in our power, and look forward to that which depends upon chance, and so relinquish a certainty for an uncertainty. – Seneca

While goals might be fuzzy, the immediate plan will be clear and will focus on maximising the potential of a current state. The focus should be: “What can we do right now to maximise the evolutionary potential of a business?” This is a fundamentally different question to traditional three-year planning.

The effectiveness of the interventions put in place need to be understood. If they are working, then the success should be amplified. If not, resources must be re-allocated to mitigate any negative consequences.

The business plan thus becomes an action plan based on the understanding of emerging opportunities and risks. This plan is focused on achieving multiple parallel actions where outcomes are measured, successes amplified and failures dampened.

5. Enable Fast Deployment of Resource
The above process relies on the ability to rapidly deploy a small amount of resources to test ideas and seek market feedback. As an idea matures, the role of a manager is to wrap additional resource around it so it can be exploited in more traditional ways. The team that takes successful pilots and turns them into new products and services may be different to the team that tests ideas. The two phases require different skills.

This means that teams will need to be cross-functional and resources need to be drawn from across the organisation. Traditional structures focusing on departments or functional areas may impede fast collaboration. Successful managers need to de-couple resource control from implied personal stature within the organisation.
 
Advice for Operating in Complex Systems
The following are heuristics – rules of thumb when operating in a complex or fast changing space. Note that these are ‘rules of thumb’ and not ‘rules’! Rules belong in ordered systems or in a highly constrained situation.

Stop Listening to Experts
Experts have a legitimate domain within complicated systems. These are systems where cause and effect can be determined before taking action. Experts are useful in areas of our business that are repeatable and stable.

Within complex systems however, cause and effect is not related in a predetermined way – only seen in retrospect. Those who claim expertise within complex systems either do not understand the concepts of complexity, are self-deluded, or are good old-fashioned charlatans. (It is a sad fact that within the consulting community there are many self-described experts working within areas where expertise can actually never be a legitimate claim).

Avoid Buying Snake Oil
The basic model for most business books and traditional consulting models is:

• Use a set of case studies to weave a coherent narrative about traits of successful (but fundamentally unrelated) businesses.

• Deliberately avoid (or ignore through confirmation bias) bits not fitting the narrative.

• Create a formula, process or set of rules based on the common aspects of the narrative.

• Write a book to encourage others to repeat the rules or the process, in common with the successful cases. Ideally, establish a website and charge a consulting fee for helping others to apply the rules. In a perfect world, train other consultants to apply your method while charging a license fee for the privilege.

• Bank the profit, before your method or process is shown to be pseudoscientific nonsense. In order to delay the inevitable, establish a coherent narrative to explain the lack of results are an implementation fault rather than of the system.

While the above sounds silly, one need not look far to see a substantial number of organisations applying such template consulting, and creating completely inauthentic solutions to complex problems. For example, look at any non-manufacturing business trying to apply Six Sigma techniques. Or any organisation applying project management techniques to culture change.

Data Can’t Answer Interesting Questions
In order to operate in a complex system being sensitive to small changes is important, which can provide weak signals from emerging opportunities and risks.

Relying on consolidated data is to be always operating in the past. Modern technology purports to hold the answer – providing us with real-time information while sophisticated algorithms show relationships between agents otherwise never seen. However, neither can predict the future in a complex adaptive system.

The best they can do is describe what is happening. Our recent article on dairy forecasts showed the almost complete inability of the combined power of large New Zealand agencies to predict the price of milk solids on the international commodities market. This is evidence of the folly of analytical approaches to complex systems. To increase strategic sensitivity narrative research must augment analysis.

In order to truly be sensitive to the future, true diversity of opinion should be maintained. Decision-makers must be directly in touch with the data source – the people at the coalface interacting with the system every day are seeing weak signals of change.

You can’t go back in time
Complex systems don’t have one root cause. Complex systems are an emergent property of many agents acting independently, where each action both affects the other agents and the system as a whole. In this sense the system cannot be deconstructed to its component parts with the expectation of understanding how the system operates as a whole.

Cause and effect can only be determined in retrospect. Time spent on retrospective analysis is only valuable in systems with repeatability and stability. While retrospective analysis offers clues to which parts of the system might be repeatable, a linear material relationship between cause and effect cannot be assumed. The correlation-causation error is most common in those taking a systems dynamics approach to understanding complex systems. This has direct implications for establishing a root-cause in things such as health and safety investigations.

Stimulating a Network versus Commanding a Hierarchy
Looking at a complex system is like looking work of art: you can only see it as a whole. Unfortunately for the leadership training community, a good leader can’t be deconstructed into their component parts, those parts taught to others and then have them reconstructed to create leaders.

Leadership is contextual and situational, many of the attributes of admired leaders are too complex to categorise. When talking about good leaders we tend to use anecdotes and stories. Unfortunately, the metaphor many business schools and leadership training programs employ when discussing leadership is the concept of a pyramid. Leaders are at the top, aspiring leaders in the middle and workers at the bottom.

This metaphor reflects the hierarchical structure of business. It was born from military units that have been pervasive for thousands of years. Yet increasingly complex business environments cannot be effectively lead through command and control. If business people are co-creating value with clients and suppliers are co-creating value with businesses, then a business structure cannot be accurately depicted as a hierarchy. It is more like a small world network. This network will most likely operate as a complex adaptive system.

The historical concept of leadership within such a system is almost redundant. Leaders within a small world network need to shift towards stimulating actions, measuring the results of actions, amplifying success and mitigating failure.

In order to successfully lead within complex systems, leaders need to be in touch with the distributed granular information coming from the system. Detached, dashboard, filtered and analysed information does not provide a basis for continual intervention within a complex system.

Lastly: Go Back to School
Many contemporary and historical management theories have questionable efficacy – their approaches are a summary of business case studies. But we know context is vital in complex systems and small changes in starting conditions can mean massive changes in outcome.

Many books and experts talk about best practice, formulas for success and winning strategies. In complex systems there can never be best practice, only emergent practice. Breaking free from the shackles of linear thinking means abandoning fear of uncertainty and embracing the real world of complexity. Learn it. And then do it.

Steve McCrone and Paul Sullivan operate Cornwall Strategic

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