People naturally abhor uncertainty. Psychologists put this down to an ancient evolutionary trait where uncertainty often meant unacceptable exposure to mortal danger – typically in the form of some unseen carnivorous threat. Translating forward to modern day business and this trait is not as useful as it once was, particularly in medium to longer term capital investment decisions, which is one of the biggest sources of value creation (and destruction) in the resources industry.
The result of people’s reluctance to deal with uncertainty are business planning and decision making systems which are very often overly deterministic and rigid. They tend to be too pre-occupied with single point forecasts and central cases, frequently at the expense of taking due consideration of the natural spread of possibilities and implications.
VCI’s benchmarking across industries have found a distinct trend amongst best practice leaders to counter these tendencies. We are seeing a greater emphasis on precision in the understanding of uncertainty (rather than more effort on central case forecasting) and a cultural acceptance that forward plans must be put in place to prepare for eventualities across the full uncertainty range. Preparation can take several forms including: pre-prepared detailed contingency plans; rapid re-planning capability along the value chain; and expansion plans which have “low regrets” ramp up and ramp down options built in at successive stages (the data storage server industry being a good example).
In their endeavours to deal with uncertainty in forward planning, best practice companies are increasingly utilising technology, particularly in the form of simulation and decision support, to assess multiple forward pathways, to rapidly re-plan, and to isolate some of the more deleterious effects of human biases. Integration, both along the value chain, and between people in the business who can have useful impact, is another key approach that is being deployed.
Given the volatile and cyclical nature of the resources industry, and the massive impact that medium and longer term capital investment decisions have on ultimate business outcomes, it is hard to think of an industry that has more to gain by grappling with the pitfalls of decision makers and embedded business systems which do not adequately deal with uncertainty.