There is a growing body of economic research that explains and documents what can be termed “policy uncertainty costs” to the economy. Steven J. Davis, William H. Abbot Distinguished Service Professor of International Business and Economics at the University of Chicago Booth School of Business and Senior Fellow at the Hoover Institution, is a leading researcher in this area.
Recently, Davis posted an article about the cost of policy uncertainty from the current “trade war.” In short, because businesses don’t know what tariffs might be in the near future — importing/exporting, to/from China and other countries — major decisions, including major investments, are delayed, hedged and so forth. Davis wrote about this before as it related to the unpredictable nature of the regulatory onslaught during the Obama administration.
Importantly, what we are talking about here is uncertainty, not risk (as I explained in this newsletter). Uncertainty is fundamentally unpredictable; risk is not. With uncertainty, businesses can’t weigh the odds and make a calculated decision. This is why real estate developers continue to build where hurricanes strike (risk), but are reluctant to do anything if there is no clear and predictable permitting policy (uncertainty).
So, just like the economy at large, can “policy” uncertainty within your company be a drag on your business? Absolutely! And, like government policy uncertainty, business policy uncertainty is man-made — usually by senior management and by the CEO or owner(s) in particular. These are unforced, avoidable errors resulting in avoidable cost and dysfunction.
How then do businesses create their own policy uncertainty? Many ways. Here are a few of my favorites…
Strategy & Policy Uncertainty
In this circumstance, there is no decided, clearly communicated, well understood, longer term objective, strategy and plan(s) for the business. As a result, when situations change a bit (and they always do) and decisions need to be made about what to do, lower level management doesn’t know how to respond.
Unfortunately, the world doesn’t stop, waiting for a big decision from on high. Nobody knows what to do, and so they tend to analyze, analyze some more, and then present, hoping a decision has been made one way or the other.
For example, when I was in the car rental business, we always lost lots of money in New York City. Our costs were high, our prices were low, and our volume was far below that of our competitors. Interestingly, on paper, some locations in Manhattan appeared to be very profitable. But that was a mirage because the cars were only rented for two days over the weekend and then they sat during the week or were rented at a low rate at the airports, incurring high costs to move the cars back and forth between there and Manhattan.
Corporate Sales said we needed to be in New York City in a big way for corporate business. Our owner, Ford Motor, said we needed to quit losing money. But there was no clear financial or business objective for the company. Were we going to match Hertz and Avis for corporate business without their lower cost structure, or were we going to go after profitable niches instead? As a result, we went through costly waves of opening and closing locations in New York City, all with expensive analyses, meetings and so forth. All the while, the large losses piled on.
When I was at State Street Bank, a similar uncertainty resulted in cost and confusion. While State Street is mostly what is known as a custody bank, at the time, the Bank had a very profitable commercial lending business. That business head thought he had convinced the CEO to let him buy into what is known as syndicated loans, back in the late 90’s. After all, the CEO had said, “Great idea, I want to be involved in the hiring process for the person who will run the group.” Unfortunately, no one was ever quite good enough — or cheap enough — in the eyes of the CEO.
What was really happening was that the CEO didn’t like to say no. Instead, he would hamstring implementation. Yes, history soon showed that the late ‘90s would have been the absolute worst time to enter the syndicated loan market. So while the CEO had made the right policy decision by withholding approval, part of the bank spent time and money pursuing a growth strategy that would never happen.
New leadership brings this type of uncertainty as well. Usually with CEO changes, but also at lower levels. For example, let’s face it, there is lots of uncertainty for GE management at the moment, with the first outside CEO in its 126 year history. You can bet that there are a fair number of managers treading water, dressing up their resumes, and waiting for a sign of direction. The longer it goes, the longer GE’s recent horrible performance is likely to continue.
Constant “reorgs” to fix problems creates the same effect, as do large acquisitions. Everyone knows change is coming — but they don’t know when or what it will be. That leads to lots of doing nothing and playing it safe.
Process & Procedure Uncertainty
When companies have well defined processes and procedures, employees know precisely what to do and how. Things happen consistently and with no surprises. I have written about this before (4/2017; 12/2015). But when the outcome of what should be the routine is uncertain, people resist making decisions, bump too much “upstairs,” and so forth.
Entrepreneurs are legendary for creating this sort of uncertainty. Their fear of losing control leads to micromanagement and resistance to putting people in place with real authority.
And by the way, if your employees are impacted by this organizational uncertainty, so are your customers and suppliers.
What To Do
- Have clear objectives, strategies and plans for the business or your part of the business. Then make certain these are communicated and understood by all. That means you must make decisions and stick to them. This eliminates most of the worst kinds of uncertainty.
- Be cognizant of when certain conditions will create uncertainty, no matter what. Then eliminate that uncertainty as fast as possible. If you are making a big acquisition, for example, have a 100-day plan done before the deal closes and communicate that, at least within your own organization. If you’re the seller, minimize uncertainty for at least key employees with stay bonuses or similar packages.
- Listen to the employees. Sometimes you don’t realize you are creating uncertainty. For instance, when I was in the rent a car business, I was at a major location, conducting a regular financial review with the general manager and his staff. Coincidentally, our HR director was there to kick off a training program. I noticed the general manager and his staff were anxious, even though we all knew each other and had a good relationship. We all went to lunch and the HR Director joined us. She had noticed the high anxiety level too, so we asked. It turned out that the last two times the HR director and I were at the same location, we fired lots of people. Uhm.
- Develop clear, well communicated policies and procedures. This is better than having none at all, but be wary of ambiguity, either because they are poorly thought out or, worse, because it gives middle management flexibility to, well, wing it. As Steve Davis notes in his economic research, this is a costly problem for the US economy. Laws are passed; there is the wait for the regulators’ rules to implement the laws; and the rules themselves are often ambiguous. All of this creates more uncertainty and cost.
Unfortunately, uncertainty, by its very nature, is not something that can always be avoided. That said, in business, much of it is self-inflicted and therefore, avoidable. Avoid what you can and minimize the rest.