Working In Uncertainty

Open and honest about risk and uncertainty

by Matthew Leitch, 7 July 2004.

Preface

This document is based on the text of a speech given on 7 July 2004 at IIR's Risk Management Congress in London.

Open and honest about risk and uncertainty

Companies usually get into difficulty before they start behaving dishonestly. Perhaps some minor dishonesty starts earlier but the serious deception is usually a response to getting into serious difficulty by legal means.

Uncertainty suppression as a prelude to deception

One reason for getting into difficulty is looking at the future with blinkers on. I often call it ‘uncertainty suppression’, though not all is deliberate. I'm going to say a lot about how this happens and I think once I've described some of the common pressures and behaviours you will recognise them and know from personal experience that they are common. It is virtually certain that uncertainty suppression occurred in Enron, Equitable Life, and so on, because it happens to some degree nearly all the time in nearly every large organisation.

Despite that it is surprisingly hard to find documented evidence of uncertainty suppression. It is something that happens in private meetings, in conversations, in our minds. Business writers rarely have access to that kind of evidence, let alone realise its significance.

One eye opening exception is the story of boo.com, one of the most hyped businesses of the internet hype era. The full story, in excruciating detail, has been told in a book, ‘Boo Hoo’, written by one of the founders of the company and the Chief Executive, Ernst Malmsten, and others.

The company's ambitious strategy hinged on getting some impressive technology to work. Unfortunately, progress was not as fast as it needed to be and repeated assurances by those involved turned out to be worthless. Ernst commissioned an independent review of the project and it revealed a long list of problems (though nothing unusual). Finally, Ernst began to see what was going on.

‘I was beginning to wonder how we had ever believed we were only a few weeks away from launch. It was a mass delusion. We either hadn't seen, or had simply closed our eyes to, all the warning signs. So who was to blame? Was it the technology companies for making promises they couldn't deliver? Partly. Of course it would be easy to blame Steven Bennett [boo's technology manager], but when it finally came down to it, I realized with a sinking feeling, I had to take responsibility. As the CEO, my neck was on the line, anyway. I was the one that everyone would blame if the company didn't launch. But I knew that they'd be right too. Instead of focusing single mindedly on just getting the website up and running, I had tried to implement an immensely complex and ambitious vision in its entireity. Our online magazine, the rollout of the overseas offices, the development of new product lines to sell on our site – these were all things that could have waited until the site was in operation. But I had wanted to build utopia instantly. It had taken eleven Apollo missions to land on the moon; I had wanted to do it all in one.’

‘Nor had I taken into account the huge pressure that this vision created. It was far ahead of the infrastructure we had to support it, but I'd banned all talk of failure or delays as defeatist. The result was that rather than reveal their worries people had preferred to ride blindly into the guns.’

That example is now a few years old but I like it because it expresses so powerfully the main features of uncertainty suppression.

How the blinkers go on

There are two main reasons for our limited view of what the future might hold. One is that even thinking by ourselves we have a narrow view. The other is that social pressure tends to drive us to ignore even the uncertainties we are aware of.

Imagine a landscape scene represents the future. What we see is a narrow band near the middle. For example, ask people for a range for the FTSE 100 share index in a month's time such that they are 80% sure the actual index will be in that range and most people will give a range that is too narrow. The same thing for sales forecasts.

Since I learned about this I have tried to do better. I often push myself to think of a wider range of possible future outcomes and it has helped, yet despite that I go through life constantly surprised, just like everyone else!

The exact mechanisms underlying this are not yet understood but they have been investigated extensively by psychologists. Much less work has been done on the effect that other people have on us, but I suspect it is much greater.

Imagine you have written a plan for improving risk management in your organisation which needs some kind of senior approval. Your boss is dealing with it, so you are surprised one day to get a call from the secretary of the PA to someone who is a main board director and very much more senior than you. You are summoned to meet the great man the next day at 8am for 15 minutes before he meets the Prime Minister, gives a TV interview, then jets off to solve the crisis in the Middle East and expand the market for an important product.

You sleep badly. You don't know him personally but his reputation has your imagination sweating.

At 8.05am you are ushered into his office and his opening words are ‘Well, this risk plan of yours. Is it going to work?’

There's always a chance that faced with such an extreme situation one would break down and confess everything from one's doubts about the plan to marital difficulties, but I'd guess that what most of us hope we would say instead is ‘Yes’, calmly and confidently, and then go on to give some brief but persuasive reasons why.

So, no doubts at all? No areas of uncertainty led you to create a flexible plan with fallback options? No questions about how people will react to a new approach? It would survive a hostile bid from another company? A period of financial difficulty? The external auditors have already guaranteed they will not criticise it?

Of course you have doubts and if you don't you should have. My point is that faced with selling an idea to an organisational superior we often aspire to covering up our doubts. We consider it a skill.

Here are some situations where we tend to suppress our uncertainty because of other people:

Selling ideas. As I've already described. It's more of a problem with salespeople from other organisations but we all do it sometimes.

Avoiding criticism of feared people or groups. How comfortable are we pointing out risks that suggest doubts about the performance of senior executives, or groups like HR and IT support – people we fear or rely on in one way or another.

Avoiding ownership of nasty risks. Some risks are unmanageable – the sort of responsibility we don't want to be given. If we think we are the ones most likely to be assigned owners of a risk like that why mention it?

Managing expectations and targets. To sell an idea we typically talk up the advantages but we have to be careful not to raise expectations too high. We may feel that the outcome could, just possibly, be very good indeed but we usually prefer not to say so in case we get set that outcome as our target. So, we avoid talking about the upside risks as well as the downside risks.

Concealing bad news. Another common situation is where some project is ongoing and we have doubts about the eventual result. Since the project hasn't actually failed, yet, do we need to say anything? Many of us, like Nick Leeson, prefer to keep quiet and keep going, hoping that things will come right for us and we will never have to give bad news.

Fear of legal liability. Sometimes people feel that they are safer not knowing about risks and half-consciously discourage others from mentioning them. Which would leave you more exposed legally? Not to have known about, say, a safety risk? Or to have known but done nothing about it?

What can be done?

What can we do to get people to be more realistic about the future, and more open and honest about risk and uncertainty?

Here are nine ideas for you to consider.

Ethical stance. I think we have to take a strong ethical stance that says concealing uncertainty is wrong. A ‘confident’ presentation that conceals uncertainties is not a demonstration of a desirable social skill. It is a lie deserving a reprimand.

Leadership example. Leaders need to make it clear that acting confident of things you are not confident of is not a desirable social skill, but deception. But they also need to be careful not to drive people further into a defensive shell by talking about risk management as if it is a tool for achieving the original objectives come what may. Too often the subordinate gets the message that risk management means there are no excuses for failure. In effect, the message says ‘If something unexpected happens and this fails it will be your fault for failing to anticipate and manage that risk.’ This only reinforces the sense that the world is more controllable than it really is, discourages sharing of information, and increases uncertainty suppression.

Risk management is not a tool for achieving the original objectives, because things happen unexpectedly that change our objectives. Consider a stroke of good luck that means we can now be more ambitious if we want to. Should we revise our objectives or just coast towards the original objective?

Let's also try to set a good positive example. Imagine that very important executive does not greet you with ‘Well, this risk plan of yours. Is it going to work?’ Imagine that instead he says ‘Well, this risk plan of yours. It's got some fresh thinking in it. I like that. What are the most important uncertainties would you say?’ And then imagine he listens and says ‘Thank you. There's just one thing I'm concerned about. I know we can't be sure how people will react to the new techniques and I agree that the early trials are critical. I'd like to see if we can be more flexible and plan to review the timetable at that point. You never know, the trials could be so good we can accelerate things, or you might need more time to create something that works smoothly more of the time, so we'll need a back up plan for the financial year end. Work something out will you.’

What a nice guy!

Evaluating people differently. Putting risk management on peoples' personal objectives and in the evaluation system is such an obvious idea it's also become a cliché. However, I want to distinguish clearly between requiring people to do their part in the corporate process of form filling for risk management, and requirements that mean something more. I've already pointed to openness about uncertainty being an ethical matter. We also need to encourage people to develop their personal skills as managers so that they deal more expertly with risk and uncertainty in all the ways they challenge a manager.

Early intervention. Uncertainty suppression undermines technical improvements in risk management. Most organisations try to get business cases and high level project plans to address risk in some way. Usually it's a section in the document template called ‘Project risks".

That's not wrong, but how often does it have a significant effect? The usual situation is that it's too little too late. By the time we write that part of the document we are already committed to our ideas and approach. We've probably defended it verbally in more than one meeting. We identify the approval of the proposal with our personal success. The Risk section is just one more hurdle to clear to get the go-ahead.

We in risk management need to promote techniques where uncertainty gets identified early, before people are personally committed if possible. Risk thinking needs to be part of the way ideas develop, not just part of how they are evaluated.

Hard-to-fudge techniques. Uncertainty suppression, as I've mentioned, tends to undermine technical improvements in risk management. However, some techniques are harder to fudge than others. For example:

• A risk analysis tool that already has the unpopular risks written down so that nobody has to volunteer them.

• A risk planning tool that already has a framework of responses and your task is to tailor it, with justifications.

• Risk ratings supported by objective risk factors not pure subjectivity.

• An unyielding requirement to state the source of all data, even if it is just to name the person whose opinion it is.

• Segregations of duty.

The more we understand about the psychology of uncertainty suppression the easier it is to see what we have to do to counter it.

Conversation and presenting skills. A lot depends on whether managers at all levels are skilled at talking about risk and uncertainty. For example, do they have the skill needed to advocate new ideas effectively while still being open about uncertainty? I've written a lot about this for my website, including ‘How to talk openly about uncertainty at work’, ‘How to be convincing when you are uncertain’, and ‘Understanding uncertainty in interpersonal encounters.’ As far as I know this material is unique.

Upside too. If your view of risk management is that it is a technique for making sure bad things don't happen and prevent you from achieving the objectives originally set by your boss, you will be disappointed. First of all, the world is not so obedient. Second, you'll be beaten by people who are more open to opportunities, looking for them, and ready to raise their sights if the circumstances allow.

Integrating upside and downside risk management also makes the whole process less negative in feel, more balanced, and less defensive. It encourages people to focus on being more open minded about the future.

Natural techniques. To counter the psychology of uncertainty suppression our risk management toolkit needs to contain more techniques that are natural, easy, and quick to do. One example is what I call an evolving uncertainty list and it makes sense when you are developing an idea or plan. At each iteration you simply jot down the areas of uncertainty that remain and have some relevance to what you are doing, consider their potential impact, and think about how to find out more and what you could do anyway if the uncertainty remains.

Initially, the areas of uncertainty tend to drive your research and thinking in a productive direction as most of your actions are to find out or think more. Towards the end of plan development the list takes shape as the initial risk register for the project.

Techniques like this that are quick and low brow have a chance of becoming part of a manager's behaviour even when there isn't a procedure mandating them.

Embedding by building on what's there. When I'm enthusing about the value of risk management people say they manage risk all the time, and so they do. Any programme that aims to cultivate risk management in an organisation in a meaningful way needs to pay proper attention to the risk management that already exists, and cultivate it. Gradually, from the fragments of effective practice and skill, a fully grown capability will grow.

Summary

• Uncertainty suppression is a powerful foe and undermines technical improvements.

• Beating uncertainty suppression is the ultimate proof of successful ERM.

• We need to attend to personal values and skills as well as devising corporate processes.

References

Here is a selection of papers from my web sites illustrating the potential for technical development in risk management.

‘How to be convincing when you are uncertain’

‘How to talk openly about uncertainty at work’

‘The basics’ (i.e. of risk management – includes 7 techniques for busy people)

If there's anything more I do to help please contact me at matthew@workinginuncertainty.co.uk.

Words © 2004 Matthew Leitch. First published 7 July 2004.