The most significant change that is yet to take place in the minds of business executives and managers is that business is a game of probabilities which cannot be neatly expressed in a spreadsheet. Some years ago I hosted a conference on Enterprise Search technologies. One of the speakers was Mike Lynch (Founder and CEO of Autonomy at the time) and he went to great lengths to impress upon the audience that business was all about probabilities and that the deterministic Newtonian approach adopted by many managers was at best ineffective and more usually harmful. This was not a new angle for me, but I was impressed that someone with such a high profile would risk alienating his audience. He didn’t – the delegates lapped up every sentence. In fact he even scored more highly than I did on delegate feedback (as I type with a grimace).
So back to probabilities. The most exact sciences on the planet are based on probabilities. These sciences have the luxury of being able to isolate very simple systems – pretending that the rest of the universe does not exist. Physics is particularly blessed with this world view, and yet everything in physics relies on statistics and probability (you would not be using a computer if some bright spark had not realized that the behavior of atoms and their constituents were based on probabilities rather than cast iron mechanical laws – the result was quantum mechanics). So if the hard sciences cannot claim deterministic behavior, despite the ability to isolate and simplify, then there is no excuse for thinking that real life, and particularly business life is in any way deterministic.
Unfortunately business life is full of bravado – the budget, the sales forecasts and so on. Most seasoned business professionals know these things are not worth the paper they are printed on – and yet we keep doing it. Well things are at last changing – and this is not something I proclaim every year. For the last thirty years it has been clear that businesses would cling to outdated methods regardless of the cost – but not now. Although I’m certainly not predicting a mass conversion.
That windows of opportunity have been shrinking in duration, that globalisation has made the economic climate more volatile, and that chaotic crowd behavior has become more amplified should be staring every business leader right in the face. If it isn’t – wake up. In response to this a new breed of technology has made an appearance. This comes under various headings – machine learning, data mining, predictive analytics, big data analytics etc etc. What may not be so apparent is that most of these technologies are based on probabilistic methods. There is nothing cut-and-dried about a predictive model that says there is a seventy per cent chance that Joe Bloggs will default on his loan – it’s a probability – he may and he may not.
The problem with probabilities is that they are often counter-intuitive (read Daniel Kahnemann – Nobel prize winning economist if you want more info). And so it means that we need to acquire a new skill set and engage a new breed of experts – variously called Information Scientists, Data Scientists, Analysts – or whatever. And I’m not speaking in a vacuum here – this is already happening. What will take much longer is for senior executives to start thinking probabilistically. We’ve all seen those silly return on investment (ROI) calculations – usually legitimizing some finger in the air estimates. Instead of this we should be using a probabilistic method – expected returns specifically – but it will be a long time before we do. Not many managers would willingly incorporate a ‘risk of ruin’ component in their calculations of investment return – and yet ruin does indeed happen, so why ignore it.
After thirty years of pretending that it’s business as usual the penalty for such pretense will soon be oblivion. The future looks very, very interesting – at last things are on the move – probably.