July 2, 2014


Robustness Testing of Corporate Plans

I have a question for you.

What is the probability that you will meet an accident in the next 100 hours of riding on a motorcycle? Close to zero, right? Definitely, very low, you would agree. After all, how many motorcyclists do you see falling off their bike everyday as you commute to and from the office?

But if that small probability happens, then the consequences could be high, right?

Since, Risk = (probability of an event occurring) x (impact of that event), we wear helmets.

Change of subject.

Those who are familiar with PERT (Program Evaluation and Review Technique) know that the Expected Time to accomplish a task is computed using (a) Optimistic Time (b) Pessimistic Time and (c) Most likely Time. The Most Likely Time has a weightage of 4 and the three times are averaged to obtain the Expected Time.

That makes sense, right? As we all know, things so not always proceed as expected. In fact, in our daily lives all of use PERT subconsciously. Don’t you always take into account a bad traffic situation while planning for a rendezvous?

Yet many corporates make their annual plans that look heavily driven by best case scenarios.

Since their numbers are driven heavily by aggressive target setting, the steps followed are usually:

  1. How much will the past year trend continue this year?
  2. How aggressive can we get?
  3. What do we need to do to get these numbers?

 A few corporates have a Plan B. These plans are driven by scenarios and are result of asking a series of ‘what-if’ questions. Plan B helps us ask two more questions:

  1. How do we minimize the impact of all negative scenarios?
  2. What do we do to maximize the likelihood of positive scenarios occurring?

So far so good!

But what of those very low probability extremely high situations? Rarely do corporates plan for extreme events. Since the probability of outliers, by definition, is tiny, not many really bother about it. As it is plans A and B consume a lot of time. Besides, there is no end to negative thinking, right? Share markets can crash, war can be declared, governments can collapse, suppliers and customers may vanish, global warming could accelerate, I mean, is there any end to it?  And yet these outliers occur with notorious regularity.

So what is the solution?

How about forming a team of ‘Corporate Testers’? Just as safety critical software and systems are tested for robustness by independent testers, Corporate plans need to be subjected to robustness testing by an independent team, who would subject the corporate mental models to extreme scenarios. And from such ‘war games’ will emerge Plan C. The overhead of having Corporate Testers will more than justify itself when Black Swan events strike.

Such Plan C’s are vital for corporate health. After all, we do wear helmets, don’t we? 

Reference (rather trigger):

[1] Antifragile: Things that Gain from Disorder by Nassim Nicholas Table.