Nearly all business decisions involve elements of both risk and uncertainty. This is just the nature of predicting the future course of events. They are not the same thing, but how do you identify which is which and how do you move forward, knowing that there is an element of both present?
The basic distinction between these two features is this: in predicting the outcome of a decision, how much information can be known beforehand, and how much of that information do you know? If you know most of the data points, then you are dealing primarily with risk. If you do not know most of the data points, then it’s uncertainty. The methods of proceeding can be quite different, and should both be considered before moving forward.
In assessing risk, you are essentially considering how much of the appropriate data set can be relied upon with reasonable certainty to continue as before? This means that we know enough about the data points to estimate or evaluate the future outcomes of any decision.
This sounds like a simple notion, but can be deceptive. Our macro world is riddled with previously unseen and not forecasted events, making the certainty factor suspect. In the financial world, the US government bond was always the symbol of a rock solid, riskless investment. In recent years, our currency has been inflated, the national debt has assumed historic proportions, and there is talk of downgrading and perhaps defaulting on the US debt as a way for the Federal government to regain solvency. I think this is highly unlikely in reality, but the mere mention of it and some semi-serious talk about this makes one doubt the basic premises.
At a lower economic level, private practice decisions are targeted on questions that involve risk assessment also:
- Should I expand my physical practice space?
- Should I buy an existing practice as a way to get started?
- Should I buy an existing practice as a way to get a satellite clinic established?
- Should I expand my menu of services and/or products?
In assessing any decision of this magnitude, there are mostly know-able data points to work out in order to be able to make a decision and move forward with confidence. Good questions to ask are:
- What if this takes twice as long or costs twice as much?
- What can confound my plan or go wrong? (What are the fail points?)
- Are the fail points something my organization can tolerate and fix?
- Do I have the time, energy, capital, wisdom, etc. to move forward with confidence? If not, what’s missing?
Uncertainty is much harder to deal with effectively when making business decisions. Uncertainty can be a tangible feature of an external environment, or a vague collection of impressions that are essentially subjective in nature.
As an example of an externally generated uncertainty factor, a powerful governmental bureau or insurance payer could announce that at the start of next year, a large set of restrictions, new procedures, mandates will be put in place, but you do not know exactly what these things are. This in fact happened at the beginning of 2014 in several simultaneous forms.
An internally generated atmosphere of uncertainty frequently revolves around one’s personal environment, set of friends or mentors, or internalization of other people’s agendas. This can take the form of generalization, or mis-application of an isolated event to a system in general. This can be true at times, but is not automatically true.
Most businesses do not make major changes in the face of uncertainty, which can lead to a generalized slowdown of economic activity (sound familiar?) If your organization is relatively stable and healthy, this can be a wise pathway, at least for a finite amount of time. However, sometimes businesses are forced to make changes and make decision, even in the face of uncertainty. How can you manage this situation most effectively?
- What’s missing from this picture that would give greater certainty and get this into risk assessment?
- What information or knowledge do I need that I do not have? How can I get that knowledge? (It can be something that you build yourself through learning or you buy through the use of outside services.)
- What is the most adverse outcome of my decision? Is this something I can alter along the way? Will I see it coming or will I only know about it after the fact? Can I tolerate an adverse outcome? Can I recover from it? What would it take to recover?
Decision-making is a big part of owning and managing a business, no matter what the specifics of the business entails. In a climate that is increasingly complex and multi-dimensional, it is even more challenging. Successful businesses in the future are ones that can deal with (not avoid!) risk, ambiguity and uncertainty.