Captain E. J. Smith spoke confidently, “I cannot imagine any condition which could cause this ship to flounder. I cannot conceive of any vital disaster happening to this vessel” he told reporters ahead of the maiden voyage of the SS Titanic in April 1912.
It is certain that the future is uncertain - but organisations dedicate sometimes vast resources to anticipating it anyway. Strategy ‘gurus’ (perhaps so ubiquitous as so few people can spell ‘charlatan’) preach that ‘the more dynamic the situation, the farther ahead the leader must look’. Such advice is both illogical and dangerous - for the more dynamic the situation, the poorer your foresight will be. The more uncertain the future, the more the essential logic should be ‘take a strong position and create options.' All attempts to conquer the complex, unknowable future and make it succumb to a visionary’s will be at best, idealistic, and at worst, dangerous.
But engineering the ideal future is at the heart of much ‘formal strategising’ in organisations. Meetings, discussions and plans aim to build consensus around perceptions, goals and roles to support strategic actions - despite evidence that these have little to no positive effect on a company’s profitability. Profitable firms are as likely to strategise informally - making use of informal channels of communication and evaluation. Formalisation is part of modern business’ obsession with engineering outcomes - picturing ideal futures, identifying gaps to overcome, and planning the steps to be taken - often in excruciatingly precise detail that seeks to confer some sense of authority.
Formal strategising about the future often fails as the managers tasked with building such plans have very inaccurate perceptions not only of markets and industry they operate in, but of their own organisation and its capabilities as well. In such cases, formalising the flaws amplifies the likely harm to the organisation. And even when the organisation can claim some authority about its operating environment and can boast about the talent it manages it can simply mobilise around a future that’s just plain wrong. IBM’s CEO in 1948, Thomas J Watson, confidently forecasted ‘a world market for about five computers’ which helped lead the leader down a blind alley for decades until a nimbler, less encumbered Microsoft revealed the fault lying at the heart of IBMs strategy.
Organisations can approach strategy in a more naturalised way - taking lessons from evolution:
Evolutionary approaches seek to build on awareness of what's really happening, rather than wasting resources anticipating what might happen. The hubris of Captain Smith - and many stewards of organisations navigating choppy waters - testifies to the danger of being blind to the many futures we clearly can’t see: no matter how visionary we claim to be.
Thailand’s political landscape is drawn along class lines. In 2011, the party of the poorer north made a populist election pledge to “put money into poor farmers’ pockets and stimulate domestic demand” which helped drive it to election success. But what happened next exemplified why leaders shouldn’t try to command or control complex systems like markets.
The election pledge was promptly implemented by the new government. They would buy rice from poor farmers at twice the market rate. To cover the losses of this extreme intervention the government stockpiled the rice - 18 million tonnes worth, or half the annual global trade - in an attempt to push up global prices before selling on its reserves. Thailand’s position as the world’s biggest rice exporter contributed to it’s belief that it could 'make the market' in such a manner; yet it's failure to understand how actions in a complex system are never isolated or reactions so simply predictable has contributed significantly to Thailand's recent problems.
First to respond were other major rice exporters, India and Vietnam, who quickly increased their supply to meet global demand - containing the global price of rice. In fact, the only thing to rise dramatically was the Thai rice mountain, which left the government in a ‘stick or twist’ quandary: sell the rice at a huge loss or continue to stockpile further and wait out the market. But while the Thai government waited out the market, the market out waited it, sure in the knowledge that as the quality of the stockpiled rice deteriorated so would it's market value. When the poorer-quality rice flooded the market, prices struck rock-bottom. The market won because it was resilient - it had options. Thailand did not. The rice mountain policy cost it $12,5 billion in the first year and $15 billion in year two - equal to 4% of GDP.
Beating the market is beyond the ability of many organisations and almost all governments. The market is complex - it has almost infinite variation from which an optimal solution can be selected - while organisations are limited to a few ‘good’ or ‘best practice' options that can become obsolete in a moment when changes in the wider eco-system gang up on them. Jack Welch, former GE Chairman, warned that “if the rate of change on the outside exceeds the rate of change on the inside, the end is near.” It’s a lesson learned too late by Thailand and others, not least the former US Federal Reserve Bank Chairman, Alan Greenspan.
In his testimony to Congress on October 24th 2008, following the collapse of Lehman brothers and a global slump that wiped “no less than $12.8 trillion” from the US economy alone Greenspan expressed ‘shocked disbelief’ at a fallout ‘much broader than anything I could have imagined’ because his subscribed ideology - that informed the mechanisms by which the US economy was regulated - had been working ‘exceptionally well for 40 years or so’ he explained.
Yet hubris reigned in financial services - innovation had not perfected the management of risk and unprecedented occurrences were more likely to occur because of the financial innovation that more tightly coupled the global economy. Cleverness doesn't trump complexity - it merely makes it more exponentially likely that something that has never failed before will do so now as we take our eye of the ball. Alan Greenspan and Thailand learned the third lesson of complexity too late and too hard ...
The third ‘rule’ of complexity is that it changes as we engage with it
Seeing the future as merely an extension of the past is a fundamental error. Complexity’s immense, volatile and unpredictable character will make tomorrow less resemble today than yesterday did. So navigating a journey through the rear-view mirror won’t help you avoid the brick wall up ahead.
Following the stock market crash of October 1987, value-at-risk (VAR) models became the rage in financial services. JP Morgan was an early convert and pioneer as VAR provided the Chairman, promptly at 4:15pm each day a single number that defined the extent of the bank’s risk exposure. The allure of sophisticated mathematics to simplify risk management fanned VARs popularity, with over 200 books published about it. The only problem was that it was nothing more than a “beautiful lie.”
VAR is driven by historical data and dependant on one huge assumption: that the future will follow the same pattern as the past (from where the data was taken). In other words, if you haven’t driven into a wall yet, you won’t. But as Nassim Taleb has pointed out, the highly improbable nature of rare events (black swans) must be considered together with the oversize nature of their potential consequences. Driving into a wall may be unlikely but, as it’ll probably kill you and everyone else in the car, you're probably best advised to remain aware enough not to do it.
The culture of financial service firms particularly predisposes them to VAR-type errors. Miles Kennedy, a PwC partner described the culture as a “tendency to place greater confidence in risk information that is data-driven, in the belief that this confers objectivity and truth.” But whilst objectivity is a noble aim in business - freeing us from cognitive bias and politicking - objectivity “doesn’t equate to truth” where the future is concerned, for “risk is about the future, and there are no facts about the future.” Substituting foresight about possible futures and consequences for forecasts that are pleasing yet flawed is, as the world has discovered over the last six years, dangerous.
The economics professor and writer, John Kay, describes this cultural bias as a “belief that a number based on the flimsiest of data is better than a qualitative, and necessarily subjective, judgement.” Although this bias is rampant in the ‘numbers professions’ - bankers, accountants, economists - it’s spreading to other organisations through the allure of big data. And where certainty is claimed about the future - a place where no certainty can exist - it'll be a treacherous guide to navigating an increasingly complex world.
McKinsey argues that ‘increased risk and complexity are now here to stay’ while research from KPMG conducted with 1,400 executives in 22 countries across seven industries found 70% agreeing with the statement ‘increasing complexity is one of the biggest challenges my company faces.’ But the real challenge is not in recognising this but in (1) understanding what complexity is and (2) learning to cope with it.
Complexity can’t be mastered; it must be absorbed
Frederich Hayek, an economics Nobel laureate, argued that ‘nobody has yet succeeded in deliberately arranging all the activities that go on in a complex society.’ If they had, that society ‘would no longer make use of many minds, but would be altogether dependant on one mind; it would not be very complex but extremely primitive.’ Efforts to simplify, cut through or master complexity merely destroy its inherent potential without mitigating risk.
‘Ordered systems’ are defined by repeatability (do A and B happens: always) and can be managed with the more traditional engineering approach that seeks to produce predictable outcomes. But complexity has distinct characteristics that defy this ordered approach:
Perhaps this is best explained by way of a story? A forest’s greatest enemy is fire, so the US National Parks Service adopted a zero tolerance stance - every outbreak would be extinguished. But soon they noticed an increase in major fires, as most forest fires are small, burn out quickly and remove combustible undergrowth, which create firebreaks that limit the occurrence of major incidences.
So, the US National Parks Service adopted a policy to put out man-made fires, but allow natural ones to burn. But very soon the largest fire ever-known hit Yellowstone National Park as several natural fires, in very extreme conditions, joined together. It took 25,000 firefighters and $120 million to fight it and destroyed a third of the park’s vegetation.
The US National Parks Service policy today? Allow forest rangers to use judgment in deciding which fires to tackle.
The second ‘rule’ of complexity is that it can’t be commanded or controlled
Organisations must discover what’s really driving the behaviour of their networks of staff, customers and suppliers. The economic crisis only postponed the war for talent: it’s been simmering and is starting to heat up again. The demographic bust of baby-boomers leaving the market now threatens to escalate the war into a global thermonuclear conflict that HR looks a little unprepared for.
Since the 2008 crisis high global unemployment has been juxtaposed with organisations experiencing an acute shortage of workers with the right skills. Education reform is a long-term corrective measure but in the short-medium term organisations will have to balance the need to secure and retain critical talent with increased attendant costs and a deteriorating productivity dividend themselves.
If HR is to meet this challenge it must perhaps relinquish its treasured ‘seat at the main table’ that threatens to ossify it. Getting back into the evolutionary gene pool will accelerate its symbiotic development with Marketing (another traditional laggard). HR will of course protest its uniqueness and importance - but to paraphrase Tywin Lannister, ‘if you have to tell people you're important; you’re not’.
Fundamentally, HR and Marketing have the exact same aims in our complex modern world - attract and retain key people. It is increasingly irrelevant to distinguish customers from staff. Many are becoming both, but more importantly, both have valuable resources (purchasing power and knowledge) organisations need and are part of the same interlocking, integrated networks themselves - using the same tools to interact. Marketing has been struggling to get ahead of this curve for years. Are CEOs now really going to give HR the same time, resources and indulgence to work the same things out?
The history of HR is an evolutionary one - it’s current form is merely its latest metamorphosis. In the early 20th century ‘welfare officers’ focused on making industrial practices less harmful to workers; as manufacturing levels increased ‘labour managers’ coordinated communication; while the emergence of the service economy gave birth to the ‘personnel department’ to ensure the means of production and now delivery were suitably serviced. The modern incarnation of ‘HR Business Partner’ completes the evolution of the function rather than a need.
HR has moved as far as it can from its core constituency - getting and keeping key people - and the backlash will start once CEOs recognise that, not only do HR and Marketing have the same aim, but now also employ the same engagement, communication and measurement tools. As neither do it particularly well, (though one has more practice at failure) it won’t be long now before they seek synergies from these efforts - in the form of Network Directors: who, in a hyper-connected world, will seek to occupy multiple intersections of knowledge flows to detect key signals earlier, speed up innovation feedback loops and execute the leading-edge responses a generation impatient with the status quo will reward with their time, attention and money.
A functional merger of HR and Marketing will reduce admin costs, management complexity and silo barriers. But organisations that are early adopters will also have the pick of the best professionals and the best professionals themselves will be able to define their new areas of accountability. We are entering the Age of the Pull Through. Network Directors will drive alignment in this age, but not of people to organisational ideas, but of organisations to their espoused values, carefully constructed to meet the expectations of a more discerning market - and intensely monitored to seek signs of dissipation.
The key question is - are you ready to surf this wave?
Shape the Future
Don't just adapt to it