Risk VS Uncertainty: Why Health Care Leaders Must Understand the Difference

Splitting hairs? Not really. Read Hanging Tough in the April 20 print issue of The New Yorker (while not really business press it is the press commenting on business). This piece by James Surowiecki examines the nuances of leadership decision making in both risky and uncertain times. While covering some of the same territory as R&D; Spending Holds Steady in Slump, April 6 Wall Street Journal – and the subject of this blog’s April 8 commentary Health Care Leaders Should Preserve R&D; Spending in Down Times – Surowiecki focuses squarely on characterizing the strategic investment dilemma currently faced by senior health care leaders.

Navigate by Analysis? Or by Strategy?

Paraphrasing the late economist Frank Knight, guru of risk and profit analysis, Surowiecki reminds us that: “Risk describes a situation where you have a sense of the range and likelihood of possible outcomes. Uncertainty describes a situation where it’s not even clear what might happen, let alone how likely the possible outcomes are.” So in a sense, navigating risk is less risky than navigating uncertainty. .

We’ll come back to navigation below. But suffice it to say that it’s important for health care leaders to distinguish between the two. Risk is amenable to quantitative modeling – statistical, probabilistic, and sensitivity analyses can inform and guide risk taking. In the absence of a crystal ball, strategy is the best (?only) tool to deal with uncertainty. This economy is uncertain. The decision to approach the current environment defensively or offensively is pure strategy – and therefore the job lies squarely in leadership’s domain.

Offense or Defense?

In this column, Surowiecki does a great job of chronicling the results of companies that invested (played offense) and did not invest (played defense) in advertising, product development, growth, etc. during uncertain times. Results are portrayed in the context of the outcome of strategic investment decisions made during recession as measured by performance in the post-recovery years. He draws a similar conclusion to the WSJ article referenced above – there are plenty of examples of companies that gained market advantage by investing when their competitors did not.

Similarly, it’s important for health care leaders to understand the ramifications of making (or deferring) strategic investments in training, site or scope expansion, capital investment, practice acquisition, etc. It’s easy to appreciate the impact of these decisions on current budgets – which certainly must be managed. Much more difficult is to estimate and manage the effect of these decisions on organizational performance for years to come. It’s essential to pause over this strategic conundrum rather than reflexively play defense.

Navigational Hazards

To summarize the ramifications of how this all shakes out, Surowiecki references Profs. Peter R. Dickson (Florida International University) and Joseph Giglierano (San Jose State University) who framed the Schylla and Charybdis faced by organizations in times of uncertainty. “…companies have to worry about two kinds of failure: “sinking the boat” (wrecking the company by making a bad bet) or “missing the boat” (letting a great opportunity pass).”

Which will you choose?