Business leaders today are faced with business challenges and a level of uncertainty that is unprecedented in recent memory. Established approaches and well-tried options no longer work, forcing us to make business decisions in uncertain times. This article collects some useful tips for making better business decisions that I have learned over the last 40 years.
Making Business Decisions in Uncertain Times
“By strategy, I mean a cohesive response to a challenge. A real strategy is neither a document nor a forecast but rather an overall approach based on a diagnosis of a challenge. The most important element of a strategy is a coherent viewpoint about the forces at work, not a plan.”
Richard Rumelt in “Strategy in a Structural Break“
Our typical clients are bootstrapping startups who need to manage considerable uncertainty about many aspects of their business. My background and education are in mathematical modeling and decision analysis. Most of the complex mathematical models and formal decision science techniques I learned have not proven as useful as the simpler approaches and rules of thumb I present here.
A Decision is an Irrevocable Commitment of Resources
The definition of a decision that I find most useful is “an irrevocable commitment of resources.” You can tell when you have made a decision when you have committed resources. The extent of the decision are the resources that have been irrevocably committed–the primary resource is time, as lost time cannot be recovered. There are no “reversible decisions” in this framework, although future decisions can change the allocation of resources.
Framing the Problem
Here are key questions to answer up front. Write your answers down and share them with the team as appropriate. Even if you are the final decision maker, forcing yourself to write these down and explain them to at least one other person will help clarify your thinking. As you gain new information, update your answers to reflect what you have learned.
- What is the problem you are trying to solve? What is the objective you are trying to reach or achieve?
- What is the scope of the decision: what is the time frame for solving the problem or achieving your objective? What time limit is imposed on making a decision before you forfeit one or more options?
- What is under your control? What people and resources can you commit or marshal and bring to bear? What else can you stop doing to free up people and resources to allocate to this problem or need?
- What are other constraints on your solution or final course of action?
- What organizational values need to be considered when evaluating a solution or course of action?
- What options do you see for solving the problem or achieving your objective? Which of these satisfy your constraints and are congruent with your values?
- Where is the uncertainty? What aspects of the problem or decision would be affected most by a change in your level of information or insight?
A good framing is rarely whether or not to do something. When time is short, and resources are low, it’s easy to frame a decision as a whether or not to do X and consider only one option versus continuing with your current approach. This is almost always too narrow a framing for several reasons. First of all, if you cannot consider several ways to address the problem you are facing with your current approach, you are probably ignoring viable–and perhaps better— alternatives. Take both options off the table and consider what else is possible. If you are under tremendous time pressure, then it’s prudent to act on the first viable alternative of you can develop. But strategic challenges are typically less urgent and allow for exploration of multiple options and experimentation to test critical assumptions.
Determine the Time Limit to Make a Decision
Avoid indecision by determining a time limit for the decision. Inaction is still a decision to commit resources to the current allocation. Often a solution or plan of action will have a lead time and resources needed for setup. Not every decision is so urgent it needs to be made today or this week but you want to make sure you don’t lose options because the lead time or other deadlines for preparation have slipped past you. For important decisions with significant uncertainties define a timetable for making a decision. If your current default approach is unacceptable, then pick a satisfactory approach as a default and use the time you have to look for better alternatives or useful refinements and improvements to your current default.
Sometimes you need to take the first viable option. If you are in a firefighting mode or have your business viability threatened, you have to resist the temptation to optimize or polish. When your landlord sells the building–and the new buyer will demolish it next month–you need to find new office space immediately. When your runway is down to only four months, you need to focus on deals that will close quickly with customers who will pay in time to keep you from running out of cash. If you find yourself facing the same emergency multiple times you need to revisit how you are managing your business, perhaps you are taking on too much risk to save money or close a large deal.
Use your exploration budget to experiment and reduce uncertainty. There is emotional relief in settling upon a course of action. But don’t trade the emotional discomfort of having to manage uncertainty for a poor plan of action. If you have time to gather information that might allow you to improve your plan substantially, then take the time, and live with the discomfort of an unsettled decision in the interim.
Look for Similar Problems and People Who Understand Your Problem
Start with similar problems that you have solved previously. If you can find a set of at least six similar decisions several times, this is the best place to start. Here are two good practices to make this easier. Keep a log–especially in unfamiliar situations–so that you don’t have to rely purely on memory. Start a checklist the third time you have to make a similar decision. Building a checklist of questions to ask and potential courses of action to try is a good investment for the future. Difficult decisions are a costly drain on your time for both research and analysis. Relying on a standard approach allows you to preserve your time to focus on critical issues where a better outcome has a significant impact.
Find someone familiar with the territory. This is very important if you are faced with a problem or challenge that is unfamiliar. It’s always useful to compare notes with others who have faced the same or similar challenge, especially when it’s a new challenge for you. You can consult more experienced peers, carefully observe competitors, and pay careful attention to how partners and suppliers solve similar problems. It’s why doctors engage in “curbside consults” or informal requests for advice. One reason to take part in industry and professional associations is to make comparing notes easier. For significant decisions, you can formally benchmark how others in your industry approach the same challenge. Cultivating an informal board of advisors or kitchen cabinet from people who have given you good advice in the past is one way to increase your ability to make better decisions more quickly.
Be specific, but let others rhyme. By framing a very specific question or problem statement, you are more likely to engage the right people in helping you solve it. List what you have already tried and what options are under active consideration to save more time–yours and theirs. But while you are as specific as possible, be open to answers from problems that are not an exact match. As Mark Twain observed, “history does not repeat itself, but it does rhyme.” The solution to a problem that rhymes with yours will often spark new thinking on your part, enlarging the set of viable options you can consider.
Consult experts who have solved the problem. When you describe your situation in detail, you hope to see a slightly bored look from the expert, because they encountered it many times before and achieved excellent results. Be careful of consultants who excited by the chance to learn from your problem: they may not bring the requisite expertise to deliver the results you need. One test for an expert is the ability to diagnose your situation in detail and offer insights into root cause and key issues. An expert should also be able to explain how different answers on your part would lead to a different conclusion and differences in the recommended course of action. Be careful that an expert in a method will tend to recommend that method. An expert in a problem area can recommend different methods and explain their strengths, weaknesses, and relative merits.
Traditions solve problems that you have forgotten you have. Sometimes a decision forces you to break with tradition because what used to work–a habit, practice, or established process–is now unsatisfactory. But be careful in selecting a course of action that violates a tradition which is not broken, you may end up re-introducing a solved problem. It’s OK if the problem you re-introduce is less severe than the problem you are trying to solve, provided you are conscious of the trade-offs and can manage them.
Gather More Information to Reduce Uncertainty
Zoom in: make sure you are looking at the real situation first hand; look for the ground truth and the actual details of the problem. It’s helpful to listen to other perspectives, especially from people who have dealt with similar challenges–or who are wrestling with them now. But go and see for yourself. If it’s a more significant problem with many aspects, send someone you trust who has a substantial stake in the outcome to help you scout out and map the “ground truth.”
Zoom out: complement your understanding of the details by considering your situation as part of a category of similar cases. Establish a benchmark set of comparable situations you can use to estimate the likely range of outcomes. A category-based approach helps you avoid an overly optimistic assessment. If you cannot find a comparable situation where the result you are planning for was achieved, then you need to revise your estimates downward. It also helps you adjust your worst-case downward if one or more firms you are benchmarking against saw outcomes that were worse than your current worst-case estimate. You have to guard against survivor bias where “losers” are removed from the category and, therefore, your consideration. If you are considering launching a new product, you cannot just benchmark against revenues achieved by products launched in the last year; you have to consider the number of products that completely failed and were withdrawn.
A Decision Results in a Plan of Action
Don’t try to guess the exact number, estimate a range and a midpoint. Force yourself to estimate a reasonable best-case and worst-case in addition to the most likely outcome. Assessing the best-case and worst-case will help you plan what to do if events carry you off of the most likely track. The problem with spreadsheets is that they encourage you to think in terms of point estimates. Some examples: what will our revenue be next month, how many inbound inquiries will we see, how many demos will need to give. Instead of trying to guess the right number, you are better served to estimate a range and a midpoint. What is the number that you would expect to exceed 90% of the time? What is a number that you would expect to be above half of the time and below the other half? What is the number that you would expect to exceed only 10% of the time? Now you have defined your 10th, 50th, and 90th percentile and placed a bound on the likely range of outcomes. You can use the midpoint or 50th percentile for a baseline and the 10th and 90th percentile for stress testing your plan.
Force yourself to be productively pessimistic. Imagine that it’s far enough in the future that you can see the impact or outcome of your decision. And further assume that it’s not gone well, that you are at the lower end of the range you expected. List at least three things that might cause this (you can list more, but if you should not stop until you have at least three plausible reasons why your decision may not work out). What can you do to minimize or prevent these things from happening? Include these mitigation steps in your course of action. How soon could you detect that things were going wrong? What could you do to contain a loss or recover from a setback? Assume you still hit the worst-case, what would you do next? Doing that first might be a stronger move than what you are already planning. One example: do not increase spending or hiring until you see that your strategy is working: that minimizes or eliminates any cuts you might need to make later. In uncertain times it’s better to forgo a certain amount of upside in exchange for minimizing the impact of the likely worst-case.
It’s OK to explore multiple approaches at once. If you are facing a lot of uncertainty, running short experiments that target one or more unknowns can be front-loaded into your plan of action. It’s also useful to craft prototypes and scale models that test crucial assumptions in your approach. Any time you are prototyping or experimenting, you need to weigh the cost in time and resources against how much you will learn and how this new information may lead to a better outcome. At it’s simplest, the principle to observe is, if the results of the experiment won’t change your plan, don’t run it. Don’t step on the scale unless you are willing to go on a diet.
Include explicit review points in your plan. Include at least one date where you will review the results to judge the impact of your decision. Intermediate review dates help prevent a premature pessimism or second-guessing when there is a minimum time to see results. Don’t confuse feeling good after a great conversation on a sales call with closing the deal, and don’t confuse closing one deal with the launch of a successful product. Set appropriate review points based on the time to see effects. Give enough time such that a negative result will inspire you to take corrective action.
The final review date is a natural time for a “lessons learned” discussion as well. It’s important to distinguish between a good decision–one that followed a sound process based on the information available at the time–and a good outcome. This is crucial when it comes to “near misses.” These are decisions where you ignored risks and narrowly avoided a bad outcome by improvisation. This is a “good outcome” that calls for change in your process. Conversely, some “bad outcomes” may represent bad luck and don’t call for a change in the process. I like the Goldfinger rule: one accident is happenstance, two accidents are a coincidence, but three represent enemy action (where the enemy may be on your team or even lurking in your bathroom mirror early in the morning).
Two Great Books on Making Decisions in Uncertain Times
I recommend two great books that offer practical guidance on decision making:
- Decisive by Dan and Chip Heath: provides a broadly applicable set of guidelines for both personal and group decision making. Many of the recommendations in this article are also in this book, which is why I highly recommend it.
- The Art of Action by Stephen Bungay: explores the challenges of making decisions under time pressure and uncertainty in competition with other intelligent actors, communicating/delegating them, and managing their execution in a distributed fashion in an organization.
Related Blog Posts
- W. J. King’s “Unwritten Laws of Business”
- Uncertain Times
- Only Share What You Are Certain Of In Uncertain and Evolving Situations
- Dr. Atul Gawande on Managing Complexity and Uncertainty
- Questions to Answer Before You Start Negotiating
- Constructive Pessimism
- Risk Mitigation: If You Predict Rain Build an Ark
- Step Back To See Yourself In The Problem
- John Gardner: Leaders Detect and Act on the Weak Signals of the Future
- Bootstrappers Turn Time Into Resources and Possibilities For Customers
- The Best Bad Plan
- “Three Paths in Forest” (c) Tobias Arhelger (licensed from 123RF Image ID: 142362474)
- “Two Paths in Forest” (c) Veronika Ershakova (licensed from 123RF Image ID : 77730088)
This post was also distributed on LinkedIn “Making Business Decisions in Uncertain Times“