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Colleagues holding question mark signs in front of their faces (Jacob Wackerhausen/Getty Images/iStockphoto)
Colleagues holding question mark signs in front of their faces (Jacob Wackerhausen/Getty Images/iStockphoto)

Managers must embrace uncertainty in the New Year Add to ...

Hurrah for uncertainty! Three cheers for trepidation! As the world tiptoes gingerly into 2012, let’s celebrate the fallibility of forecasting and the perils of prediction.

Why? First, because uncertainty will not dissipate soon, so businesses might as well try to make the best of what little they do know. Second, because an excess of certainty got us into this predicament. A little new year caution may be welcome.

Some of the steps taken by managers to offset dangers ahead are worryingly circular, however. I was surprised, for example, at the number of top executives and directors who, in a recent survey for Lloyd’s, the London insurance market, said the most effective risk management action they had taken over the past three years was ... to put in place a risk management team.

Other countermeasures can prove counterproductive. In June 2010, McKinsey consultant Lowell Bryan suggested companies should prepare for the “high probability of future financial shocks” by erring on the side of “being overcapitalized, overliquid, and overprepared,” while also engaging in “serious scenario planning” about “unthinkable” events. Sensible. But the effort of holding this brace position for the past 18 months, while some of those unthinkable events unfolded, would have induced paralysis in most business leaders by now.

As Leif Johansson, chairman of Ericsson and current head of the European Round Table of Industrialists, told the Financial Times last month, on the eve of the European summit: “Uncertainty has that effect: on many, many individual accounts, customers are saying, ‘Let’s wait a little.’ And the trouble with that wait-and-see attitude ... is that it takes us into a recession, quicker and steeper than we would have expected.”

He knows from grim experience what he’s talking about. In his old job as chief executive of Volvo, he witnessed the extraordinary period in late 2008 when more customers in Europe were cancelling orders for its trucks than placing them.

Even some of Mr. Bryan’s sensible measures could inadvertently add to future uncertainty. Absolute Strategy Research, an independent group of macro-analysts, points out that in the U.S. and Europe, the corporate savings rate has increased to levels not seen for decades, as public sector deficits have ballooned. The hoarding could reflect justifiable caution but if it persists, ASR suggests, governments may start accusing large companies of “rent-seeking” behaviour and may even penalize those that are seen to have accumulated “excessive” cash.

As for scenario planning, it has its uses, but, as another chief executive of a large European industrial company told me recently in relation to the fate of the euro: “We have plan Bs [for potential break-up of the currency] but there are only so many plan Bs you can make.”

As executives’ reluctance to commit themselves grows, so the appetite of outsiders to know about their future plans increases. Investors are now far more interested in the “outlook” section of the company report than in the backward-looking summary of the historic results. But in their public statements, most chief executives hide behind a “lack of visibility,” adding to the general nervousness.

Let them instead embrace uncertainty and accept that it is unrealistic to expect all clouds to lift and the way ahead to become clear. Business leaders need to count on their ability to be the one-eyed man in the land of the blind – a proverb recently recast by Richard Rumelt in his book Good Strategy/Bad Strategy: “If you can peer into the fog of change and see 10 per cent more clearly than others see, then you may gain an edge.”

Merely peering is not enough, though, if you do not move forward. So, in the spirit of circularity, let me offer the mini-roundabout, that peculiarly British innovation in traffic management, as my metaphor for sensible strategy in times of peril. The mini-roundabout instills just enough uncertainty in drivers to encourage them to reduce speed at junctions, but not so much doubt as to cause gridlock. When it comes to assessing future risks, it may not have the romantic appeal of certain rare waterfowl popularized by Nassim Nicholas Taleb but, as a reminder neither to accelerate blindly into the unknown, nor to stall for fear of collisions, it could prove more useful.

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