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Business System Design: Guarding Against Unseen Risk

Date Posted: 8/27/15
By Kevin Carpenter, contact: kcarpenter@kca-us.com

 

Business system design is all about efficiency. But when you face uncertainty at every turn it’s hard to be efficient. We typically work with companies that want to discover uncertainties associated with strategic and project decisions.

Unfortunately, leaders across the board fail to grasp the value of understanding uncertainty. Whether in business system design or simple budgetary decisions, most executives account for the risk of the unknown.

To the Moon

Usually there are few key uncertainties. The value of decisions influenced by those uncertainties very by a large margin. Understanding drivers, their impacts, and how they might impact outcomes are key insights to success.

However, the number of uncertainties that must go right can be so large that even a small degree of risk for each uncertainty can make a slam dunk seem like a hopeless cause.

Consider the Apollo missions. To successfully go to the moon and back, literally thousands of things have to go right. If any single item fails, the launch, landing, or return fails and the outcome is a disaster.

The problem comes when you add up several uncertainties to determine the likelihood of a positive outcome.

If you have ten uncertainties, each with a 99% chance of success, you only end up with a 90.9910% overall chance of success. Raise that to one hundred uncertainties and you only have a 37% chance to complete the project.

Going back to our Apollo example, if you increase the number of uncertainties to one thousand the flight is pretty much guaranteed to fail.

This proves the chance of success for each contingency in a project must be greater than 99%.

Even with a 99.999% chance of success, if you have 100,000 contingencies your total chance of success is still almost nonexistent.

Business System Design and Uncertainty Assessments

This problem also occurs in business uncertainty assessments. When a business case is broken into a large number of uncertainties, on the surface a project can look like it’s destined to fail.

I call this the U^n or “U to the n” problem. When you raise uncertainty (U) to the number of uncertainties (N), you end up with almost no chance to succeed. This can quickly disconnect a problem’s relevance from the real world.

Part of our problem is it’s difficult for us to grasp very large or small numbers. This happens because our life experiences skew the way we look at problems.

Look at the airport. If you sat down and did the math you would quickly find the average person is late roughly 1 in 100 times. But that doesn’t feel like very often. It’s not easy to sit back and absorb a 1% chance of failure with any sense of urgency.

So, what do we do?

We procrastinate that one time and miss the vacation of our dreams. In business, we convince ourselves we’ve done all our homework when we know we haven’t thoroughly assessed the risk of adopting the new technology we’re acquiring.

We hold a big meeting to kickoff our business system design initiative before we know if we’re even solving for the right problem.

The Ben Franklin Close

But if underestimating risk is one of our collective flaws, how can you accurately assess minute probabilities of failure? I’ve seen two approaches that work.

The first approach is akin to what people in sales call the “Ben Franklin Close“. In short, you draw a line down the middle of the paper and weigh the pros and cons of a decision. However, this approach does not provide granularity to make a critical and insightful decision.

Practically speaking, this looks like aggregating all of the uncertainties associated with a decision into groups or systems. By grouping everything that can go wrong according to the appropriate impact on the overall project you can easily assess discover the outcomes; positive or negative.

If the sum of individual uncertainties roughly equate to your system assessed uncertainty, you’re good to go. If not, you can compare overall uncertainty against calculated individual uncertainty effect. There are two key questions to ask in this process.

  1. Why are they different?
  2. Which individual uncertainties taken together create a different value compared to your system assessment?

Figuring out which is the “right” number is inconsequential. It’s far more important to resolve differences. Without finding the factors driving the difference in probability between two outcomes it’s impossible to get a correct assessments.

Comparative Analysis

The second approach uses comparative analysis. This is where you compare the likelihood of an individual assessment against one or more uncertainties with a known track record.

That can sound rather esoteric, so here is a list of things that could happen on a given day in the life of an astronaut. Look at the list and rank them based on the percentage percentage likelihood that they will happen:

  1. A bolt shearing off an electrical reactor housing.
  2. A fuel source becoming contaminated.
  3. Being more than an hour late for work.
  4. Finding a wrench forgotten in the fuselage.
  5. Having the air conditioning fail in the house, car, and office at the same time.

You don’t have to be an astronaut to know the last scenario has the lowest percentage because it involves multiple failure points. This shows the value in comparative analysis. It helps you calibrate assessments into the correct percentage range before you begin assigning probabilities.

Business System Design Success in an Uncertain World

Anyone tasked with business system design knows the frustration of turning abstract principles into concrete systems. Compound these frustrations with the fear of the unknown and organizational paralysis by analysis can quickly take hold.

If you apply both of these approaches at the outset of your business system design process, you can adapt to changes in the environment. It’s a lot easier to react to challenges after you’ve proactively considered their likelihood and potential impacts long before they arrive.

This gives you the confidence to intuitively take the correct next action because you have thoroughly reasoned through all of the potential outcomes.

What’s Your Advice?

What do you think? How do you guard against unseen risk in your organization? If you have anything to add, please leave a comment below.

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