David Matheson - SmartOrg, Inc.

Futurist Paul Saffo on Uncertainty - David Matheson

Technology Forecaster Paul Saffo recently wrote about forecasts in the Harvard Business Review. He articulates very well the fact that forecasts are all about uncertainty.

Here are a few sentences from his "Rule 1: Define a Cone of Uncertainty":

"As a decision maker, you ultimately have to rely on your intuition and judgment. There’s no getting around that in a world of uncertainty. But effective forecasting provides essential context that informs your intuition. It broadens your understanding by revealing overlooked possibilities and exposing unexamined assumptions regarding hoped-for outcomes. At the same time, it narrows the decision space within which you must exercise your intuition.

"I visualize this process as mapping a cone of uncertainty, a tool I use to delineate possibilities that extend out from a particular moment or event.

“The forecaster’s job is to define the cone in a manner that helps the decision maker exercise strategic judgment. Many factors go into delineating the cone of uncertainty, but the most important is defining its breadth, which is a measure of overall uncertainty.

"Drawing a cone too narrowly is worse than drawing it too broadly. A broad cone leaves you with a lot of uncertainty, but uncertainty is a friend, for its bedfellow is opportunity—as any good underwriter knows. The cone can be narrowed in subsequent refinements. Indeed, good forecasting is always an iterative process. Defining the cone broadly at the start maximizes your capacity to generate hypotheses about outcomes and eventual responses."

Value-Based Management software tools like SmartOrg’s Portfolio Navigator™ focus decision-makers’ attention on dealing with uncertainty and monitoring its impact throughout the decision-making process.

Check out the article at

http://harvardbusinessonline.hbsp.harvard.edu/hbsp/hbr/articles/article.jsp?articleID=R0707K&ml_action=get-article&print=true&ml_issueid=BR0707

Also, if you are in Silicon Valley, you can hear Paul speak at the Churchill Club on Tuesday, Aug. 28  http://www.churchillclub.org/eventDetail.jsp?EVT_ID=744.

Uncluttering Metrics - David Matheson

I was talking to Ron Howard, a pioneer in Decision Analysis, about value.

How do you know what you want? Usually there are some high-level constraints, such as ethical and legal behavior, then many possibilities.

In many business contexts the answers are relatively straightforward: more money, sooner, and at less risk. But often discussions get muddied by many objectives: strategic fit, difficulty, market potential, budget, etc.

Dr. Howard offered a crucial distinction about value metrics: direct vs. indirect value. Direct values are those you trade off directly, indirect values are proxies for things you really care about.

Consider purchasing a car. You might have objectives around total cost of ownership and MPG. But MPG is simply part of total cost of ownership--based on fuel consumption and prices, this translates into dollars quickly. So MPG is an indirect value: you could compute whether or not it is desirable.

However, MPG today conveys bragging rights. This is distinct from the economics of MPG. So the MPG metric may be obscuring a direct value: green pride. You have to make a value judgement about how much you are willing to pay in total cost of ownership to achieve green pride. Nobody can tell you the right answer, as this is a value judgement.

Dr. Howard's advice is to always look for the direct values and focus your decision making on those. Get one or two clear direct value measures, and understand your tradeoffs among these. What are you willing to pay for green pride bragging rights?

This advice has always held me in good stead. I have seen very complex situations and choices literally littered with metrics and infested with confusion become crystal clear by identifying the real direct values and tradeoffs among them. From decisions on whether to run the Tennesee Valley Authority River system for Power Production or Recreation, to decisions about which house to buy, to portfolio prioritization in R&D, getting clear about the direct values is often a key to turning confusion into insight.

In business, it usually boils down to money. Even the three I mentioned at the begining: more money, sooner and at less risk can usually be reduced.

Money sooner versus later is usually an indirect value, based on discounting at the cost of capital. The direct value for money sooner versus later usually has to do with meeting street expectations, not money per se. Usually this is not really an issue.

Often "risk" is a stand in for "we have made assumptions nobody believes", and is not really a value at all, but rather a symptom of poor information.

Treating information as uncertain and modeling uncertainty in an economic case goes a long way into dealing with risk. When risk remains part of the decision, then it often remains as a direct value: greed versus fear.