business uncertainty agile india

February 17, 2012Agile India 2012

Confronting Business Uncertainty

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

Traditional ValuesAgile 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

Lean Complexity

Agile practices

Practices & governance

Management principles

World view

Traditional business culture: where does uncertainty fit?

Frank Knight: Risk vs. Uncertainty

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

UncertaintyRisk

• 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

1921 1944

CertaintyUncertainty Risk

Risk analytic world: uncertainty is lack of knowledge

KnownUnpredictable outcomes

Predictable 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 same• Rational• 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 paradigmLabor • 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 utilityWork: manufacturing, production-oriented; fungible; focused on optimization (Agile Project Management, Jim Highsmith)

Risk-analytic world view

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

3 - Production

2 – Centralized planning

1 – Centralized Evaluation

Best Solution

Economies of scale

Do it right the first time

Objective: optimize Style: algorithmic

Risk-analytic world: avoid uncertainty

Inside the zone of rational inquiry

Outside the zone of rational inquiry

Risk-analytic management principles

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 opportunity2. Gather facts, make assumptions, run scenarios 3. Estimate likely return, if threshold met4. move forward

.5 years 2 years1.5 years1 year

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

Risk-analytic program management

1. Set charter2. Produce comprehensive specification 3. Produce comprehensive plan 4. Implement plan

1. Set charter2. Produce comprehensive specification 3. Produce comprehensive plan4. Implement Plan

2 years.5 years 1 year 1.5 years

$1.5 m$6 m

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

1. On budget 2. On time 3. 100% specification compliant

The way its supposed to work!

Ain't it great?

Risk-analytic governance

3 - Production

Business case

decision

Project charter

Big bang release

Detailed spec & plan

Risk: ManageUncertainty: Avoid

Risk-analytic practices & governance

Risk-analytic business culture

Certainty

Risk-analytic business philosophy

Uncertainty Risk

• 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

X XStart

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

Yikes!EnlightenmentStone AgeRenaissanceAncient Greece

Accelerating rate of technology change

Radios

Personal

Computers

Cell Phones

Color Tele

vision

Basic C

DVD Players

Internet

Access

MP3 Players

phones0

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

# of Years

Good ole Moore’s law

1970 1972 1974 1978 1982 1984 1989 1993 1996 1999 2000 2003 2004 20070

200,000,000

400,000,000

600,000,000

800,000,000

1,000,000,000

1,200,000,000

1,400,000,000

1,600,000,000

Transistors

As the rate of change goes up…

1950 2011

Rate of Technology Change from 1950-2011

Product lifecycles shorten

1950 2011

Rate of Technology Change vs. Product Lifecycle

2004 20071971 1974

Adoption rate of MySpace through 2008

2004 2005 2006 2007 20080

MySpace Active Users (per million)

MySpace

Adoption rates: Facebook vs. MySpace

2004 2005 2006 2007 20080

Active Users (per million)

FacebookMySpace

Adoption rates: Facebook vs. MySpace

2004 2005 2006 2007 2008 2009 2010 20110

Active Users (per million)

FacebookMySpace

Shorter product lifecycles means shorter return horizons

|--------------------||--------------------------------------------------------------------------|

Investment Expected Return

|--------------------||--------------------------------------------------------|

Investment Return horizon shrinking

|-----------| |-------------------------------|

Investment Expected Return

• 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

OK, Technology is accelerating. So what?

Unintended consequences revisted

• 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

Unintended consequences revisited

What causes unexpected consequences?

• The platform effectStewart Kaufman

• People (the pesky irrational part)

David Kahneman & Amos Tversky

First case1. You receive $10002. Choose between the following:

A. 50% chance to win $1000B. $500 for sure

Heuristics and Biases: the framing effect

Second case1. You receive $20002. Choose between the following:

A. 50% chance to lose $1000B. Lose $500 for sure

heuristics and biases: the framing effect

1. First case: most people choose A2. Second case: most people choose

B3. Yet from a maximize utility

perspective there is no difference 4. People hate to lose more than

they like to gain

heuristics and biases: risk adversity hard-wired in

Plenty of other examples • The case of the hungry judges• Defying logic

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

heuristics and biases: we are not utility optimizing machines

Accelerating rate of tech change, increases rate of unexpected consequences

Conditions Change

Platform effect

People react

Competition responds

Technology change

Unexpected consequences

More unintended consequences leads to more business uncertainty

Conditions Change

Platform effect

People react

Competition responds

Technology change

Unexpected consequences

Certainty

Mounting business uncertainty means…

Uncertainty Risk

• 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

X XStartXX

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…

Certainty

Why not extend the risk-analytic strategy?

Uncertainty Risk

• 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

X XXXStart

The more risk management business case

1. Identify a potential opportunity2. Gather facts, make assumptions, run scenarios 3. Stop before all is known4. What’s riskier? Doing nothing or something?

?? ?Business case shaky because instability of key variables

.5 years 2 years1.5 years1 year

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

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

“More Risk Management” program mgt

1. Spec and plan insufficient as compliance controls2. No good way to modify spec or plan or respond to

emerging conditions3. No easy way to revise contracts and agreements

Yet all the money is spent

$0.0 m

2 years.5 year 1.5 years1 year

$1.5 m$1.5 m $1.5 m $1.5 m

2 years.5 year 1.5 years1 year

Traditional governance now impedes us

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

Final outcome of the “more risk management” strategy

When tool does not fit the problem anymore

Certainty

If the risk-analytic world is wrong then…

Uncertainty Risk

What might be right?

X XXXStart

An alternative world view

199619752000

1927 19621900

19821963

We've come along way, baby

Complexity is a management Issue

“…the time has come to broadenthe traditional approach to leadership anddecision making and form a new perspectivebased on complexity science.”

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

Simple, complicated, complex & chaotic

Simple Chaotic Complex Complicated

Inspired by David Snowden’s Cynefin framework

Certain Uncertainty

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

• But they also represent different ontologies

• 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

Certain Uncertainty

Simple, complicated, complex & chaotic

Simple business conditions

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

Asphalt Distributor

Certain Uncertainty

Complicated business conditions

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

OilExploration

Certain Uncertainty

Congruent with risk-analytic world view

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

OilExploration

Asphalt Distributor

Certain Uncertainty

Complex business conditions

Green EnergyGreen Energy

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

Certain Uncertainty

Chaotic business conditions

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

Fail Fail

Certain Uncertainty

Where are the business opportunities?

• 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

XCertain Uncertainty

How different are these two world views?

Risk-analytic Complex-adaptive

Complex-adaptive world: uncertainty

• 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”

Certain Uncertainty

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 imperfect computers– 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

Complex-adaptive world view

May be resolved by integrating the complex-adaptive perspective

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

• Iterative progress • Feedback-driven adaption• Empower knowledge

workers & share information

• Facilitate self-organization & collaboration

• People are idea incubators• Deliver early and

frequently

• Identify best solution• Do it right the first time• Centralize information &

management decisions • Apply external constraints• People are labor

production units• Leverage economies of

The risk-analytic business philosophy

3 - Production

1 – Centralized Evaluation

Best Solution

Economies of scale

Do it right the first time

Objective: optimize Style: algorithmic

Complex-adaptive management philosophy

Production

planning

EvaluationSolution prototype

(vision)

Production increment

Early & frequent delivery

Iterative progress

Solution prototype

(vision)

Solution prototype

(vision)

Solution prototype

(vision)

Solution prototype

(vision)

Objective: Innovate Style: Heuristic

How do we reconcile these two worlds?

Risk-analytic Complex-adaptive

• Innovate • Heuristic • Uncertainty

opens things up

• Optimize• Algorithmic• Uncertainty closes

things down

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

Chaotic Simple

Today you must traverse both worlds

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

The more risk management business case

1. Identify a potential opportunity2. Gather facts, make assumptions, run scenarios 3. Stop before knowledge reached 4. And…

?? ?Business case shaky because instability of key variables

Use real options to open up possibilities

Real Options

Real Options – Decision tree

New Assumption

Assumption one

Assumption two

Real Options

Risk-analytic approach: manage variance

Simple

Start with expectationOf ideal solution

Innovative approach with real options

Start with many possibilities

Real Options

Explore new options

Refine ideas

Complex-adaptive governance

BusinessCase

Real Options

If business case emerges proceed; but keep it open

Agile Project Managemen

Apply agile project management

They work together as a system

Small bets help determine direction

Governance for innovative initiatives

Production

planning

Evaluation

Early & frequent delivery

Real Options

Emergent Business

Case Agile Project Managemen

• Heuristic • Adaptive

The innovative enterprise: strategy

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

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

Strategy

The innovative enterprise: budgeting

• Annual planning needs to be modified to adapt to intra-year changes

• Capital budgeted by sectors, according to degree of uncertainty

Capital Budgeting

Agile portfolio management is active portfolio management

• All investments (projects) reviewed quarterly (new and funded)

• Investments are “uncertainty” adjusted

• Persistent teams are leveraged to retain collaboration power and tacit knowledge integration

• Capital deployment is based on portfolio—not project—optimization

Agile Portfolio Management

Strategy

The Innovative enterprise

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

Active PortfolioManagement

Real Options Capital

Budgeting

Agile Project Management

Business Case

Working towards an innovative business culture

Governance designed for innovation

Facilitates rather than impedes progress

Questions?

Thank you

business uncertainty agile india

risk analytic world

riskanalytic world viewworld

riskanalytic business

sameconclusion copyright

algorithmic copyright

irrational copyright

oncomplexity copyright

external constraints

Business

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