“Then, he was dying in the middle of a dream, he was in Nazareth and he heard his father say to him, shrugging his shoulders […] I cannot ask all the questions and you can’t give me all the answers.” These words with which “The Gospel According to Jesus Christ” by José Saramago concludes give us a clear idea of the role that uncertainty plays in all moments of our life and, as part of it, in economic activity.
Thus, economic decisions are always surrounded by uncertainty, as they are based on expectations and these coexist with many different risks that must be identified, evaluated, assigned and mitigated as far as possible, for which the consultancy has methodological procedures.
How to mitigate uncertainty and associated risks?
Assuming this environment of uncertainty, in most of the processes and decisions of the company and of the governments, a type of task must be present, both in the preliminary phases and in the development of the actions to be carried out: planning. This involves an exhaustive work of information analysis, diagnosis and evaluation so that decision-making -investment, divestment, purchase and sale of companies, productive changes or infrastructure development- is supported by the best criteria.
It has been shown that countries in which a greater dedication of resources to studies prior to the subsequent development of the different projects is carried out, their final cost is significantly lower, due to having less need for modifications, than that which occurs in countries with less dedication of resources in the preliminary stages. For example, in the US, the costs of previous studies in infrastructure projects usually represent around 15% of the budget, and the average of their subsequent deviations does not usually exceed 10%; On the contrary, in Spain, these preliminary costs average only 5% but the deviations frequently exceed 30%. Also, the mergers and acquisitions processes for companies tend to have a higher percentage of success in those cases in which there is a more exhaustive planning work.
Planning is itself a two-way or feedback process: initial planning must organize a series of factors and tasks with general purposes that, in turn, will provide the necessary information to deepen planning and compliance with the specific objectives of later phases. Among the works of the planning stage are market studies, feasibility studies of investment projects, valuation reports, etc.
Nonetheless, we must be aware that planning does not eliminate risk or adverse outcomes, but it is a powerful resource to mitigate them. Therefore, the cost that may entail any stage of preliminary studies and planning must be considered as an investment to mitigate future costs and, therefore, to improve the profitability of the corresponding operation.
Indeed, and following the words of the beginning, we will not be able to have an answer to all the questions, we will not be able to eliminate all the uncertainty, but with proper planning, business risks can be reduced and, in this way, the total costs of a decision can be reduced economical.
