Many commentators argue that the world is becoming a more uncertain place to live. While we have always had to live with natural disasters, this 'new uncertainty' increasingly results from human activity. Climate change, terrorism, food security, pandemics, aging populations, systemic failures in financial systems; the list of significant, realised and potential disruptions grows year on year. And whereas in the past human induced uncertainty was often local, now it takes on global proportions. This new uncertainty has significant implications for business. Uncertainty is the basis for business risk. The new risk standard, ISO 31000 makes this explicit in defining risk as "the effect of uncertainty on objectives". On this basis, the capacity of an organization to manage uncertainty should be at the centre of all risk and compliance management. It often is, but in a perverse way. The vast majority of businesses attempt to manage uncertainty by applying methods geared to certainty rather than uncertainty: they try to make it go away.
From disasters such as BP's Deepwater Horizon Oil rig explosion to the collapse of large institutional banks as a result of poor decision making around the issuing of sub-prime loans and the creation of complex instruments to manage them, we repeatedly see Management defending themselves on the basis that these failures were not intentional and that they thought that they had systems in place to manage them. They may well have, but they were the wrong type of systems derived from unhelpful ways of thinking about uncertainty.
Wrong-thinking points to a problem of worldview, as much as to one of competence, and capability. By worldview we're referring to the specific sets of assumptions and psychological filters that we all apply to our interpretation of what is going on around us and our subsequent decisions. The way in which we perceive and advocate responding to uncertainty is specific to our worldview. Our worldview is, by definition, unique to each one of us. However, research has shown, that there are distinct approaches to risk and decision-making that inhabit the different management roles and disciplines. These differences affect the organizations collective ability to respond appropriately to different forms of uncertainty as well as to gain buy-in from critical stakeholders. Given the significant effect of worldview on risk management and the degree to which they are deeply embedded in and shape the structure, policies and priorities of the organization, it is interesting that they rarely if ever form part of any analysis or risk frameworks.
Professor James March (1991) conceptualised the way in which organizations adapt to and learn about their environment, and hence respond to uncertainty, as a tension between processes of exploitation and exploration. Exploitation or 'Exploit' processes are necessary to ensure efficiency and effectiveness in an organization's operations. They are focused on the delivery of quality, cost management and control. Typically they involve tightly integrated, hierarchical, silo-based structures finely tuned to managing the current business conditions. Organizational change initiatives conducted in the context of 'exploit' will be designed to realign operation to objectives, remove redundancy, reduce cost or maximise production and add to today's bottom line - the focus will be short-term. Risk will be managed by breaking problems down into small manageable (predictable) pieces that can be assessed for compliance. Uncertainty has the potential to disrupt these finely tuned structures and so is managed to minimise the downside. Put another way 'Exploit' processes are designed for the management of certainties and they focus on uncertainty as presenting a threat rather than an opportunity.
Conversely, processes of Exploration involve potentially ad hoc changes in direction. The focus is more adaptive: concerned with long term survival or opportunity share rather that short term performance. Organizational structures which support this stance involve smaller loosely coupled, self-managing teams which support an element of both internal competition and collaboration which in an exploit context would appear redundant and wasteful. Significantly, 'Explore' processes assume an uncertain environment and as a consequence are designed to systematically harvest the upside of uncertainty and therefore risk. In short, Explore capabilities in organizations are designed for the management of Uncertainties.
Over the lifetime of an organization the balance of resources assigned to 'Explore' functions and 'Exploit' functions gradually shifts. Young start-up companies are often characterised by a large component of 'Explore'. Overtime these 'Explore' capabilities are increasing replaced with 'Exploit' in response to the need to manage the growing complexity of the organization and limit volatility across the different aspects of its operations. Viewed through the lens of 'Explore' & 'Exploit', today's mature modern corporate is geared to be 99.9% 'Exploit'. The concept of Explore/Exploit is not just a set of organizational characteristics, it is indicative of what we might consider to be two fundamentally different worldviews about the management of uncertainty and risk.
It's not hard to see why organizations would invest heavily in the development of 'Exploit' capability, and not much in 'Explore'. One worldview (Exploit) assumes certainty about environmental conditions in order that they can be managed efficiently and effectively. This removes the need for redundancy and increases predictability in performance. The second (Explore) assumes the environment is inherently uncertain and manages down this uncertainty by optimising the ability to draw in diverse perspectives to continuously trial alternative solutions, all the time sensing the response of the environment to its actions and building in resilience. It's not very efficient but it is the most effective way of reducing uncertainty. Unfortunately gaining buy-in to build an 'Explore' capability for the management of uncertainty is very difficult in the modern corporate. So while we hear many and frequent calls for greater innovation and better management of risk, in managing for certainty, we diminish the organizations capacity to achieve either of these outcomes. Managing for certainty means that we miss the opportunity uncertainty presents and in so doing undermine the long term viability of the organization. Managing for certainty also makes organizations much more vulnerable to unexpected change - the 'Black Swans' Nassim Taleb warns us of. In short, organizations that manage only to maximise their capacity to exploit current conditions have very low resilience and are vulnerable to the ever increasing sources of local and global uncertainty.
Developing an explore capability requires different structures and governance systems and a different set of worldviews and culture which are difficult to achieve. It is significant that this strong orientation towards the 'exploit' stance rather than a balance of explore and exploit exists despite many CEOs being very clear about what supports organizational survival in the long term. A study we conducted in 2012 into how 51 ASX200 CEOs thought about organizational resilience, revealed a strong emphasis on those aspects of organization which were supportive of explore - including a high level of employee engagement in the organizations purpose, a flexible, adaptive learning orientation in the face of uncertainty and a culture of trust. One possible explanation as to why the short term, uncertainty avoidance worldview wins out, may be due to the short tenure of CEOs - only 4.2 years in this sample. Such short tenure makes it very difficult to achieve commitment to establishing and maintaining explore related functions (which the evidence suggests seldom survive a change of CEO) and the cultural characteristics associated with managing for uncertainty in the long term.
A fully developed and mature organizational stance against uncertainty and risk requires achievement of a balance of explore and exploit capability. Because these require fundamentally, and in many respects, contradictory systems, capabilities and cultures they also need very different funding and governance systems. Very few organizations do this and as a consequence very few organizations achieve and sustain the necessary balance, making them vulnerable to both short term and long term change in the business environment.
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Dr Chris Goldspink is an Executive Director of the Sydney, Australia, based research and consulting firm Incept Labs http://www.inceptlabs.com.au Incept Labs helps SMEs, large corporates and Government deal with uncertainty in current and future environments by providing targeted research and supporting innovation, risk management, change and quality governance.
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