Real commerce drives society, politics, the economy, and our future. To bait a hook, real commerce, is about making sense of the way the world really works.
So how can real business people make sense of the way the world really works? Since the financial crises post-2007, economics and finance have taken some serious blows as tools for understanding. Some practitioners are taking these blows seriously and the disciplines will undoubtedly recover. However, we feel that business people need to reflect much more.
‘Wicked problems’ is a phrase popularised in the 1970s to describe messy, circular, and aggressive problems, such as trying to run a business. According to Laurence J Peter of The Peter Principle fame, “some problems are so complex that you have to be highly intelligent and well informed just to be undecided about them.” Real commerce is full of wicked problems in a technicoloured world.
In our book, ‘The Price of Fish: A New Approach To Wicked Economics And Better Decisions‘, we explore four streams of thinking for business: choice, economics, systems, and evolution. We believe that all four of these streams need to be included and integrated in order to understand the price of fish — in order to make sense of the way the world really works. We believe that real commerce is not only about exchange; it is about the community of exchange.
One big problem with communities that exchange anything, from ideas to products and services, is the use of different language. Business people live in clouds of probabilities. How much might we sell? When will that project really finish? Can we count on that supplier delivering on time?
And they often have frictions with finance. The clouds of business probabilities clash with finance professionals whose underlying paradigm is single, historic numbers, not future odds. Together, business people and finance professionals clash with regulators who frequently have little interest in numbers and proportionality, rather more interest in whether a set of rules has been subverted or broken. It’s clear that significantly different viewpoints create opportunities for conflict.
One approach towards a common language we’ve found useful is to write down and share the ranges for various ‘judgement calls’ in business – revenue recognition, tax liabilities, goodwill and intangibles, asset valuations, share-based payments, and management and performance fees. There are numerous ways of representing ranges, many somewhat complex, such as error bars on a chart, candlestick diagrams amongst traders, time-based fan charts for economists, and box and whisper diagrams for scientists.
One of the simplest ways of representing ranges is simply to state the Bottom value, the Expected value, and the Top value, with a judgement on the likelihood percentage that the value is in that range – BET%. As a simple example, a value for freehold land might be expressed as, B: £1m, E: £2m, T: £4m, with a 98 per cent confidence the value is in that range.
In several businesses we’ve worked with, just using BET% in sales forecasts helps the finance function work much more smoothly with sales and marketing. Sales and marketing can express their clouds of probabilities openly, and finance can take BET% estimates away and analyse them to create future sales pipeline reports. Management get improved estimates and control. Everyone gets closer together by using the same language.
Real commerce and real business are full of different sounds, smells, flavours, and colours. By using ranges rather than single numbers we recognise more of the colour in our business world and can work better together. And by using BET%’s perhaps we can come a little closer to making sense of how the world really works.
Michael Mainelli is Emeritus Professor of Commerce at Gresham College (founded 1597), Executive Chairman of Z/Yen Group, and Principal Advisor to Long Finance. His latest book, ‘The Price of Fish: A New Approach to Wicked Economics and Better Decisions’, written with Ian Harris, won the 2012 Independent Publisher Book Awards Finance, Investment & Economics Gold Prize.