The cost of confidence.

Rick Hauser, President Truth Consulting, info@truthconsulting.com
 

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Summary: Most decisions in business and in life are uncertain. Typically, more important decisions demand a higher confidence level because there is simply more at stake. However, companies must be able to accept certain levels of uncertainly since there is a cost involved in the additional collection and analysis that creates higher levels of confidence. Rick Hauser discusses how companies can determine the 'good enough' point and use their CI resources effectively to attain it.


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There are many decisions in business and in life that are uncertain. Typically more important decisions should demand a higher confidence level because there is simply more at stake. However, there is a cost in time and money to gaining higher levels of confidence because additional intelligence collection and analysis must be conducted. A good competitive intelligence professional or service can generate the needed confidence in the least amount of time, effort, or dollars expended, and instinctively know when a ‘good enough’ confidence level has been achieved to make a given decision.

The 'good enough' point

In an ideal world, identifying the ‘good enough’ point is a function of logic and intuition (intuition being a function of inductive reasoning), and this point typically results in the correct answer. In reality, the ‘good enough’ point inside companies is determined by corporate politics, culture, and habits, which are sometimes difficult for a BI/CI professional to overcome. In 'inertia prone' organizations, the logic and intuition of the competitive analyst is thrown out the window, even when the analyst has demonstrated a consistent winning record.
 
Given an identical decision in the same industry, different companies will require different confidence levels.  One company may think that a 60% confidence level is sufficient while another requires 70%, 80%, 90% or more. Which of these companies gains the most competitive advantage? Typically the company that gets it right and acts on it at lower confidence levels.

All else being equal, if 70% confidence is just enough to make a correct decision, the company that makes a decision at this point gains cost and time advantages over one that demands a 95% level. CI department money, time, and effort is wasted when overkill confidence levels are required.  The company that demands a 100 % confidence level before they take action does not need an intelligence function. Their executives just need to read the daily newspaper. If management does not take action on indications and warnings, there is no need for a company to develop predictive capabilities.
 
Of course, this type of company may have cost-savings from not investing in good competitive intelligence capabilities, but unless they are in a very stable industry, with minimal competition in the future, this isn’t a very good choice.
 

Using CI resources effectively

Companies normally have specific intelligence requirements that need to be prioritized and answered. They also need to know ‘what they don’t know that they need to know.’ A good CI analyst can identify the right anomalies or facts from their extensive information sources, both electronic and human. Good analysts are master integrators and synthesizers, and they are careful about selecting the appropriate information to integrate into a competitive picture of the future. First-hand and anecdotal observations, coupled with analytical instincts and intuition, help form a clearer picture.
 
To go beyond knowledge to achieve ‘wisdom’ an organization needs to act on predictive intelligence at the optimum confidence level that generates preemptive course corrections which feed back into a company’s strategy.  One aspect of wisdom is utilizing intelligence resources efficiently and effectively. If 95% certainty is demanded when 60% certainty is sufficient, the correct business actions are unnecessarily delayed, and time and money is wasted. If intelligence overkill is avoided and the minimum confidence-level threshold is reached, return on investment is maximized.
 
One hundred percent confidence level companies have typically had an overwhelming market share for years, or they have top management that may only see decisions in black and white (digital mode) rather than shades of gray (analog mode). 100% companies also typically have hierarchical organizational structures, and entrenched bureaucracies where forward movement of any kind is stifled and inertia reigns.
 
The executives may be very political, which is one reason they are distanced from reality. Or they may not want to be blamed for taking an action if they are nearing retirement age. To “play it safe” they will use any technique to abdicate decision-making. They don’t want anyone communicating reality because it is a threat to their existing power structure. In this environment, people who lobby for change or communicate competitive truths are summarily executed.
 
When implementing business strategies, there are typically first mover advantages. Nevertheless, in some industries or situations a company may find it advantageous to be a laggard at times, to see how an adversary responds to events, and how things develop (to capitalize on any 'mistakes') before taking action. However, in general, when a company always adopts a wait and see attitude they typically have a harder time building market share in a market that has already started to be dominated by others, and they become more predictable. Predictability generates vulnerability, and playing 'catch-up' costs many more marketing dollars. If a company is weak in marketing, these kinds of behaviors are even more damading. Acting on accurate foreknowledge in a timely manner, integrated with a strategy that generates good barriers to entry, generates a competitive advantage that is hard for other companies to overcome..
 

The right confidence level

Different decisions demand different confidence levels to confidently and proactively move forward. The percent confidence level demanded should be directly proportional to the importance of the decision, and indirectly proportional to the speed that is required to make the decision.  When percent confidence required is correctly correlated with the aforementioned factors, a company's recources are optimized.

Analysts need to know 'up-front' what confidence level they will need to achieve in a given time-frame, what will be sufficient for management to act. This means having a good up-front dialog with management to determine the decision's importance, required 'proof factors,' etc.  The actual 'percentage confidence' of a finished assessment is a judgment call, based on facts/logic (including an assessment of the source's reliability) and fuzzy factors, and 'anomalies that are also correlating with the facts.  Communicating how one arrives at a given confidence level is imperative. 

Which companies are the winners in their marketplace? The ones that aren’t afraid to listen to, and act upon, refined intelligence when an optimum 'good enough' confidence level is achieved for a given decision, before it becomes a fact.  The good analyst instinctively knows which tidbits to select and dig deeper on, and where to quickly collect the nuggets they need to reach the desired confidence level in the most time and dollar efficient manner. When this happens, good strategies and defenses can be formed from early indications and warning, instead of experiencing a corporate Pearl Harbor that is caused by management demanding a too-high confidence level, prior to proactive measure being taken
 

Background:

Rick Hauser is President of Truth Consulting Inc., business intelligence and strategy consulting firm and the Chicago SCIP chapter chair.  Prior to Truth Consulting, he was Manager of Global Strategic Marketing and Business Intelligence at Motorola. Prior to Motorola, Rick ran Agent Knowledgebase Associates Inc., a company performing high-end text retrieval consulting, competitive intelligence, and advertising agency services.  He has been a member of SCIP since 1992, and has over seventeen years of experience in the intelligence field. Rick also composes music with synthesizer keyboards and plays jazz trumpet in Chicago-area Blues clubs. Rick’s hobbies include biking, hiking, camping swimming, eating good cheese and bratwursts, and taking care of his beagle puppy (Skippy, aka SCIP PI), and a 55 gallon fish tank full of strange looking fish.
 

Copyright 2002 Society of Competitive Intelligence Professionals

SCIP.online, volume 1 number 12, July 24, 2002.