Guidelines for managing uncertainty/risk when establishing preferences (including setting goals, objectives, budgets, etc)
Introduction to the guidelines
These guidelines are to be used when thinking about how to establish preferences (in the widest sense). The guidelines concern only managing uncertainty/risk so they should be considered alongside any other guidelines or suggestions based on other factors.
The guidelines are designed to apply to any situation where establishing preferences is done at a level where an agreed approach is considered worthwhile. They are worded very carefully to be as widely applicable as possible and that means they are not always as short as they would be if you were just writing for your own organization. Consequently, you may need to read each guideline more than once, carefully, and read any related examples, explanations, and even other documents referenced from this page. A lot of knowledge about how to manage risk has been condensed onto this page.
Usually it will be easy to think of ways to follow the guidelines but sometimes, if your situation is demanding, it may require quite a lot of thought and experimentation. What should not be difficult is justifying the guidelines. As far as possible, these are guidelines that most people think are obvious good sense.
The scope of establishing preferences
Although the words ‘goal’, ‘budget’, ‘objective’, ‘target’, and ‘limit’ all have a variety of interpretations in management, the common factor is that they attempt to express the preferences of stakeholders that are relevant to decision-making.
Although we usually focus on the idea of expressing preferences explicitly at an early stage in thinking, a very common approach in practice is to do nothing of the kind, and for a very good reason. Instead we suggest courses of action to stakeholders until we find one that gets good support from enough stakeholders to go ahead. This avoids the effort needed to elicit potentially complex preferences from multiple stakeholders who themselves don't really know what would be good for them.
The approach to establishing preferences should meet the following practice guidelines:
Those participating in establishing preferences adequately represent, or have adequate knowledge of, all the legitimate interests of all stakeholders.
Note: In addition to promoting fairness (which is not directly an element of risk management), this guideline encourages gathering more information about preferences.
Explicit expressions of preferences, if used, collectively cover outcomes that are unwanted and unplanned (e.g. fraud, accidental injury, flood) as well as outcomes that are wanted and planned for (e.g. higher sales, more skilled employees, lower premises costs).
Note: This guideline addresses one of the major expectations that most people have of risk management, which is that it helps reduce the impact of unwanted, unpredictable events. It guards against the common mistake of ignoring these and focusing only on what is desired when formulating statements of preferences.
EXAMPLE: A company’s objectives for revenue are broken into sales value, value of sales returns, value of lost revenue due to incomplete billing, and value of debts not paid. While the sales value is far greater than the other numbers, the profit on those sales is not so different from the lost revenue due to incomplete billing and the value of unpaid debts, which are pure lost profit. The figures for the losses that are not wanted or planned towards provide rich information about the true performance of the sales and billing processes and show clear opportunities to improve profits.
Explicit expressions of preferences, if used, cover sufficiently wide ranges of potential outcomes to guide decision-making where outcomes are uncertain.
Note: This guideline addresses another of the major expectations that most people have of risk management, which is that it should help us deal with uncertainty. It is important to be able to evaluate alternative possible outcomes from courses of action that might be considered. Since the consequences of courses of action can be multiple and uncertain, any statement of preferences should be able to cope with this complexity or be supplemented by a procedure that compensates (e.g. by eliciting more preferences than originally stated, as needed).
EXAMPLE: Sophisticated techniques have been used in aircraft design to translate the customers’ ultimate commercial value from an aircraft into specific objectives for engineers designing the aircraft and components of it. These are often more sophisticated than targets for a good reason. Imagine two designs for a fan stator vane need to be compared. One weighs 3kg for a set and is expected to last 20,000 hours. The other weighs 1kg for a set and expected to last 19,990 hours. If the targets are a weight of not more than 3kg and a life of 20,000 hours then the first design is to be preferred because it meets both targets. However, there is very little difference between the two designs on life and a huge difference in weight in favour of the design that does not quite meet one of the targets. It is very likely that these targets would lead to the wrong choice.
Further reading: Keeney, R.L. (1996). Value Focused Thinking. Harvard University Press.
Explicit expressions of preferences, if used, are expressed flexibly where appropriate (e.g. as with flexible budgeting, where direct cost budgets are calculated from actual production rather than set on anticipated production).
Note: Flexibility will usually mean that more possibilities can be covered with less work.
Plans are made to revise explicit expressions of preferences, if used, sufficiently frequently, given the level of uncertainty experienced, and to revise them if events or new thinking render them obsolete to a significant degree.
Note: Well-controlled change is usually the best approach to changing objectives, budgets, targets, and so on during the year. Continuing with obsolete objectives, etc (perhaps because these were incorporated within a pay deal) is likely to lead to poor decisions (particularly if a pay deal encourages them to strive for those obsolete objectives). A frequent human bias is to be overconfident in predictions and this leads to a tendency to underestimate the value of revising statements of preferences.
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