The Planning Fallacy

If you are one of the business crowd, and especially at the senior level, you spend a monumental amount of your time involved in "planning" exercises: business planning, sales planning, production planning, project planning. And, as you very well know, it is time not well spent.

Why? Because planning does not work - it is just a huge fallacy based on a whole complex of human psychological biases and misplaced assumptions! The good news is that we can indeed plan but we should always keep in mind the limited applicability of planning and adjust accordingly.

Determinism and the faith in planning

Whether we realize it or not, the thinking patterns of the Western civilization as we know them today, have been established during Renaissance by the likes of Isaac Newton, René Descartes and Pierre-Simon Laplace. These titanic figures of philosophy and science were the first to resurrect the Aristotelian image of a deterministic universe, firmly governed by a "cause-and-effect" discipline.

So far reaching was the causality revelation, that it has not only dominated science for more than 300 years but it has also extended its dominance over everyday thinking and practice.

One of the most significant implications of a deterministic way of thinking, is that the world is treated as a fully predictable game, where an exact knowledge of the initial conditions and the dynamics of the game at hand, would allow us to predict the future of the system and thus plan at any level of detail and for any time horizon. This assumption, which at first sounds familiar and common sense, is plain wrong - this is what we call the planning fallacy.

Quanta, chaos and other daemons

Determinism was first established by physicists and it was also first demolished by physicists. First strike came in 1927 by Werner Heisenberg through his "uncertainty principle". In essence, the uncertainty principle states that at the micro-level, the information required to locate a specific particle can never be fully obtained.

This in turn means that, even if the dynamics of a microscopic system are fully understood, our inherent inability to establish the initial conditions will never allows us to truly predict its future. This principle has been the cornerstone of one of the most revolutionary scientific theories, commonly known as quantum mechanics.

The second, and even heavier hit for determinism, came from the study of dynamical systems and particularly a very interesting class of dynamical systems called chaotic. Chaotic systems are non-linear systems where a small variation in the initial conditions leads to an exponentially diverging result over time.

The first glimpse of such systems came in 1880 from Henry Poincare and, especially in the second half of the 20th century, chaotic systems came into focus in every practical domain of science - meteorology, astronomy, neuroscience, socials sciences, economics, chemistry and the list goes on and on.

The key takeaway from chaos theory is that, even if we know the dynamics of a system, and even if we know the initial conditions with excellent accuracy, we can only forecast their behavior for very limited times, if at all. An excellent example is the weather whose forecast is so notoriously inaccurate, especially for larger time scales.

Implications for project and business planning

The above analysis only gives a background to the fact that every single planning practitioner understands: Planning, for the most part, does not work. We have all spent months of our lives trying to build the perfect project plan or the perfect business plan model, only to realize, unfortunately ex-post, that our well-engineered model failed to depict the future. Usually, it fails big time.

How come? Well, both project and business planning are exercises that try to model and forecast real-world systems that are highly non-linear and, to a large extent, inherently unpredictable. On the other hand, there are certain activities, such as production planning, that are much more linear and their planning works in a much better way.

Especially in project management, planning has been proven so difficult and fruitless, that we try to plan in a rolling or just-in-time manner (wave rolling planning / progressive elaboration). Even bolder approaches have also emerged such as extreme project management, a discipline that typically acknowledges the shortcomings of project planning and focuses on achieving value rather than trying to run a prescribed project recipe.

Tips for practitioners

In Simulen, through our everyday work with senior managers, we have distilled some good practices both for project and for business planning.

#1 Identify the moving parts

Whenever we are facing a business or project planning exercise, the first thing to do is identify the parts of the system to be modeled. For example, when we are preparing the business plan for a new venture, we would need to model sales revenue, production cost, sales cost, fixed / administrative cost.

For each of these components, we would need to understand the level of detail that our model can dive into - typically, the revenue of a new business is really hard to forecast and the sales forecasts should be treated as "sales targets" / "sales aspirations". On the other hand, the cost side is, for most cases, much easier and much more linear to model.

#2 Create scenarios for the high uncertainty parts

For the moving parts of a model that are inherently less predictable, it makes sense to prepare scenarios instead of forecasts. So, when we enter a new market with a new product, it is virtually impossible to get any reasonable estimation of the sales - what we present is our best guess or, even more, the projection of our wishful thinking. It is thus much more useful to understand the different scenarios (best case, worst case) and to have a clear view of the critical numbers such as break-even points.

#3 Communicate numbers for what they are

When a startup reaches out for funding, they tend to show a superhuman confidence concerning their revenue forecasts. In our view, a clear communication strategy is much more beneficial - pinpointing the high risk / high uncertainty parts of a plan along with the alternatives for the different scenarios only shows a mature management team.

#4 Perform cost-benefit analysis for the planning exercise

It is not uncommon, especially in larger organizations, to see a policy for exhaustive business cases and for ultra-detailed implementation plans. Furthermore, the exhaustiveness of these planning artifacts is fully enforced even for initiatives of low risk / investment. It is thus very important for senior executives, to weigh carefully the effort involved in planning / forecasting.

#5 Understand where planning / disciplined execution makes sense (and where it does not)

When we are facing a problem that has been tackled before and that the solution can be clearly described, then rigorous planning and disciplined execution might be appropriate. However, when we are facing new problems, or disruptive solutions to long standing problems, then traditional wisdom might not make sense.

For these cases, the manager should consider adding to his arsenal new tools such as the Lean Startup methodology when it comes to business planning or the Extreme Project management methodology when it comes to project management. These methodologies, along with the various agile IT development methodologies that are their natural development counterparties, have become the de facto standard in the bold new world of technology startups.

Although the traditional corporate world shouldn't run and adopt them, we should definitely be aware of their merits.

You can learn more about Simulen and how we help our clients through our insights and services.