I was reading JP’s post from a week or two ago Agile contracts versus covenants and was reminded of the challenges of dealing with uncertainty. He wrote:
A short while ago I was musing over a classic problem to do with Agile [by which he means agile software development]: the traditional human desire for predictability, how that often influences the creation of flawed plans, how it is that the flawed plans then get funded, and the consequent militant standoff between the Plan and reality.
In my world this manifests itself in portfolio company strategy and business planning sessions. I have previously posted some thoughts on the importance of not letting uncertainty get in the way of good decision making.
I stand by that, but JP points to another sort of danger – that uncertainty is dealt with by denial, a plan is made and adopted without recognition that things will most likely pan out differently, and then the subsequent divergence between plan and reality is denied.
Trust and open-ness are the keys here. If there is enough trust amongst a team, or around the board room table, then uncertainty needn’t be an issue. Part of the reason we have the “desire for predictability” that JP notes is because we need to understand how other people will judge us – at a basic level we all want to know what we need to do to be loved, not to mention to get a good bonus.
This plays out every year in the annual budgeting cycle. In most start-ups there is huge uncertainty about next year’s revenues – trying to minimise the uncertainty (or even denying it exists) leads you to take the risk out and lower your ambition levels. That isn’t good.
By contrast, embracing the uncertainty, agreeing a stretch target with the recognition that hitting the plan is a great result and a near miss is still a good result gives you the best chance of making the most of your opportunity.
Doing this requires a lot of trust though. Non-execs have to trust management to be grow costs more slowly than plan if revenues are coming in below target, and management have to trust non-execs to reward them for a good performance, even if it is off plan. I like to work it so everyone is comfortable going for the big plan because the comp plan is structured so that rewards are still good if the end result is 80% of target.
In his post JP talks about contracts and covenants:
A contract tells you how to punish the other person if something goes wrong. In a covenant, at the slightest sign of trouble, you look for “repair”.
I guess what I am describing here is a covenant between management and the board. A mutual understanding of how things will be handled if they are slightly off plan. When it comes to compensation I am a big believer in writing things down as well – doing the hard work of thinking in advance what will constitute a good year, in terms of strategic development as well as the finances is very beneficial. It forces real clarity on strategy and makes year end bonus discussions much easier.