Complexity, risk, uncertainty and change


Business management, particularly for those intent upon ‘change’ or responsible for managing exposures, needs a rigorous, objective, measurement of the endogenous properties (complexity) that enables the functionality from which (through interactions with exogenous parties) the business generates the revenues that sustain it in changing and turbulent economic times.

“Complexity increases cost and decreases flexibility — often in unforeseen ways — and also tends to decrease stability,”….

Peter Leukert, CIO of Commerzbank

It is the number, nature and integrity of dynamic, multi-scalar, interactions that are the sources of strength (enabling performance greater than the sum of the parts). The ability to distinguish and respond to ‘signals’, that maintain the variety, effectiveness and agility of the complex system, from the ‘noise’ of flawed metrics, self-serving culture, hierarchical structure (silos), skewed incentives – of an unsustainable, failed or failing, model (reliant upon  assumption, reflexive, subjective, statistical analysis and prediction) that has its foundation in flawed (linear) economic thinking.

We won’t get different or better answers while we keep on asking the same questions.

For meaningful change to occur and to be sustained requires a rigorous justification, sufficient to counter financial projections that satisfy the goals of C-level short-termism that are detrimental to the stability and long term health of the business.

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General ignorance:: accident or design?

The PROFESSIONAL-NOVICE DIVIDE is something that I have touched upon before, when dealing with “Hierarchies of Understanding” and “The difference between knowledge and understanding”. But, from the evidence of what I have seen in my own industry [insurance] – like wider Society – the gap between the haves and the have-nots, is, if not widening, then certainly not closing! This isn’t only detrimental to current stakeholders and shareholders…

  • job satisfaction
  • employee retention
  • effectiveness and efficiency
  • errors and omissions
  • management and performance
  • governance and compliance
  • profitability
  • resilience and sustainability

…but to those that follow.

I’m sure that there are those conspiracy theorists who would suggest that this is no accident. But I’m not so sure. Although I could be easily persuaded that leaders of the prevailing culture – some of whom view technology, like financial rewards, only in terms of what short term benefits it brings them and their business – still view humans and technology within organisations as separate entities.

How can they be? They are interdependent components in the processes of a business system that has been created to perform a range of functions from which the organisation generates revenue, the means to sustain the enterprise and (hopefully) profit.

This kind of thinking is holding many organisations back!

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Legal & Professional services:: re-connecting pricing to cost, profit & value

Sell moreWhilst the article from which this extract is taken relates specifically to the legal profession, the truth of the matter is that this isn’t just an issue for lawyers…it’s a fact of life, the new norm for service industries!

The graphic on the right was aimed at Insurance Brokers but these are common issues.

I remember some of my earliest Economics lessons dealing with “elasticity of supply and demand”. We are now in the trough that, inevitably, followed an artificially prolonged series of peaks. As a result, the ‘Supply’ created to serve in the good times, when the revenue was there to sustain it, is now a surplus (excess capacity). The market has contracted, demand or, at least, budgets have fallen. Value and cost is under close scrutiny.

Suddenly “how well you know your client” is back at the top of the agenda. So are a few other questions:

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Viva Aviva:: McMillan deserves high praise for ‘Systems Thinking’ strategy

I like to think that I keep my finger on the pulse of what is happening (or not) in the UK general insurance industry and I am ashamed that, perhaps the most significant change in recent years, has completely passed me by! I can only attribute this to a form of blindness brought on by years of short-lived, occasionally ludicrous, strategies and initiatives launched by past Aviva management and that sapped the morale of their employees and saw them shed good business in favour of large premium commitments…many containing unknown exposures!

Perhaps I should have dug a bit deeper when they took a stand against Towergate earlier this year. I can only claim that my cognitive bias was brought by having to listen to a former “leader” – surely a graduate of the same business school as Fred Goodwin!- attempt to spin (that is as polite as I can be) strategies that were patently spawned by the unholy triumvirate of GREED, FEAR & EGO.

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Andy Haldane:: Still making sense – ‘Central banks should admit their mistakes’

My admiration for Andy Haldane‘s “thought leadership” grows with every paper, article, presentation or speech…he isn’t misled by symptoms because he understands what lies at the root of our global financial “difficulties”. After all, if a Director of the B of E is going to publish a paper on systemic risk, with a Professor of Zoology you would need to make sure you were on pretty solid ground, OR accept that the men in white coats could come to take you away at any time!!!

What WE need now is for such influential individuals to embrace this new thinking and to lead the organisations, with which they have influence, away from their point(s) of “critical complexity” in order that they can build the RESILIENCE necessary for times of such financial volatility. Whilst in his role at Bank of England, he hasn’t shirked from communicating a fundamental lesson about complexity, the threat of contagion, systemic risk and the fact that we are dealing with uncertainty (unknowns) as distinct from risk (knowns) – on the basis of the available evidence, this is considerably more than can be said for many in the risk management business within financial services! Read more of this post