In our recent blog post on Risk Management, What’s It About and Why Should You Care, we demonstrated risk is really about uncertainty – uncertainty about a choice to be made, where there are multiple possible outcomes, or even uncertainty about multiple events that could all affect your plan, and ultimately, your ability to reach your goals.
Uncertainty can cause “analysis paralysis” – the state of over-thinking a decision to the extent that a choice never gets made. But leaders need to take action.
How do you overcome analysis paralysis and choose your path wisely? The first step is identifying your risks and uncertainties. The next step is figuring out what type or level of uncertainty you are dealing with. Hugh Courtney, Professor of International Business and Strategy at Northeastern University, identified four distinct levels of uncertainty.
Level I – Clear Enough Future
The first level of uncertainty is when the future is clear enough. Let’s illustrate this idea with an example. We worked with an association with a declining membership base. This organization decided that pursuing a merger with a similar organization was essential to their survival. The future is pretty clear in this case.
There was a risk, however, that they could identify the wrong merger candidate. Careful research of potential merger candidates allowed the association to identify an optimal merger partner. At the time, some uncertainty remained as to whether they chose the right candidate, but the risk was reduced to a level that was acceptable and the organization was able to move forward.
Level II – Alternative Futures
What happens when your uncertain situation could involve a number of possible outcomes, one of which will occur? Courtney refers to this scenario as alternative futures.
Think about an organization that determined it needs a new member management solution. The risk is easy to identify –not choosing the right solution. With dozens of member management solutions available, there could be dozens of possible alternative futures.
There are ways to limit the number of alternative futures. By determining key requirements, and then selecting from a short-list of solutions which meet those requirements, the organization has already reduced the number of possible outcomes. By interviewing vendors, watching demonstrations, and speaking to users of the short-listed products, uncertainty can be reduced to much more acceptable levels, allowing the organization to proceed with a choice.
Level III – Range of Futures
A range of futures means a small number of variables define a broad range of outcomes and the actual outcome will likely fall somewhere in that range.
Several years ago, we advised an organization that was seeking donors to support an initiative which engaged at-risk-youth in after school social activities. The risk was the at-risk-youth would not actually participate in after school social activities. If that happened, another risk popped up – donors would no longer support the organization’s programs because they could become concerned about the impact their donations were having.
To help our client, we identified a number of variables that could impact participation rates in the proposed after school social activities. Once our client knew what the variables were, we worked with them to define proactive measures they could take to manage these variables, which in turn allowed them to impact participation rates. The first risk – low participation rates – had been addressed. But what about the risk of donor confidence? Our client was able to demonstrate to donors what could happen in each outcome within the range of possible futures. And, more importantly, they were able to clearly show donors how they could impact the participation rate by being proactive and managing those variables.
Level IV – True Uncertainty
True uncertainty is, fortunately, quite rare. In this case, it can be challenging to identify potential outcomes or even ranges of outcomes.
Imagine this scenario: a federal election campaign is underway, and one of the party leaders is vowing to reform how Canada Revenue Agency treats not-for-profits. In fact, they are promising to implement sweeping reforms that could have a devastating impact on hundreds of organizations. This is an example of true uncertainty.
Luckily, such situations tend to be rare. Research and experience suggest that over time, they tend to migrate to one of the other three categories of uncertainty.
Are you operating in an environment full of uncertainty? We can help to guide you through it.