Understanding extreme uncertainty

Due to the severity of this crisis, many organizations are in a struggle for their existence. An existential crisis puts at stake the organization’s survival in recognizable form. Readers can probably call to mind numerous individual companies that faced such crises in the recent past. The crises may have been touched off by single catastrophic incidents or by series of failures; the sources are familiar—cyber breaches, financial malfeasance, improper business practices, safety failures, and natural or human-caused disasters. Effective action saved many; others spiraled downward.

Existential crises subject organizations to both extreme uncertainty and severe material consequences; they are often new and unfamiliar and can unfold quickly. In business terms, the present crisis more closely resembles economic crises of the past. In the financial crisis of 2008–09, for example, many organizations were simultaneously affected. Qualitatively, however, the present crisis is far more severe.

The COVID-19 pandemic and the resulting economic recession have affected most large organizations around the world. Managers continue to scramble to address rapidly developing changes in the public-health environment, public policy, and customer behavior. And then there is the economic uncertainty. The severity and speed of the crisis is reflected in the International Monetary Fund’s (IMF) projections for US GDP growth. After an estimated GDP expansion of 2.2 percent in 2019 (year-on-year), the US economy, in the IMF’s view, was expected to grow at a rate of 2.1 percent in 2020 (forecast of October 2019). With the onset of the pandemic, the IMF quickly shifted its estimate into contraction, of –5.9 percent in April 2020, revised to –8.0 percent in June. The latest estimate (October 2020) is less severe at –4.3 percent, but this would still be the worst result in many decades. The forecasting institution foresees the world economy shrinking at a rate of –4.4 percent in 2020, after having grown 2.8 percent in 2019 (estimate). 

Uncertainty levels from recent global shocks do not approach those of the present COVID-19-triggered crisis. The IMF’s GDP contraction forecast for 2020 is more than double the estimated contraction that took place in 2009, the worst year of the earlier global financial crisis. As measured by the Economic Policy Uncertainty Index, a metric developed jointly by researchers at several US business schools, uncertainty on a daily basis has been elevated for nearly 200 days’ running. By contrast, commensurate uncertainty was experienced during the 2008–09 financial crisis a few times for a maximum of 27 consecutive days. The COVID-19 outbreak already accounts for seven of the ten highest-ever daily readings. ² Crises such as Hurricane Katrina or the Fukushima Daiichi nuclear disaster cause high levels of uncertainty for individual communities or particular industries. Since the uncertainty is confined by industry or geography, the magnitude decreases steadily with time. In the present crisis, however, elevated uncertainty is globally pervasive, and events trigger compounding effects. The following exhibit conveys a range of crises and their corresponding levels of uncertainty.

Why existing operating models fail

Extreme uncertainty on a global scale is rare; however, existential crises at the organizational or community level are more frequent and thus provide lessons concerning which operating models succeed and fail during periods of uncertainty. Many organizations, including publicly traded companies, operate on an annual-planning cycle. Managers collectively decide on strategies, budgets, and operating plans once a year and then manage operations in accordance with those goals and cost limits. Between annual-planning cycles, amendments are few and usually minor. The assumptions shape how managers engage with each other: from the content of status reports to interdepartmental information sharing to the timing and structure of management meetings. Recently, some organizations have adopted more agile techniques to make planning more flexible and responsive to outcomes from pilots or trials. However, the approach is rarely deployed in the C-suite to manage the whole organization.

The COVID-19 crisis has undermined most of the assumptions of the traditional planning cycle. Existing management operating models are no longer supporting managers effectively in addressing the challenges this crisis presents. The revenue assumptions managers relied on for 2020, often worked out to two decimal points, are not relevant in an economy suddenly expected to suffer a historic contraction. Meticulously prepared status reports are now outdated before they reach senior managers. Managers seeking more up-to-date information discover that existing processes are too rigid for a timely response.

Managers thus find themselves working in ways unsuited to a highly uncertain environment. They know what they need: flexibility, the capability to act collectively, quickly, and across the whole organization as challenges arise. They need also to be able to work in this way over an extended period. Some organizations have therefore begun to experiment with new operating models that allow managers to work together. Some of the changes have been successful and others have failed.