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Decision-making in uncertain times

By Dr Martin Farrar, Associate Technical Director, Research and Development –Management Accounting, Association of International Certified Professional Accountants

With a team of strategists, generate ideas for solutions and probable outcomes. Here’s guidance to make quality decisions.

Quality decision-making has never been more important — or more difficult.

In times of complexity and with situations changing rapidly, it is easy to go on autopilot. Our brains go into the ‘fight or flight’ modes of survival, and if we don’t properly assess the changing situation, decision paralysis can ensue. At the other extreme, we fire from the hip and end up bulk buying toilet rolls to feel in control.

In the current COVID-19 situation, we are experiencing an ‘infodemic’— an excessive amount of information that makes decision-making and business solutions for organisations more difficult. 

We all must build structure into our decision-making, taking the time to ask and answer the question, ‘What is going on here?’, if we are to make informed choices.

The lesson is one of problem-solving and being able to match an issue with the right strategy. David Epstein in his book ‘Range; how generalists triumph in a specialized world’ notes:

‘The most successful problem solvers spend mental energy figuring out what type of problems they are facing before matching a strategy to it, rather than jumping in with memorized procedures’.

Step back for a historical perspective

I hear from colleagues, ‘that nothing like this has happened before — cities and countries in lockdown; businesses shutting or in meltdown. This is new. This is unprecedented’.

However, history tells us otherwise. CIMA’s London office is in an area called Moorgate. Its name originates from one of the seven gates that surrounded London during the medieval period. From Roman times, the City of London had a wall surrounding it, and parts of it can still be seen today. Cities in the UK, such as Chester and York, were specifically designed with outer walls to protect their citizens from advancing soldiers. These walls were also a form of disease control; cities could go into lockdown. 

The word ‘quarantine’ comes from the Venetian language, meaning 40 days. In 1448, to tackle the spread of plague from incoming passengers on merchant ships, the Venetian senate imposed a 40-day isolation period. At the time, it was thought that the incubation period for plague was 37 days. A quarantine was then introduced to determine the health of a ship. 

London theatres have recently shut down to help contain the spread of COVID-19. Again, there’s precedent. This also occurred in 1606 when the plague led to the closure of London’s theatres, including the Globe Theatre, where William Shakespeare’s company, the King’s Men, performed.  During periods of self-isolation from plague outbreaks, Shakespeare wrote inspiring poetry and the classic plays King LearMacbeth, and Antony and Cleopatra. 

There is hope. Businesses have been in lockdown before. From adversity and quality decision-making, innovation can flow, changing organisations and the world for the better in the long-term.

We have moved from a complicated situation to a complex one. 

 Margaret Heffernan, in her book, ‘Unchartered; how to map the future together’,talks about a complicated world, and a complex world. They are not the same.

‘Complicated environments are linear, follow rules and are predictable; like an assembly line, they can be planned, managed, repeated and controlled. They’re maximised by routine and efficiency. But the advent of globalisation, coupled with pervasive communications, has made much of life complex: non-linear and fluid, where very small effects may produce disproportionate impacts’.

In the complex world, we need to use different skills to help make better decisions for the long term.

In the white paper Re-inventing finance for a digital world, I explored the concepts of ‘Increasing Complexity and ‘Where Traditional Doesn’t Work’ against the Stacey Matrix.

 The Stacey Matrix was conceived to highlight the relationship between change context and decision-making /control modes in Ralph Stacey’s book, ‘Strategic management and organizational dynamics’. 

The vertical y-axis is Agreement. This measures the level of agreement about an issue or decision within the group, team or organisation. The degree of agreement on what should be done is an important factor in determining success. The horizontal x-axis is Certainty. When an issue or decision is ‘close to certainty’, it is because cause and effect linkages can be determined. This is usually the case when a very similar issue or decision has been made in the past, meaning that you can use past experience to predict the outcome with a good degree of certainty.   Traditional management approaches are not effective in the zone of complexity. Here, finance professionals need high levels of creativity and innovation. Instead of looking for cause and effect linear relationships, they must move towards non-linear thinking, looking for patterns and their systemic implications. This means focusing on what is odd, contradictory and paradoxical. It means understanding how random connections between people and simple decision rules lead to complex, global patterns of behaviour.

The vertical y-axis is Agreement. This measures the level of agreement about an issue or decision within the group, team or organisation. The degree of agreement on what should be done is an important factor in determining success. The horizontal x-axis is Certainty. When an issue or decision is ‘close to certainty’, it is because cause and effect linkages can be determined. This is usually the case when a very similar issue or decision has been made in the past, meaning that you can use past experience to predict the outcome with a good degree of certainty. 

Traditional management approaches are not effective in the zone of complexity. Here, finance professionals need high levels of creativity and innovation. Instead of looking for cause and effect linear relationships, they must move towards non-linear thinking, looking for patterns and their systemic implications. This means focusing on what is odd, contradictory and paradoxical. It means understanding how random connections between people and simple decision rules lead to complex, global patterns of behaviour. 

Now, more than ever, our thinking and quality decision-making need to be continuous and always confronting an open-ended future. In ‘Managing the Unknowable; strategic boundaries between order and chaos in organizations’, Stacey suggests: 

  • Developing a new mental model for each new situation rather than applying the same general prescriptions to many situations 
  • Anchoring one’s thinking to the here and now, not the future 
  • Reasoning by analogy and intuition about qualitative, irregular patterns rather than analysis and quantification 
  • Thinking in terms of a whole, interconnected system rather than separate parts 
  • Focusing on the learning process, and on the mental models governing the process, rather than on outcomes 

Business Models, scenarios and planning strategically  

A business model shows how an organisation defines, creates, delivers and captures value for its customers, investors, other stakeholders and itself.— Excerpt from CGMA’s Business Model Concepts 

A good place to start is with your organisation’s current business model. Understand how decisions that are being made across your organisation affect the business model, and how these decisions change its form. Business models are not static, they are fluid, and as the environment changes so they must transform, too. 

A business model connects with an organisation’s strategy. The two can help decision-makers simulate different strategic scenarios. The scenarios can be used to understand different choices and their impact on generating and preserving value. 

Finance professionals, especially those involved in strategic development, must be able to use the business model to understand the end-to-end view of the organisation, and the interaction of the organisation with its  ecosystem. 

In the past few days, we have witnessed companies transforming their business models to help in the fight against COVID-19: 

These examples highlight that the fight against COVID-19 presents organisations with both risks and opportunities. 

Alongside exploring your organisational business model, scenario planning can help you to identify several plausible futures. 

‘Scenario planning is a management tool that is designed to allow organizations to evaluate the efficacy of strategies, tactics, and plans under a range of possible future environments.’  
 Excerpt from Scenario Planning: Providing Insight for Impact 

Scenarios help quality decision-making by allowing a group to interrogate possible actions and understand upfront the impacts and long-term consequences. Once you have answered the question, ‘what is going on here?’ scenario planning focuses on two questions: 

  • What could happen? 
  • What would be the impact? 

For each major decision, develop between two and four distinct scenarios. Any more than that will be confusing and counterproductive. 

The warning here is to make sure that your scenario planning does not become too prescriptive. As finance professionals, Margaret Heffernan highlights, we need to be aware that, ‘Models can become too rigid and their makers so wedded to them as to become blind to disconfirming data.’ As decision makers, John Kay and Mervyn King highlight in their book, ’Radical Uncertainty; Decision-making for an unknowable future,’ we need to watch for, ‘When people take these financial models too literally, populate them with invented numbers and base important decisions on them, the models become misleading, even dangerous.’ 

Finally, some thoughts from Steven Johnsons book, Farsighted; how we make the decisions that matter the most’, on the eight primary factors that contribute to the challenge of quality decision-making. Complex decisions: 

  1. Involve multiple variables. 
  2. Require full-spectrum analysis. 
  3. Force us to predict the future. 
  4. Involve varied levels of uncertainty. 
  5. Often involve conflicting objectives. 
  6. Harbour undiscovered options. 
  7. Are prone to System 1 failings. 
  8. Are vulnerable to failure of collective intelligence. 

Building innovation and business resilience, in these uncertain times, comes from organisations working together to make informed quality decisions. More than ever, right now, organisations need to build in time for fluid contemplation and the construction of good questions when decision-making, instead of rushing for the instant answer. Remember that short-term decisions made today, will have long-term implications for the future. 

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