Think You Know It All — Don’t Forget All Those Unknown Unknowns!

It has become popular to manage operations with data. New tools to collect and analyze data are continually appearing. But things can still go very wrong with data. Dashboards and analytics apps rely on multiple assumptions, and if external factors change, models don’t work anymore. COVID-19 responses in many countries have been good examples of this. When you don’t know all the elements, individual numbers can be misleading. You can never manage only by the numbers you have; you must understand the environment and be ready to look for changes outside the numbers.

Some years back, US Defense Secretary Donald Rumsfeld made a famous statement about known unknowns and unknown unknowns. Many people laughed at that statement, but it is quite an excellent way to describe reality, not only in war and foreign politics but also in business environments. Many companies focus on things they know, but they are not prepared to handle external factors they are unaware of.

Many countries specified data-based recommendations and rules during the current pandemic, such as tier systems to close shops, services, and restaurants and varied travel restrictions. They are based on the number of cases per 100,000 inhabitants, people in hospitals, and the virus’s R-value (reproduction rate). But most governments have been forced to change their rules and thresholds many times. It has given reason for citizens and opposition parties to criticize their actions. The reality is that it is challenging and not very intelligent to manage a response using only a set of numbers when many factors remain unknown. In this type of scenario, it makes sense to change rules and metrics as we learn more about the situation.

Many companies focus on optimizing their operations based on numbers they follow and measure. This is precisely why a disruption in an industry causes trouble for incumbent companies, who may only focus on numbers in domains they know and recognize. Disruption often changes factors that they don’t monitor or are unknown to them.

The most famous examples of this kind of disruption involved mainframe computer companies when personal computers came out; for Nokia, when Apple introduced the iPhone, and for print publishers when online content became mainstream. Those companies focused on optimizing their operations, products, and metrics in the existing business environment. For example, Nokia was optimizing the production costs of phones, model ranges for different customer segments, and their software features. The iPhone looked too expensive based on their metrics, not suitable for many customer segments, and had too few features for users. Many years later, hindsight tells a very different story.

Known unknowns and unknown unknowns are relevant categories for businesses to analyze in more detail. Known unknowns are factors they know about but cannot get details or data on. These include competitor’s future products, economic growth, and the future availability of components.

Unknown unknowns include factors that we aren’t even aware of but are likely to impact us. The pandemic, for example, came as a surprise, and we had no idea what impact it would have on our lives and businesses. There are many factors we don’t know about or can’t even imagine, but they still might have a big impact on our lives.

We can also think of one more category, unknown knowns. This refers to things that are known but whose impacts are unknown. For example, being aware of available data but never thinking it will be relevant, like a company being aware of climate change data but not recognizing it as a factor in their business.

However, if we only focus on the ‘known knowns’, we can still be surprised when something changes and still not understand the real reasons behind it. Many businesses and people focus only on the ‘known knowns’ and try to understand and explain everything based on that. However, they often miss those three other areas discussed above; external factors surprise them, and they may draw inaccurate conclusions if they don’t understand that things outside their focus have an impact on what they’re doing.

Can we do something to improve our handling of unknown areas? Maybe the most important thing is to keep your eyes open for new developments and outside factors, instead of assuming you know and understand everything. You can probably improve your use of data and metrics in at least three categories of actions:

1. Don’t focus only on data that explains your current business. Instead, try to have a vision of and develop insight into how the future could look, even if it changes your business fundamentally.
2. Don’t think your data and models are perfect. They might be useful for measuring and optimizing your current activities, but there are other factors too, and if external factors change, your existing model might stop working.
3. Prepare for unexpected events by imagining potential scenarios. You can’t know all things that might happen, but you can create strategies to act fast when things don’t go as you expect.

The COVID-19 pandemic and its impact on governments, businesses, and individuals has taught us how companies can and need to be better prepared for unexpected events. Some of them can be big significant global events, others can be smaller ones, like why certain sales go down and why people are no longer interested in a particular product.

Maybe the most important things to remember are: 1) you cannot know it all; 2) your models are not perfect; and 3) when something unexpected happens, don’t think you can explain or handle it by only using old models. As the famously coined Darwin quote goes, “the species that survives is the one that is able best to adapt and adjust to the changing environment in which it finds itself.”

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The article first appeared on Disruptive.Asia.