Take the creep out of creeping – how do you manage assumptions in business decisions?

At Kenwell, we have a number of clients who could be called Portfolio Entrepreneurs. They make their career out of running one or more businesses at a time. They pursue these experiences not only to achieve their money goals but to learn and develop their talents and abilities.

Every one of our business clients seeks to provide a customer experience that is consistent, dependable and reliable. These qualities are staples to produce a great experience and secure repeat business.

One reliable way to achieve this outcome is to ensure that your business has robust and detailed processes. Document the steps that are taken and the decisions that need to be made along the journey from an enquiry to a sale. From one perspective, a business can be viewed as a series of processes that are designed to satisfy a customer’s needs.

Processes themselves are constructed, like all decisions, on assumptions. But how do you manage assumptions in business decisions?

Assumptions are necessary. An assumption is a conclusion about an input that we either accept as obvious, relatively unchanging, or not easy to measure.

The dangerous part about assumptions is that they can be invisible. By their very nature, we forget them.


Changing Facts, Changing Assumptions

But what happens when we get assumptions wrong? Or your conclusions change?

When looking at a person’s character, we often admire those who are constant and reliable. But let’s not get character mixed up with conclusions. John Maynard Keynes famously said:

“When the facts change, I change my mind.”

The truth in business is, you can ask yourself the same question six months apart and get a different answer. Yet both answers can be correct. Every time the facts change, we need to change our assumptions or reap the consequences.

The wrong assumption, in changing circumstances, can be devastating for a business. That is because the consequences can be either material on the size or can change very quickly – either way it can leave your business high and dry.

Assumptions can also change in their nature. Assumptions that were not material suddenly can be material.

Look at all the non-material assumptions that were made pre-pandemic, that suddenly are material.

Let’s use international air travel as an example. The material assumptions almost everyone made on a daily basis were that flights would be available, there would be a competitive market between different airlines and weather would allow travel. Pre-pandemic, these were the assumptions that really mattered.

Non-material assumptions were that borders would be open, and governments would permit travel. I mean, really? When was the last time a major Western government closed their borders to travellers? Sure, you might need to apply for a visa, but unless you were headed for North Korea or had a large criminal record, you could probably get where you wanted to go.

Suddenly, with the pandemic, the non-material assumptions become VERY material. If your business depended on regular air travel – as you were the traveller or the travellers were your customers, then you were in trouble.


Assumptions can change over time as new data appears

One of my favourite authors is Kurt Vonnegut. I was re-reading his masterpiece Slaughterhouse Five where he stated (in 1969) that the bombing of Dresden in World War II killed over 135,000 people, based on research by David Irving. The same David Irving that was later discredited as a Holocaust denier.

It was later uncovered that a better estimate of this tragedy was that 25,000 (I am not going to use the word ‘only’ for something of this magnitude) died.

Without taking away from the seriousness of the event, from a simple numerical perspective this is a big factual error.

An irony that Kurt may have appreciated – his figure in a work of fiction based on inaccurate research has become better known simply because of the popularity of his work and the lack of a retraction in any later editions. He assumed that Irving’s research was accurate, yet, over time, without reviewing that assumption, dear Kurt was quite wrong.

So, what has this all got to do with business?

A lot. While Slaughterhouse Five will remain in print, despite the changing data, your business can quickly be adversely affected if you make the wrong assumptions or rely on bad data. I talk more about this here in Business Decision Making for Entrepreneurs.

The solution is to regularly identify, challenge and review the assumptions you have made.


How do you manage Assumptions in Business?

In business, if you have a problem, make it a procedure, then you won’t have a problem anymore. Depending on the size of your business, you can take a few different approaches.

Many larger companies will adopt a Risk Management Matrix to identify and then track the assumptions – the risks – that are inherent in their business. This process has the advantage of not only identifying the risks, but working out how material they are, and then what to do about them.

Here’s a screenshot of an example we have done, based on some of the companies we have worked with. You can download your own free copy of the Risk Management Matrix here.