2016 – Anti-fragile Strategic Planning

The following page is the “director’s cut” for an article published in the online version of the Financial Management Institute’s eJournal (January, 2016); this article can be downloaded here (copyright restrictions apply): PDF: Antifragile Strategic Planning (FMI Jan 2016).

Which one should you read?  The FMI version reads better and was better edited.  The Director’s Cut is more technical but is also rougher around the edges when it comes to editing.  Heck, why not read both!  But before you start to read, a note of thanks to my friendly peer-reviewers!

As always, let me know what you think of the concept, its utility and whether you were able to use some or any of it in your organization.

Grandmother's tea cup, an example of the extremely fragile that does well in a non-volatile environment (e.g. between visits from the grandchildren).

Grandmother’s tea cup, an example of the extremely fragile that does well in a non-volatile environment (e.g. between visits from the grandchildren).

Antifragile Strategic Planning – Director’s Cut

Nassim Nicholas Taleb has written extensively about randomness and about systems.  In his book (and my blog) ‘Antifragile: Things that Gain from Disorder’ he calls strategic planning ‘superstitious babble’.  He goes on to say “… there is no evidence that strategic planning works… (strategic planning) makes the corporation option-blind as it gets locked into non-opportunistic courses of action.” [1]

I have to agree with Taleb that most strategic planning is a waste of time but I am not as wholly dismissive of the effort.  What Taleb is missing from this discussion is the basis for rest of his book.  A strategic plan should be the roadmap to make an organization increasingly Antifragile if not at least robust/resilient.  A robust and optionality-attuned-organization can make the best use of circumstances as they present themselves and weather small shocks or even larger negative Black Swan events.  At this point some definitions are in order.

Definitions of Fragility

  • Fragile: what does not like volatility.  According to Taleb, this is essentially everything in the modern economy.  Think of the bank system in 2008, the Fukushima nuclear reactor or the peace prior to World War I.  A porcelain tea-cup is highly fragile.
  • Antifragile: likes and requires volatility (randomness, stress, etc.) to stay healthy or to get stronger.  Generally anything that is living likes some stress to stay healthy.  Stressors in the environment are fundamentally information that allow an organism (or organization) to make minor adjustments.
  • Robust/Resilient: resistant to volatility but not Antifragile because this does not improve or grow because of stress.  A breakwater in the ocean is robust in the short/medium term but fragile in the long-term.
  • Black Swan Event:a positive or negative significant event that creates enormous upheaval in an eco-system.  Think of a comet striking the earth or the 2008 financial melt down.
    • Events that are extreme, unknown and very improbable (according to our current knowledge); adapted from p.xxvii, The Black Swan: The Impact of the Highly Improbable, Nassim Nicholas Taleb, 2007.

Definitions on Strategic Planning

Kaplan and Norton in their classic book, the Balanced Scorecard, answered these questions by identify three benefits or reason the planning and target-setting management process enables the organization to[1]:

  1. quantify the long-term outcomes it wishes to achieve,
  2. identify mechanisms and provide resources for achieving those outcomes, and
  3. establish short-term milestones for the financial and nonfinancial measures on the scorecard.

Many organizations select a set of outcomes and a flashy balanced scorecard and are then blindsided by subsequent-unpredicted change.

Definition of an Antifragile Strategic Plan

An Antifragile strategic plan takes the best of the balance scorecard while also preparing an organization for change through the following attributes or maxims.

  1. Do No Harm: Makes the organization no worse off than as if there had been no strategic plan.
  2. Core Competencies: Ensures the organization is getting better at its core business(es).  Conversely, the organization is shedding businesses that they should no longer be involved in.
  3. Creating a Sustainable Organization: Describes the known-known changes facing the organization and ensures it has the capacity to weather all but large-scale unpredictable and irregular events.
  4. Balanced Scorecard: Identifies long-term outcomes, implementation plans to achieve these outcomes and short-term milestones to monitor their execution – but only after the above maxims have been satisfied.

Planning for Volatility

When times are calm, predictable and unchanging; organizations can grow large, complex and take on debt (have these conditions ever really existed?).  When times are uncertain and affected by rapid change, organizations face peril.  When a Black Swan event occurs, organizations are slaughtered – or worse, bailed out by the taxpayer.  As a result, a strategic plan needs to focus on how an organization can survive and ideally thrive on uncertainty.  Taleb indirectly has the following advice:

  • Avoid deficits and debt.  A negative cash flow places control with external parties.  Be it a government or a not-for-profit, keep your cash flow positive and your cash-reserves healthy.
  • Keep some fat on the meat.  Organizations that cut to the point that they are hyper efficient but do not have redundancy to fall back on when the environment changes.  This does not mean an organization needs to accept slackers or employee-tourists – everyone needs to be contributing to a healthy cash flow and the program imperatives of the organization.
  • Seek optionality.  Optionality means that an organization can accept the maximum downside (the limit of its risk) of a decision for which there is significant upside.  The key is to manage the downside so that it is fixed while the upside is unlimited.  Organizational redundancy and good cash reserves can help an organization capitalize on options when they present themselves.
  • Keep things small but networked.  Organizational size has a non-linear relationship with fragility.  Basically as things get bigger, complexity increases on a curve such that suddenly it is impossible to control, coordinate or communicate within the organization.  Cash is burned, slackers flourish and options dwindle in a large organization.  Economies of scale work, but with diminishing returns.  This is the reason that mergers seldom produce the results expected.  “There appears to be something about size that is harmful to corporations” [3].  Rather than focusing on size, focus instead on networks and relationships with other organizations that can capitalize on an opportunity or help to weather a Black Swan event.
  • When in Doubt, Procrastinate.  Procrastination requires the greatest amount of discipline on the part of a manager or organization.  As well, the benefits are difficult to measure as they are often loss avoidance rather than a clearly defined gain.  There is a basis in psychology for procrastinating, namely that “… we humans are very bad at filtering information, particularly short-term information, and procrastination can be a way for us to filter better, to resist the consequences of jumping on information…” [2].  There is a risk however with procrastination.  For example, the Kodak corporations waited too long before changing its business model from film to other imaging technologies.
  • Expect the Black Swan – and hopefully it tastes like chicken.  Black Swan events are large-scale unpredictable and irregular events of massive consequence.  They are often postdicted (predicted after the fact) but in reality cannot be foreseen.  Nevertheless, by avoiding debt, having organizational capacity and decisions based on optionality – they can be ridden out – or possibly even profited from.
  • Skin in the Game.  Ensure the individuals who are making decisions have skin in the game.  Economists describe this as an Agency problem where someone influences or controls an outcome such that they receive the benefit but do not bear the costs.

How to Have an Antifragile Strategic Plan

The following are some examples for each of the above Antifragile philosophies that could be found in a strategic plan.  While most of the strategies can be bent to a variety of organizations (for profit, private, public, government), the primary focus is on government strategic plans with an aside to my own personal interest in the volunteer/non-profit sector (Marked with an “*”).

Avoid deficits and debt.

The good news is that governments understand Keynesian economics.  The bad news is that they have only read half of what Keynes wrote about, namely that governments need to both smooth out depressions but also retrench during booms.  As a result, governments incur debt during both the boom and the bust periods.  Debt accumulated during the good times means that many fewer options available to the government during the bad times.  While Taleb recommends a total aversion to debt, I would suggest that this is impractical although a lofty goal.  Some specific actions to consider include the following:

  • A realistic and transparent budget setting process.
  • Organizations need to come on budget.
  • Pay down debt as a priority and ideally have the debt firstly held by citizens.
  • 3-6 months of working capital.
  • Donors pre-contribute toward programming *.

Debt is More than Just Cash

Taleb does not discuss this but debt is more than cash.  To use an alliteration, we can extend Taleb’s debt to Time, Talent and Treasure.

  • Treasure is the most obvious and is discussed above.
  • Talent are the people who make your organization successful.
    • Talent debt is both the top and the bottom.  That is, recruiting and retaining management is great but be sure you have a darn good entry-level program to continuously bring in talent.
    • For volunteer organizations, developing and sustaining a health volunteer base is imperative *.
  • Time deficit is a pandemic.  People do not have time to give the attention to matters and increasingly we are doing things like practicing Drive By Management.  A strategic plan needs to ask the question, how can we give back more work (and personal) time to our employees or volunteers.

Keep some fat on the meat.

A continuation of the Time, Talent and Treasure debt management discussion, some practical ideas of keeping (and enhancing) organizational capacity:

  • Succession planning program is in place so that at all levels there is good bench strength in case of terminations, retirements, lotteries, etc.
  • Good documentation and records management for core operational activities.  This allows organizations to have consistent operational activities so that the focus can be on the ad hoc or Black Swan management.
  • Good internship/apprenticeship program to attract future employees.  See: Maximizing Employees or Internships without Hardships for more on how to run a good internship program.
  • An effective volunteer program to continuously renew the donors, board members, volunteers, base.  For notes on this, Paying your Volunteers Well series of blog posts. *
  • Key production processes are run below maximum capacity so as to preserve the equipment and to ramp up production when demand becomes available.

Seek optionality.

Because of his career, Taleb’s focus is on the optionality of investments.  Some advice along these lines include:

  • Never invest in securities the organization (government, board, management, etc.) cannot explain to the shop floor employee, Joe/Jane citizen or an average donor.  Typically this means government grade securities, blue chip corporate bonds, etc.
  • The organization should consider risky investments to be ‘lost’ the moment they are made.  Risky investments are paired with boring secure investments to provide optionality.  Thus if the risky ones are lost, the secure ones remain.
  • Ensure that new initiatives and exclusive arrangements have buy out options and sunset clauses.  As well, new programs are implemented in a modular and ‘fail-fast’ fashion so that changes can be made quickly and effectively.

Options are More than Investments

Options extend beyond investments although the principles are similar.  Large and high profile projects reduce optionality whereas many smaller lower profile projects that can ‘fail fast’ reduce the total risk for an organization.  Static organizational structures, strict union agreements, an intransigent corporate culture (e.g. the Healthcare Ethos) reduce the opportunities for an organization to exercise its options when faced with stressors. The opposite to each of these provide capacity to make organizational change.

Keep things small but networked.

Optionality is partially a function of size.  The bigger the organization, the harder it is to change.  Conversely, the larger an organization, the easier it is to effect change (think of your child running into you at two years of age and then at fourteen – which one would be more likely to knock you over).  For organizations, size considerations include the following:

  • Management span of control cannot exceed a typical board room.
  • Move employees around the organization to meet other folks.
  • Develop back office capacity so the front office can focus on being nimble.
  • Use network and virtual organizations to compensate for size when buying goods and services.

Employ Healthy-Stress

At the Gym, our muscles will over react to a small stressor (e.g. lifting a weight) so that they can better handle a larger future stressor.

Beware of the Agency Problem

A strategic plan often is influenced (and rightly so) by the government of the day or the perspectives of large donors.  Influence is one thing, lacking skin in the game on the part of donors, politicians or executives is another.  An influencer may want to take an organization in a direction which directly or indirectly benefits them but for which the bear little or none of the cost of failure.  The political arena is a good example whereby political expediency may trump good public policy.  Other areas and phenomena include drive by management.  Ensure that a strategic plan benefits the organization and its noble purposes.

Expect the Black Swan

By definition Black Swan events cannot be predicted but they can be anticipated.  More importantly organizations that apply Antifragile Strategic Planning principles are in a better position to weather or ideally capitalize on these events.  Some methods to manage these events include:

  • Have a current disaster recovery plan that has been tested.
  • Focus on testing how people react to an emergency not the emergencies themselves.
  • Have in place emergency response methods such as setting up ‘war-rooms’, response teams, communication centres, etc.  Remember, in some cases these measures will be used to respond to positive Black Swans such as a market opportunity.

To Antifragile or to Fragile, that is the Question

Visionary (and Fragile) plans tend to skip the first three maxims (Do No Harm, Core Competency and Sustainable Organization) and jump straight to the desired long-term outcomes.  In contrast, Antifragile strategic plans ensure the business has good optionality first and then takes calculated future risks.  The more skipping, the more Fragile your plan.  The more optionality, the more Antifragile your plan.  Skip or optionality, Fragile or Antifragile, how do you decide?

While it may be tempting to pick a happy medium, this should also be avoided as it will neither sustain nor challenge an organization.  A visionary plan can create positive disruption.  It will introduce self-inflicted stressors that can result in a stronger and more Antifragile organization.  The more visionary a plan, however, the more likely it will become shelf-ware.  Even worse, a plan that Fragilizes an organization may leave it unable to survive environmental changes [4].

Alternatively, an organization suffering from change fatigue may benefit from a few boring, albeit implementable, strategic plans.  The risk is that the organization may confuse apathy or inertia for Antifragility.  The following table provides the ends of the continuum for different Antifragile aspects of a strategic plan.

Notes and Further Reading:

Notes

All Antifragile page references are from the 2014 Random House Paperback Edition.

  • [1] p. 234
  • [2] pp. 123-124
  • [3] See page 179 for a discussion on the poor track record of mergers within the corporate environment.
  • [4] For a great summary of organizations who have Fragilized themselves, read ‘How The Mighty Fall: And Why Some Companies Never Give In’, by Jim Collins, Harper Collins, 2009.

Links for further reading:

Nassim Nicholas Taleb on Accepting Uncertainty, Embracing Volatility

Table of Options for Antifragile Strategic Planning

Taleb Test & Definition Fragile Antifragile
Best/Worst Time to Use? Best Time. A healthy organization has become complacent.  The Visionary/Fragile plan can wake up the organization even if it is never implemented.

Worst Time.  The organization has become Fragile but the overall market continues to be viable.

Best Time. The organization is executing upon a predefined strategy.  Also if the organization has found itself with fewer and fewer options because of environmental or self-inflicted Fragility.

Worst Time. The environment has clearly signaled that the organization is no longer relevant (e.g. continuing to manufacture buggy whips and assuming motor cars are a passing fad).

The degree of ‘sexiness’ for the plan.  How many new ideas are there and what is their size?  Directions regarding current operations. Very Sexy.  New ideas and a large list of new strategic directions pull the organization in a number of ways.  The Do No Harm, Competency and Sustainable maxims are largely ignored as existing operations are assumed to continue as is or improve on their own inertia.  Funding from existing operations may be re-directed to new ideas. Boring.  The plan focuses on the three maxims before considering long-term outcomes.  New ideas are funded but at a tinkering level and past non-failed ideas are given incrementally more funding to bring them further to fruition.
Details are ex/implicit within the plan.  Can the typical reader look at an item and inherently say, ‘I know how to build that’ Very visionary but few details or measures.  Because the hard work is done (visioning), execution is sufficiently self-evident. Current operations, if mentioned, are subject to extreme stretch goals. Details Provided Ex/implicitly: Changes to current operations measures are incremental with few unknowns as to how to change the organization.  Stronger measures are applied to new initiatives than to existing operations.
The number of new initiatives. These may be extensions of a current program area or net new efforts (e.g. new legislation, programs, systems, etc.) Many large initiatives.  Smaller initiatives may also exist but they are often hidden from sight.  Past initiatives are not listed particularly if they were not successful. Many small initiatives. All initiatives are listed to some degree.  There is a listing of past initiatives successful or not and what the organization has learned from the effort.
Implications to organizational debt of Time, Talent or Treasure of the plan.  Resourcing is Unclear.  How the initiatives will be resourced is not explicitly stated.  Time, talent and treasure are borrowed from current operations.  For larger initiatives debt may be used to cover revenue short falls. Funding is Clear.  There is a clear resourcing plan for all existing initiatives extending to time (including organizational attention span), talent (staff and contractors) and treasure (funding).
Impact to Optionality and Organizational Redundancy.  Few Options; Resources are Stretched.  Because of the focus on ‘big bang’ new initiatives, the organization is channeled into a pre-defined course of action.  There may not be the organizational capacity to either implement or extract the organization from a failed initiative.  The organization is poorly positioned to handle Black Swan events due to limited optionality. Many Options. Underlying operations are working well and the organization can experiment with small scale tinkering.  Promising experiments can be scaled up to the next level or be quickly terminated with clear lessons learned.  The organization is well positioned to react to and possibly capitalize on Black Swan events due to redundant capacity.
Organizational Structures Constantly Changing. Rapidly and repeatedly changed to meet the current vision of the plan.  Often the changes are done so as to streamline the structure. More Static and Made Thoughtfully. Changes are made but with long periods of stasis in between. Benefits of the stasis is the creation of implicit knowledge and strong networks.  The costs include inertia and personal fiefdoms.
Agency Problem Agency Conflict.  A general manager or deputy minister may demand high visibility changes but will not be around to see their implementation through or feel the impact of their possible failure.  Worse, the next ‘interloper-manager’ may completely change direction.  The innocent who are left behind are blamed for implementation failure. No or Limited Agency Conflict.  Because public servants are intimately tied to operational processes or small scale tinkering projects, they have considerable skin in the game to ensure execution occurs.  ‘Interloper-senior managers’ are restricted to suggesting new small scale tinkering efforts or incremental improvements in existing operations.
Likelihood the plan will be used Unlikely to be Used.  Because of operational demands, environmental stressors and shortages of time, talent and treasure, the vision will unlikely be implemented. High Likelihood of Being Used.  Operations are being consistently improved and tinkering has resulted in small to larger gains in productivity without jeopardizing organizational time, talent or treasure.  Better still the plan lends itself to being easily updated.