Business uncertainty agile india

Confronting Business Uncertainty

February 17, 2012
Agile India 2012

Copyright © 2011 SolutionsIQ. All rights reserved.

Speaker Introduction: Charlie Rudd

CEO of SolutionsIQ
An Agile company that
provides comprehensive
Agile solutions for
consulting, training,
development and
recruiting.


How do we get to Agile portfolio management?

• Agile adoption requires a shift in prevailing
attitudes and culture
• The big payout of Agile adoption is Agile
portfolio management
• Agile portfolio management requires that IT
and the business are super-aligned
• Alignment requires shared values and culture

Agile Values Traditional Values

The case for Agile management principles

• If Agile works well with software development
because its uncertain, then maybe Agile can
help us manage other kinds of uncertainty,
including management or business uncertainty
• To achieve that aim we would need to abstract
Agile management principles


Two conceptual pillars: focus on
Complexity


Traditional business culture: where does
uncertainty fit?
Work

Practices &
governance
Management principles

World view


Frank Knight: Risk vs. Uncertainty

Frank Knight (1885-1972), Economist, University of
Chicago
Distinguished between risk and uncertainty

Risk Uncertainty


Risk

• Faced with unknown outcomes but known
probability distributions (e.g., dice roll)
• Maximize likely utility by calculating expected value
• Basis of classic risk management techniques
• Basis for “rational” decision-making
• Basis for traditional business case
decision-making


Uncertainty

• Like risk, faced with unknown outcomes but unlike
risk also unknown probability distributions
• Since no way to quantify expected value, classic risk
management does not apply
• Avoiding uncertainty is prudent
• Embracing it is irrational


The risk-analytic world view

1900 2000

1776 1921 1944 1971

1911


Risk analytic world: uncertainty is lack
of knowledge

Uncertainty Risk Certainty

?? ? ?
?
??
? ?
?
?? ???
?
? ?
?
? ?
Unpredictable Predictable Known
outcomes outcomes

Risk analytic world: Knowledge

• Objective, enduring facts
• That fit into causal
relationships to:
– Estimate risk
– Make predictions
• There is one and only
one right answer
• Different people will
draw the same
conclusion

Risk analytic world: people

People are pretty much the
+3 same
-1
• Rational
+2 • Self-interested
• autonomous agents
• Utility optimizing machines
Sources of variance
• Individual differences
• Emotion


Risk analytic world: social

$1000000


Risk analytic world: work

Manufacturing is the
operating paradigm
Labor
• commoditized
• fungible

The fungible work machine


The risk-analytic world view

World: subject to rational inquiry & logical
analysis. Risk can be measured & managed.
Uncertainty should & can be avoided.
Knowledge: facts endure and accumulate;
uncertainty is the absence of facts.
People: rational agents bent upon
optimizing utility
Work: manufacturing, production-oriented;
fungible; focused on optimization (Agile
Project Management, Jim Highsmith)


Risk-analytic world view

Work

Practices &
governance



Risk-analytic management principles

• Identify best solution
• Centralize information &
management decisions
• Do it right the first time
• Apply external constraints


The risk-analytic business philosophy

Do it right the
1 – Centralized Best 2 – Centralized first time
Evaluation Solution planning

3 - Production
Facts
Facts

Economies
Objective: optimize of scale

Style: algorithmic


Risk-analytic world: avoid uncertainty


Outside the Inside the zone of
zone of rational rational inquiry
inquiry


Risk-analytic management principles

Work

Practices &
governance




Risk analytic world: business initiatives

Start End

• Start at a position of manageable risk
• Path to business value is clear
• Outcome obtained is the one predicted


Risk-analytic business case

1. Identify a potential opportunity
2. Gather facts, make assumptions, run scenarios
3. Estimate likely return, if threshold met
4. move forward

I I
I
I
I I


Risk-analytic program management
1. Set charter
2. Produce comprehensive specification
3. Produce comprehensive plan
4. Implement plan
$6 m $1.5 m $1.5 m $1.5 m $1.5 m

I I
I

I I

.5 years 1 year 1.5 years 2 years


1. Set charter
4. Implement Plan
$6 m $1.5 m

I I
I

I I



1. Set charter
4. Implement Plan
$6 m $1.5 m $1.5 m $1.5 m $1.5 m

I I
I

I I



The way its supposed to work!
1. On budget
2. On time
3. 100% specification compliant

Ain't it great?


Risk-analytic governance

Detailed spec &
Business plan
Project 2 – Centralized
case
charter planning
decision

3 - Production
Facts
Facts

Big bang
Risk: Manage release

Uncertainty: Avoid


Risk-analytic practices & governance

Work

Practices &
governance




Risk-analytic business culture

Work

Practices &
governance




Risk-analytic business philosophy


Start
• Competition gradually eliminates low risk
opportunities
• Prudence dictates: avoid business uncertainty
• Exploit business opportunities where risk &
opportunity can be quantified
• Objective inquiry generates business opportunities

But what if it doesn't?

• Today we hear a lot about business
uncertainty
• U.S. Corporations are sitting on record
amounts of cash because
• Prudence dictates they avoid uncertainty
• Why is more investigation not leading to
more risk-managable opportunities?
• Are we experiencing an anomoly or
something else?


What is driving increasing
business uncertainty?


A brief history of technology

Yi kes!
Ancient Greece
Renaissance
Stone Age
Enlightenment


Accelerating rate of technology change

Number of Years for New Technology to be
Adopted by 25% of U.S. Households
30

25

20

15

10
# of Years

5

0


Good ole Moore’s law

Transistors
1,600,000,000

1,400,000,000

1,200,000,000

1,000,000,000

800,000,000
Transistors

600,000,000

400,000,000

200,000,000

0
1970 1972 1974 1978 1982 1984 1989 1993 1996 1999 2000 2003 2004 2007


As the rate of change goes up…

Rate of Technology Change from
1950-2011

1950 2011


Product lifecycles shorten
Rate of Technology Change vs.
Product Lifecycle

1950 1971 1974 2004 2007 2011


Adoption rate of MySpace through 2008

MySpace Active Users (per million)
200
180
160
140
120
100
MySpace
80
60
40
20
0
2004 2005 2006 2007 2008


Adoption rates: Facebook vs. MySpace
Active Users (per million)
200
180
160
140
120
100 Facebook
80 MySpace
60
40
20
0
2004 2005 2006 2007 2008


Adoption rates: Facebook vs. MySpace

Active Users (per million)
600

500

400

300 Facebook
MySpace
200

100

0
2004 2005 2006 2007 2008 2009 2010 2011


Shorter product lifecycles means shorter
return horizons

|--------------------||--------------------------------------------------------------------------|
Investment Expected Return

|--------------------||--------------------------------------------------------|
Investment Return horizon shrinking

|-----------|  |-------------------------------|
Investment Expected Return


OK, Technology is accelerating. So what?

• Isn't this just progress?
• Not too far from what the enlightenment
predicted, right?
• New technology just improves the
playing field and raises expectation for
performance. What's wrong with that?
• But then…why are things more uncertain
rather than less uncertain


Unintended consequences revisted


Unintended consequences revisited

• Unintended consequences are
unexpected consequences
• By definition they cant be predicted
• Generally not part of the business case
calculation
• This is different kind of uncertainty than
what Adam Smith predicted


What causes unexpected consequences?

• The platform effect
Stewart Kaufman

• People (the pesky
irrational part)
David Kahneman &
Amos Tversky


Heuristics and Biases: the framing effect

First case
1. You receive $1000
2. Choose between the following:
A. 50% chance to win $1000
B. $500 for sure


heuristics and biases: the framing effect

Second case
1. You receive $2000
2. Choose between the following:
A. 50% chance to lose $1000
B. Lose $500 for sure


heuristics and biases: risk adversity hard-
wired in
1. First case: most people choose A
2. Second case: most people choose
B
3. Yet from a maximize utility
perspective there is no difference
4. People hate to lose more than
they like to gain


heuristics and biases: we are not utility
optimizing machines
Plenty of other examples
• The case of the hungry judges
• Defying logic

David Kahneman, first
psychologist to receive the
nobel prize for Economics


Accelerating rate of tech change, increases
rate of unexpected consequences
Technology Conditions
change Change

Unexpected
consequences
Competition Platform
responds effect

People
react


More unintended consequences leads to
more business uncertainty
Technology Conditions
change Change

Unexpected
consequences
Competition Platform
responds effect

People
react


Mounting business uncertainty means…


Start Start
• Fewer and fewer good bets
• However, doing nothing does not protect you
• No choice to but to begin investments under
conditions that previously were considered unsafe


Business uncertainty is inescapable

• In the risk-analytic world, uncertainty is caused
by missing information or faulty reasoning.
• This is different kind of uncertainty.
• This is an irreducible uncertainty;
• It cant be avoided because it cant be predicted
• As technology accelerates unintended
consequences breeds uncertainty like rabbits
• disrupting rational-analytic ecology


Business uncertainty is inescapable

So what are we going to do?

Well…


Why not extend the risk-analytic strategy?


Start

• Calculating risk has served us well
• Let’s apply same techniques but with greater magnitude and
sophistication
• Thereby reducing the zone of uncertainty
• This is consistent with the degrees of information
perspective


The more risk management business case

3. Stop before all is known
4. What’s riskier? Doing nothing or something?

Business case shaky
I
?? ? because instability of key
I
I
I variables
?


“More Risk Management” program mgt

Shaky business case leads to:
• Incomplete, flawed specification
• Flawed implementation plan ?

$6 m $1.5 m $1.5 m $1.5 m $1.5 m

I
? ?
?
I I
?


Traditional governance now impedes us
1. Spec and plan insufficient as compliance controls
2. No good way to modify spec or plan or respond to
emerging conditions
3. No easy way to revise contracts and agreements
Yet all the money is spent
$0.0 m $1.5 m $1.5 m $1.5 m $1.5 m

.5 year 1 year 1.5 years 2 years


Final outcome of the “more risk management”
strategy
1. Out of time and out of money

2. Key features missing

3. Delivered features not desired (waste built in)

4. Desired technical quality not delivered


When tool does not fit the
problem anymore


If the risk-analytic world is wrong then…


Start

What might be right?


An alternative world view

1927 1962 1963 1975 1982 1996
1900 2000


We've come along way, baby


Complexity is a management Issue

“…the time has come to broaden
the traditional approach to leadership and
decision making and form a new perspective
based on complexity science.”

“A Leaders framework for Decision Making,” HBR – David Snowden and Mary E. Boone


Simple, complicated, complex & chaotic
Uncertainty Certain

Chaotic Complex Complicated Simple

• Like the risk-analytic world view, each domain has a
different position along the certain/uncertainty
continuum
• But they also represent different ontologies

Inspired by David Snowden’s Cynefin framework


Simple, complicated, complex & chaotic
Uncertainty Certain


• Like the phase changes of water (solid, liquid, gas),
each domain has different properties
• Tools designed for one set of properties may not
work so well in a different domain


Simple business conditions
Uncertainty Certain


Asphalt
Distributor

• Causal relations are self-evident
• What you see is what you get


Complicated business conditions
Uncertainty Certain


Oil
Exploration
• Domain of expert knowledge
• Analysis yields objective path to success
• Reliable predictive models
• Realm of traditional business opportunities


Congruent with risk-analytic world view
Uncertainty Certain


Oil Asphalt
Exploration Distributor

• Rational business decisions
• Knowledge is explicit
• Analysis yields optimal results


Complex business conditions
Uncertainty Certain


Green
Energy
• Solution emergent not predictable
• Must learn as you go
• Plan evolves with emerging solution
• Uncertainty is irreducible & inescapable


Chaotic business conditions
Uncertainty Certain


Fail

• No causality or order
• Unrelenting turmoil
• Opposite of a business opportunity


Where are the business opportunities?
Uncertainty Certain


• Simple business opportunities are long gone or are
quickly displaced by competitive forces
• Chaotic is the opposite of opportunity
• That leaves the complex and the complicated


How different are these two world views?

Risk-analytic Complex-adaptive


Complex-adaptive world: uncertainty
Uncertainty Certain


• The root cause of uncertainty may not be lack of
information or faulty reasoning
• Emergent phenomena have unknowable outcomes
• The accuracy of predictions cannot be quantified
• No amount of research can discover the “best
solution”


Complex-adaptive world: knowledge

• Few hard facts
• Dependence on tacit knowledge
• Relevance not self evident
• Needs interpretation
• Value of information is tentative
and transient
• Different perspectives
integrated through collaboration


Complex-adaptive world: people

• We are not just
+3
imperfect computers
-1 ?
+2 – Biases & heuristics
– Expert systems
• Cant always anticipate
what we will do
• And that ain't all bad
– multiple perspectives
– Emergence of new ideas


Complex-adaptive world: social

$$$$$$$


Complex-adaptive world: work

• Knowledge work is the
operating paradigm
• Designing rather than
manufacturing
• Individual differences
– Tacit knowledge shared
through collaboration
– Team output not fungible
• Human part is where you
find value


Two business cultures


Risk-analytic business culture doubts may
be resolved
Work

Practices &
governance




May be resolved by integrating the
complex-adaptive perspective
Work

Practices &
governance


Complex-adaptive world
view

Complex-adaptive: management principles

• Iterative progress
• Feedback-driven adaption
• Empower knowledge workers
• Share information
• Facilitate self-organization &
collaboration
• People are idea incubators
• Deliver early and frequently


Different business principles

• Identify best solution • Iterative progress
• Do it right the first time • Feedback-driven adaption
• Centralize information & • Empower knowledge
management decisions workers & share
• Apply external constraints information
• People are labor • Facilitate self-organization
production units & collaboration
• Leverage economies of • People are idea incubators
scale • Deliver early and
frequently


Complex-adaptive management philosophy

Solution Evaluation
prototype
(vision) planning

Production Iterative
progress
Production
increment

Objective: Innovate
Early &
Style: Heuristic frequent
delivery


How do we reconcile these two worlds?

Risk-analytic Complex-adaptive

• Optimize • Innovate
• Algorithmic • Heuristic
• Uncertainty closes • Uncertainty
things down opens things up

The good old days: Business initiatives

Start End

• Start at a position of manageable risk
• Path to business value is clear
• Outcome obtained is the one predicted


Today you must traverse both worlds

Chaotic Simple

Start End

• Start in an uncertain position
• Navigate through uncertainty
• As you learn more revise risk calculations
• Outcome obtained is the one that emerges


How do we reconcile these two worlds?

Through most of 20th century risk-analytic
carried more weight

Have we reached a tipping point?

Early in the 21st Century, the alternative
perspective grows more persuasive

Working towards an innovative business
culture
Work

Practices &
governance


view

The more risk management business case
Use real options to open up possibilities

3. Stop before knowledge reached
4. And…

Business case shaky
I
?? ? because instability of key
I
I
I variables Real
Options
?


Real Options – Decision tree
New
Assumption
Yes
Assumption
two
No
Yes
Assumption
one
No STOP

Real
STOP Options


Risk-analytic approach: manage variance

Simple

Start with expectation End
Of ideal solution


Innovative approach with real options

Start with many Explore Refine ideas End
possibilities new options

Real
Options

Complex-adaptive governance

Agile
Real Business Project
Options Case Management

Small bets help If business case Apply agile project
determine emerges proceed; management
direction but keep it open
They work together as a system


Governance for innovative initiatives
Emergent
Business
Case Agile
Project
Management

Evaluation

planning
Real
Options Production

• Heuristic
• Adaptive Early &
frequent
delivery

The innovative enterprise: strategy

• Dynamic business conditions
means
– Constant innovation
– More course corrections

Strategy
• Feedback, information sharing
and collaboration needed to
integrate learning as you go


The innovative enterprise: budgeting

• Annual planning needs to be
modified to adapt to intra-year
changes
• Capital budgeted by sectors,
Capital
Budgeting according to degree of
uncertainty


Agile portfolio management is active
portfolio management

• All investments (projects) reviewed
quarterly (new and funded)
• Investments are “uncertainty”
adjusted
Agile
Portfolio • Persistent teams are leveraged to
Management
retain collaboration power and
tacit knowledge integration
• Capital deployment is based on
portfolio—not project—
optimization

The Innovative enterprise

Capital Real Business
Strategy Budgeting Options Case

Active Portfolio
management is the Active Portfolio
Management
center of continuous
collaboration & adaption Agile Project
to emerging conditions Management


Governance designed for innovation

Work

Practices &
governance


view

Facilitates rather than impedes progress

Work

Practices &
governance


view

Questions?


Thank you


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