Every organisation exists to achieve predetermined objectives. Some objectives can be achieved simply by having effective systems, good people, processes and procedures. These ‘business as usual’ objectives are exposed to operational risks. However for many organisations, ‘business as usual’ is not an option. Some organisations must change to survive, they must deal with uncertainty and they must take risks. Strategic risk management is necessary to deal with the uncertainty. Tony Harb from InConsult look at the linkages between uncertainty and managing strategic risks.
Uncertainty
Everyone remembers the famous quote by former United States Secretary of Defence Donald Rumsfeld from a Press Conference at NATO Headquarters, Brussels, Belgium when asked about terrorism and weapons of mass destruction “There are things we know that we know. There are known unknowns. That is to say there are things that we now know we don’t know. But there are also unknown unknowns. There are things we do not know we don’t know”
Essentially, Rumsfeld was describing the various degrees of uncertainty and linking uncertainty to level of information or intelligence he had at the time.
The body of knowledge around uncertainty and strategic risk management is still developing…a work in progress. There are a number of matrices that have been developed to assess and simplify the level of uncertainty.
We believe that the two key elements driving uncertainty are (1) the confidence of knowledge and (2) the predictability of future events.
Attempting to simply concepts that are inherently complex is fraught with danger. However, if simplifying a concept can help management better manage risk, deal with uncertainty and achieve its objectives…then I think it’s worth it!
Let’s look at the 2 elements in the Uncertainty Matrix a little closer.
Confidence in Knowledge
The first element of the Uncertainty Matrix relates to knowledge. At this point it is critical to distinguish between information and knowledge.
Within every organisation, there are literally thousands of bits and pieces of information. Information consists of facts and data organized to describe a particular situation or condition. Information is “raw”, i.e. data that is not utilised or acted upon.
Knowledge builds on the information, it is information acted upon cognitively. It is information that has been transformed, analysed and can be applied. It includes facts, truths, beliefs, perspectives, concepts, judgments, expectations, methodologies and know-how. Knowledge is gathered and integrated and held over time to handle specific situations and challenges.
Knowledge can be used to improve customer experience, refine products and services, enhance service delivery, improve financial performance, improve business processes, develop strategy, etc. Basically, knowledge is applied to interpret information about the situation or problem or opportunity and to decide how to handle it.
Information is retained in documents, processes and systems. Knowledge is retained and applied by people.
Knowledge and little wisdom are critical to managing risk and dealing with uncertainty.
The confidence in knowledge is driven by many factors.
- Quality, accuracy, relevance and timeliness of data or information you have
- Quality of the analysis you can undertake
- Quality of the people involved in gathering and analysing the situation
- Level of expert consensus and aggregated beliefs
- Quality of decision rules
- Prior experiences that help you understand the situation
Predictability of Future Events
Life is full of uncertainty. In some cases this is good e.g. a surprise birthday party or even winning the lottery!However
In some case uncertainty is bad e.g. being booked for speeding or a sudden, severe weather event finds your vehicle being washed away in a flood into a river.
It is impossible to predict the future with 100% certainty.
As humans, we all like to be as much as possible, ‘in control’ of our destiny e.g. our career, our personal life, our finances etc.
After we set goals and we take steps to achieving those goals. Along the way, we hit barriers, obstacles and face challenges. Some of these we can predict, whilst others we think ‘it couldn’t happen’.
So uncertainty of future events can sometimes be predicted and at other times unforseen.
In business, our organisation and department set goals. In some organisations, individuals set ‘accountabilities’ or personal goals linked to organisational goals.
Again, along the way, the organisation will hit barriers, obstacles and face challenges. Some of these obstacles can be foreseen and we can prepare for them, others are either unpredictable or uncontrollable.
The predictability of a future event is driven by many factors.
- The specific nature of the organisations objectives and the future event
- Level of complexity
- Scale of activities and tasks involved
- The number and type of resources deployed
- Rate of change in the external environment
- Level of controllability of the future event
- Time factors and time constraints
Bringing it together
Now that we understand the two dimensions of the Uncertainty Matrix and the various elements of each axis – or the four groups in the matrix, how can we apply it to risk management?
Known Known – This is as about as close to certainty as you can get. In this group, we can be fairly certain about an event or achieving and opportunity/objective because we have a lot of knowledge and confidence in our knowledge, but also our ability to predict is high.
Known Unknown – Here we have a lot of good quality information and knowledge, but our ability to control or influence the event is low. Also, there may be a high degree of complexity or environmental change involved so our confidence in predicting the outcome of the future event is low. No amount of analysis or knowledge gained can help so in this case, we may have to rethink our objectives.
Unknown Known – In this area, we have a limited amount of knowledge but the predictability of the outcomes of future event is quiet high. An example is when we know there is a regulatory change in development that will affect our operations or strategy, but lack sufficient information about the details and potential impact. It will take time and resourcefulness to obtain knowledge.
Unknown Unknown – Here we have little or no knowledge and our ability to predict the future is low. We are limited in our ability to control or influence the event outcome and limited in our ability to analyse and evaluate data as information is limited or non-existent. For example Rumsfeld had no or little intelligence re terrorism and weapons of mass destruction, he claimed the real situation was worse than the facts showed even after many years of intelligence gathering and he could not predict the next move of terrorists.
J. Paul Getty once said, “Without the element of uncertainty, the bringing off of even, the greatest business triumph would be dull, routine, and eminently unsatisfying”.
Conquering uncertainty, getting it right, hitting targets and getting results is a good and rewarding feeling because we planned, we implemented, overcome the obstacles and perhaps had a bit of luck too. All managers must understand the realms of uncertainty, knowledge and predictability of events to help them take calculated risk, stay in control and achieve their objectives