Category: Leading/Managing

Options and the Risk of Missing Out

In graduate school, I conducted research on managing risk in the forest industry. My working assumption was and remains that vigorous management of organizations requires the deliberate identification, assessment, and management of risks. In forestry, these include, for example, those in operations (e.g., equipment breakdowns), distributions (e.g., transportation delays), and human resources (e.g., hiring and retaining personnel). 

My research, however, focused on financial risks, which comprise those risks that a firm is not typically in the business of bearing. For a forestry firm or timberland investor, these may include the impacts of exchange rates, energy prices, and interest rates. Within this area, I studied the potential for timberland investors and forest owners to use financial contracts, operational hedges, and “options.” 

Options Have Value

Options? Yes, some view forest management as a series of real options. For capital budgeting and strategic planning, real option theory addresses limitations with net present value (NPV), which does not account for flexibility, volatility, and contingency with potential investments, whether in forestry or any other industry.

Flexibility. Volatility. Contingency. In the context of forestry, flexibility refers to the manager’s ability to defer, abandon, expand or reduce a silviculture investment or harvest schedule due to new information or investment opportunities. Volatility references changing market conditions – particularly changing timber prices – or new technologies that affect our view of potential investments. Contingency refers to situations where future investments depend on investments made today. Presumably, these options provide value and should be accounted for, or at least considered. 

Options, Flexibility, and the Risk of Missing Out

In practice, not all investors have the same levels of flexibility, exposure to volatility, or concerns about contingency. In many cases, traditional analytic approaches like NPV, which views decisions as fixed, is sufficient for making decisions. This makes real options analysis a whiteboard discussion for comparing and discussing a dynamic view of future choices for strategic planning, and less about risk mitigation.

For a firm focused on downside risk, risk management and hedging programs transform undesirable risks into acceptable and manageable forms by increasing certainty and decreasing volatility. The management of risk helps firms achieve their optimal risk profile by balancing the costs of hedging with the protection offered. 

While some view risk management defensively, others may incorporate risk management into a process of appraising investment opportunities, as risk features both potential upsides and downsides. The view of managing risk to protect the firm from catastrophes or losses ignores the risk of missing out on profitable or strategic opportunities with upside potential.  

In short, the risk of missing or underinvesting in promising projects represents a risk unto itself. Risk management can play a role in protecting and increasing the bundle of cash flows that make up the corporation, and the associated opportunities for future investments that require these cash flows. Rather than husbanding resources exclusively for precautionary safety nets or insurance-like reserves, risk management can include the allocation of capital among competing investment alternatives.

Conclusion

At a certain level, executives and investors manage risk instinctively. In forestry, this occurs through the normal calculus of assessing the risks and rewards associated with silvicultural treatments and timber sales. Executive professionals identify, assess, and manage the risk and uncertainty encountered by their operational activities in business environments subject to financial risks emanating from outside of their sectors, and in doing so preserve the ability, the option, to make opportunistic investments.

Framing Disruptions

Simple approaches can focus the mind. When thinking through the means and mechanisms by which disruptions could affect my business, my community, or the economy, I often ask two simple questions rooted in economic fundamentals[1]:

  • Big or small? In other words, how impactful, whether positive or negative, would we expect this disruption or change to be on local infrastructure, needed supplies, or aggregate demand? 
  • Long or short? What is the likely duration, whether positive or negative, of this disruption or change on supplies or demand in the community, market, or industry?

As an example from my work in the forest industry, consider the impacts of natural disasters on timber markets. In August 2005, Hurricane Katrina, a Category 5 event, struck the Gulf States, brutally affecting homes, forests, and infrastructure. As a disruption, how would we provide context to its impact on timberland owners? Consider these two questions to organize our thinking:

  • Big or small? Big event locally; devastating to some forests and damaging to many. 
  • Long or short? Short-term increase in supplies; negative impact on timberland value.

Using Frameworks to Make Decisions

Simple frameworks add value to the extent that they prove useful. This analytic exercise supports decision analysis. Using experience, knowledge, and available data, it screens and ranks the relative importance of potential disruptions on lives, businesses, and markets. We can then probe assumptions and, while there may be no “right” answer, develop operable approaches to establish priorities.

With family or colleagues or neighbors, the resulting discussions can clarify how much control we have. Some disruptions, like a zombie apocalypse, get thrust upon us from the outside, while others, like new internet providers or car technologies, offer choices. And a big impact or opportunity for an individual, family, or single forest owner can be small for the overall market and community. 

With respect to applying this approach with executives and other decision-makers, I think in terms of “tactics” (operations) versus “strategies” (capital allocation). Disruptions that get handled on the ground via operations tend to qualify as shorter or smaller in this framework, while anything that requires a board meeting or act of Congress reflects longer-term disruptions affecting investments and strategic advantage. Given this approach, how do we develop strategies and assess exposures across multiple disruptions for these situations locally?

Time as a strategic idea remains malleable. Discussions about potential disruptions reinforce the arbitrary nature of the “short” and “long” term. The space and time required for impacts to realize themselves can extend beyond today, tomorrow, or next year. 

Conclusion

Regardless, we succeed by prioritizing in the name of preparation. My working assumption is that a person or firm that is ready for everything is ready for nothing. We avoid personal and organizational paralysis through taking positions on what matters, on where we have control, on eliminating the gnats and knots to go after the disruptions that threaten survival or offer outsized opportunities. 

In March 2020, I posted “Thinking Through Risk and Uncertainty: Contemplating the Coronavirus” and am returning to these themes as ideas and questions related to risk, disruption, and stability have become more frequent in my conversations. For those interested in a further discussion of strategic thinking (and how the coronavirus affects the forest industry), click here to read a five-page white paper.


[1] These questions are a variation on the frequency-severity framework used for insurance and risk management applications. In forestry, I have found it useful to think through duration – how long something lasts – rather than, or in addition to, the gap in time between occurrences. 

Developing and Hiring Managers: Values Come First

A new manager, whether promoted from within or hired from abroad, must learn to communicate and model the values and expectations of the organization. For the internal hire, that person has the advantage of in-house experience and a demonstrated potential to manage. (That’s why you promoted them.) 

For the hired manager, it’s unreasonable to plug them in and expect that they will seamlessly adhere, model, and reinforce the “core values” of your firm. Sometimes, yes, you simply need to get that newly hired manager onboard and rolling because everyone is working overtime, the wheels are falling off the bus, and the barbarians are at the gate. Regardless, close support and explicit nurturing improve the chances for success for the manager and the team.  

In an earlier post – Train or Hire? Both – I wrote about the importance of continually looking to upgrade the skills of a team through developing younger talent for future roles within the organization. In this post, I focus on a few priorities and approaches for helping newly hired and promoted managers succeed.

Values Come First

Your new manager must, first and foremost, share the values of the team and then also have the aptitude and interest in building the skills needed for the role. In my experience with human beings, it simply does not work the other way around. Values come first.

When someone becomes a manager or executive, the allocation and use of his or her time changes. Making this transition is hard; I struggle with it to this day. You spend more time managing and coaching and less time doing and analyzing.  In football, the head coach cannot run out onto the field and catch the ball, but in a business a manager can easily inject themselves into the process, so this is one of the hardest things to avoid and manage and develop. Know when to step in and when to step back, and this becomes easier when the person aligns with the values of the team.

Use Milestones and Timelines

The successful onboarding and (initial) performance of the manager is on you or me or whoever hired this person. Provide structure to this by working off of a clearly communicated plan with systematic support. Put your mentoring on a timeline, and let it work for both of you, as a source of reinforcement, and as a path for the new manager to reach back for feedback and ideas.  

In the early days, you guide and reinforce and advise; in the latter days, the manager updates and communicates with you. In addition to technical and business-specific skills, areas you may explicitly cover during the onboarding phase may include values and business priorities, business metrics and scorecards, and approaches to coaching and mentoring. Throughout, your best path is to role model the behaviors expected from the other managers, and then follow-up to ask questions and confirm understanding.

This “short” term investment explicitly reduces risk and increases the probability of a strong hiring ROI and well-functioning team. 

Conclusion

It is tempting, as the experienced veteran or senior executive or company founder, to show everyone how their jobs should be done and to push them to keep up with you. However, at some point, you must decide whether you want to “serve” the team, or glorify yourself as the leader and alpha dog. Remember, it takes a team to build a rocket ship and get to the moon. Finding ways for the team and for everyone to get better and succeed has a compounding effect. Ten individuals each getting 10% better outperforms you getting 20% better. Prioritize values, mentor and onboard with a plan, and role model what you want to develop and help others become productive managers and colleagues. 

Keep It Simple: Another Lesson from the MIT Baseball Team

My Dad taught me and my brother, “There is no premium for complexity.”  He emphasized the value of keeping it simple, focusing on the most important things you can control, and getting it done. You don’t get paid more to sound like a robot or technocrat, or to add extra milestones or phases. A good plan is simple, and an effective leader or teacher communicates the plan or idea clearly and relentlessly.

Dad’s message still resonates for me in my work at Forisk. Nobody cares about the sophistication of our forest industry models or the length of our resumes if investments lose money or operations underperform.  Simple, well-executed strategies and plans “keep the cow out of the ditch” and on the road towards a pre-defined goal.

Still, most of us can recall times when a plan, approach, or strategy proved overly complex. 

Infield Equations

As a student at MIT, I played baseball for one of the most effective and important mentors in my life, Coach Fran O’Brien. My senior year, our Varsity Baseball Team won its first ever championship, set a school record for wins, and led the NCAA in fielding percentage. I wrote a book about the team called Beaverball: A Winning Season with the MIT Baseball Teamand dedicated it to Coach. However, at times, even the best of managers can overengineer a message.

Each season during spring training, Coach O’Brien reviewed our various coverages for defending bunts. These defensive schemes – which Coach named x, x-squared, y, y-squared, z, and z-squared – were devised for players comfortable with equation-filled chalkboards and electronic circuits. 

Each play designated who covered first and second base, and who would field the bunt laid down by the batter.  Sometimes the first baseman charged with the second baseman covering first; sometimes the second baseman charged and sometimes the third baseman. We reviewed these schemes each year and, frankly, I couldn’t remember them as a player and still can’t recount them accurately today. 

During my time at MIT, I can only think of one instance where Coach called on these bunt defenses in a game. It occurred during my sophomore year, and I was playing first base. I remember holding a runner on first and looking across the infield to see Coach O’Brien barking from the dugout, “Z-squared! Z-squared!” 

I looked to the other players on the infield to see if anyone else knew what to do. We all simply looked at each other, except for Peter Hinteregger at shortstop, who silently clicked into action. I shrugged and moved to cover the bunt as I normally would. Only the bunt didn’t happen – the batter squared around but did not execute – and neither did our bunt coverage. Coach didn’t look at us after the play; he turned away and looked at the ground. That’s the last and only time I remember him calling one of those plays.

Concluding Thought

Sometimes, we prefer a simple restaurant menu, a basic oil change, and clear parking signage. I like recipes that start with “microwave on HIGH for 2 minutes” and avoid buying clothes with “special” washing instructions. Most of humanity prefers that we keep our message, guidance, and plans short and simple. This is true at work, at home, and on the field. 

Four Qualities of Effective Coaches

A friend of mine, a former professional baseball player, recently asked, “who is the best coach you ever had?” I played multiple sports growing up and baseball in college, and this question brought back a double-header of memories, from Coach White teaching us to shoot a basketball to Coach Williams on reading the outside linebacker to Coach Farber on when to throw a “high hard one” on the mound. I also remember guidance from trusted coaches on ways to prepare, practice, lead by example, and communicate.

Later, I applied these lessons when coaching middle school basketball and little league baseball, instructing at baseball camps, and teaching workshops on “how to throw a spiral.” Currently, one of my daughters plays tennis, and this has led to dozens of conversations with tennis professionals and parents about player improvement and working with coaches.

While my experiences, studies, and watching Ted Lasso do not comprise a coaching PhD or absolute answer, I do observe qualities that consistently correspond with effective coaching, which I define as helping individuals and teams improve and achieve pre-defined goals.

Organized

Effective coaches make and implement plans. This includes daily practice plans, weekly schedules, and well-communicated priorities and objectives for the season.  All my most effective coaches, as with my best teachers and managers, were organized. All of them. 

Disorganization frustrates players and parents. It wastes time and sends the message, “well, you aren’t important enough.” With an organized coach, every day has a focus; every drill has a purpose. After any lesson or practice, you or your child should be able to answer the question, “Hey, what did you work on today?”

Specific

Improvement, like greatness, is specific, not general or generic. Effective coaches improve the performance of athletes through sharing knowledge with concise instructions. This is about communication and the ability to demonstrate and teach specific skills and techniques. 

Expansive explanations and non-stop talking dilute, distract, and irritate. The longer a coach talks and the more suggestions they hurl during a single drill, the less they seem to know about effective teaching and how players learn and improve. As Tim Gallwey writes, in his classic The Inner Game of Tennis, effective coaching professionals understand that “…showing [is] better than telling, too much instruction worse than none…”

Effective coaches communicate and reinforce lessons with specific feedback and positively worded instructions. For example, instead of staying “stop swinging at pitches over your head” they will say “swing at pitches in the strike zone.” The brain processes these instructions, which seek a similar result, differently. This means effective coaches are also…

Self-aware

A self-aware coach understands the extent of their knowledge and the effect of their style on the individual athlete. Confident, self-aware coaches listen and observe and know what they don’t know. The best ones know when to suggest a different coach, league, or resource to help the athlete get to the “next level.”  

Both individual and team sports are cooperative endeavors involving coaches, parents, and players. Coaches don’t own their athletes and parents don’t control the lineup. The self-aware coach pre-empts conflict through organization and specific communications, not through politics or happy talk. [And the best coaches want self-awareness on the part of their parents and players, as well.]

Accountable

Effective coaches consistently hold their athletes and themselves to account. As part of being organized and specific, effective coaches clearly communicate expectations for behavior and performance at practice and when competing on the court or in the field. Then they reliably reinforce and role model these same behaviors. 

A less effective coach badmouths other coaches or talks about players and parents behind their backs. A less effective coach fails to enforce standards and expectations. If a coach has alternating “good days” and “bad days” to the extent where the team or athlete is left to wonder “what will practice be like today?” then performance, improvement, and trust suffer. 

Conclusion

While Mr. Miyagi’s “wax on, wax off” approach may resonate for some, my best coaches tended to explain up front why something was important and how it would help us improve and win. An organized and accountable coach supports athletes with specific, on-point training to improve and prepare physically, mentally, emotionally, and strategically. This, in turn, builds trust, respect, and lifelong relationships