In conversation: Managing in extreme uncertainty

Here is an excerpt from the transcript of a podcast in which Sean Brown, Patrick Finn, Mihir Mysore, and Ophelia Usher participate. It was featured in the McKinsey Quarterly, published by McKinsey & Company. To read the complete article, check out others, learn more about the firm, and sign up for email alerts, please click here.

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The pandemic tested organizations’ ability to find the right balance between overreacting and underreacting. Capturing lessons from this crisis will help leaders navigate uncertainty in the future.

In a time of crisis, especially one as deep and unique as the COVID-19 pandemic, uncertainty is extreme and information changes daily. Most organizations realized that they lack the tools to manage effectively in such conditions. In this episode of the Inside the Strategy Room podcast, three McKinsey experts who are helping guide clients through the current crisis share the insights from their recent article, “When nothing is normal: Managing in extreme uncertainty.”
Patrick Finn is a leader in McKinsey’s Healthcare Systems and Services Practice, serving management teams on topics ranging from corporate and business-unit strategy to risk management and operations. Mihir Mysore is one of McKinsey’s most experienced leaders on crisis response, helping large organizations manage operational risk, stabilize crisis situations, and build resilience. They are joined by Ophelia Usher, an expert on resilience, crisis preparedness, and crisis response and recovery. This is an edited transcript of the discussion. You can listen to the podcast episode on Apple Podcasts, Spotify, or Google Podcasts.
* * *Sean Brown: Patrick, you may be closest to the front lines given your work with healthcare organizations. How is this crisis different from others that you helped clients navigate?Patrick Finn: We have long helped clients manage contained crisis events, but last year put us all in the unique position of navigating a complex set of uncertainties across the global economy. It was like being in the middle of a hurricane, with waves of all sizes and shapes across a number of issues coming from all directions, and that uncertainty remains today. In one recent week, US projections showed rising COVID-19 case volumes and the following week they were declining. Then there is the uncertainty around what the new normal will be. Crises like this tend to reshape entire economies.

The pandemic has been unique as well in that there is a large degree of daily change over a long period of time. That is very different from a typical corporate crisis where an event may have some knock-on effects but the uncertainty is largely contained to a short period. On the other extreme are crises of long duration but low daily magnitude of change, which you can see in how climate change is playing out. The COVID-19 pandemic has entailed a high degree of change over a long period. Management teams see their assumptions change weekly and even daily, and most management systems do not deal well with that level of uncertainty.Brown: Are there early indicators that can alert business leaders to start preparing for a crisis.

Finn: Some crises have early warnings, some don’t. If you think of COVID-19, some people were watching their supply chains, particularly in China, and had some warning and that early preparation helped them. In many cases, you have to be able to move to a crisis-management footing within hours or days.

Brown: Mihir, what kind of challenges or pitfalls do business leaders need to be conscious of when they confront a crisis and need to rapidly respond?

Mihir Mysore: I remember a few years ago talking with the leader of a global manufacturer with deep engineering expertise. The company’s distinctiveness was founded on the quality of their technical expertise and they were facing a very large and visible product failure in one of their largest markets. They had a choice between issuing a recall or fixing the product on-site. The economic analysis suggested that under a wide range of scenarios, having a recall would be the wiser path, but the leadership rejected that outright. They said, “We are one of the premier engineering organizations on the planet. We are not going to admit defeat and issue a recall.”

To me, that was a classic example of optimism bias, the unwillingness to imagine worst-case scenarios, which tends to be a powerful force in many organizations. Another challenge is informational instability. In late January and early February, people were saying that COVID-19 is not that severe. Part of the information problem is that many crises have a technical heart, whether you are talking about oil wells in the middle of the ocean or malfunctioning products or viruses. The problem is only diagnosed over time and that creates significant uncertainty even as more information flows in.

Finn: Both the human brain and our management systems have a difficult time dealing with information instability. People in publicly traded companies are accustomed to managing quarterly earnings to the penny, yet last spring and throughout the year there was uncertainty on a number of dimensions. What is the virus prevalence rate in the community? When will case volumes change?

Mysore: What accompanies information instability is that the solutions to the crisis may have to be invented, not only implemented. You have to go all the way to the basic tenets of the problem you are trying to solve. Many companies are not set up to do that. Executives have a powerful instinct to act based on pattern recognition and their understanding of stakeholders and markets. In a crisis, your stakeholders, including people you may have known for a long time, start behaving differently. Employees might choose to leak information externally rather than voicing their concerns internally first. Executives may engage in turf wars, and boards may seek to take control. The pattern recognition that executives have may no longer be valid, which can lead them to choose the wrong answer. It can be helpful to create a decision-making body that, whenever it feels like you are landing on an answer, asks, “What assumptions lie behind this being the right answer? And what would it take for this to be exactly the wrong answer?”

Finn: Our normal style of operating tends to lock in assumptions. If you are the leader of a business unit, you commit to a plan during budget season and then spend the year doing everything possible to achieve that outcome. In extreme uncertainty, that may be exactly the wrong thing to do, and it is challenging for executives to admit that their direction of travel is wrong because the underlying information has changed. Creating the space within the management team to revisit assumptions, celebrate changing direction, and admit that a conclusion was wrong is critical when you are in extremely uncertain situations.

Creating the space within the management team to revisit assumptions, celebrate changing direction, and admit that a conclusion was wrong is critical when you are in extremely uncertain situations.

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Here is a direct link to the complete article.

Patrick Finn is a senior partner in McKinsey’s Detroit office, Mihir Mysore is a partner in the Houston office, and Ophelia Usher is an expert based in the Stamford, Connecticut, office. Sean Brown, global director of communications for the Strategy & Corporate Finance Practice, is based in Boston.

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