This week I will feature a series on risk in compliance where I will be joined by Ben Locwin, Director of Global R&D at BioGen and an operational strategist in pharma and healthcare, to explore risk forecast, risk assessment and risk monitoring for the compliance profession.
But before we begin, last week saw the death of several actors from film and television and I will honor each of them as the week progresses. Today, I begin with the English actor John Hurt who died last week at age 77. One of the unlikeliest movie stars, he came to fame as Quentin Crisp in The Naked Civil Servant. He may be most remembered for his role as John Merrick in the movie adaptation of The Elephant Man. However, my favorite John Hurt role was as the wildly irreverent Bill Irvine in Heaven’s Gate. In an odd twist these two films are tied together as the Heaven’s Gate production was so far behind schedule and Hurt spent so long waiting around for something to do, he went off and made The Elephant Man in the interim, returning to finish his scenes on Heaven’s Gate.
I recently had the opportunity to visit with Ben Locwin, who has extensive experience within senior leadership teams in clinical and commercial scale pharmaceutical manufacturing and Research and Development (R&D). He speaks and writes extensively on many areas related to healthcare issues and specifically has written about the forecasting, assessment and monitoring of risk in the life sciences industry. This exploration began when I read a piece by Locwin in Contract Pharma’s Expert’s Opinion column, entitled “Pharma Life After Brexit”, where he posited that “forecasting has once again taken a hit for being less than accurate.” And this was before the US Presidential election. So today I begin this exploration of risk in compliance by considering the role of forecasting.
At its heart, every business tries to plan for its future. It is a critical aspect of any management of any organization, non-profits, privately owned for profits and, of course, publicly traded companies. It is important that management be able to set out what it opines will happen in the next three, six, twelve and twenty-four months. Locwin said this “is really something that the businesses try to wrap their heads around in such a way that they can shunt resources where they think is appropriate in order to meet these future demands. Forecasting really at its heart is an educated guess and really as much as it becomes a reliable model more so and less so a guess, is based on the quality of the input data.” It is a process through which you are attempting to “prognosticate what the future will bring to you”. Unfortunately, forecast models are only as good as the data which are put into them or the GIGO (Garbage In, Garbage Out) Principal.
Locwin said that forecasting “should be broadly defined as a technique to estimate future aspects of any sort of business or operation.” He divided forecasting methods into two major categories; qualitative and quantitative. While both methods use past or historical data, in the quantitative method, “you would use time series analysis, for example, to see how certain trends appear in the data in the past.” Contrasting the qualitative method, which Locwin said is “a little more subjective, and you’re using less collective data which has been, let’s say, put into some sort of time series plot. It could be finances fluctuating over time or maybe it’s various incidences. I guess in the context of your work specifically, various instances of corruption that have been occurring. How would you document these over time? When were there spikes? Those spikes, related to what sorts of things?”
Under either approach whether you are using the qualitative or quantitative method for forecasting, Locwin noted “what you’re really trying to do is say that, “We expect that the trends that we’ve seen will be somewhat predictive of future behavior.” Otherwise, if you don’t consider that past behavior is in some ways indicative of future performance, you would not engage in any forecasting whatsoever.”
Forecasting typically will raise risks (and opportunities) which you might consider going forward. However, it does not assess or monitor these risks. Those are handled by risk assessments and risk monitoring. Locwin cautioned that simply because something is forecast does not mean will occur. He cited to Nobel winning physicist Niels Bohr for the following, “Prediction is difficult, especially about the future.” Locwin went on further to explain, “Whenever you’re trying to say how something will go, really the best you can do is try to look at past data and try to say what’s going to happen with that. In my prior probabilities, my prior knowledge tells me this, and therefore what will that mean for the final outcome?”
This last point led Locwin to write in his Brexit piece about the need for other tools. He wrote, “Similarly, people in the industry will tend to overly worry, or not be concerned enough, with the changes coming to the pharmaceutical landscape as a result of Brexit. But what we can all do as an industry in order to insulate ourselves from overly adverse outcomes is to be more agile and adaptable in how we respond to the changes that are coming. Standing immutable behind hardline policies can make the necessary operational changes difficult to absorb and lead to more variance and extended costs in the long run. This concept is known as anti-fragility, where the idea isn’t to become more impervious to change and market forces, but to be more adaptable to these changes. The ancient philosopher Heraclitus of Ephesus said, “Change is the only constant.” This is true in pharma as well. Closing our eyes, covering our ears and hoping the changes will pass us over are not viable strategies. However, expecting the change and being adaptable and resilient to its effects are strategies for success. Just ask Charles Darwin.”
So while today’s lesson on risk in compliance begins with forecasting you should consider the research by Guy Mayraz, who ran a series of experiments at Oxford University’s Experimental Social Science center. The first lesson is the bias towards predicting what people hope will happen. If you want your business to increase, you have to believe your transaction/investment/deal will always make m oney. After all, have you have ever seen a business plan that was designed to lose money?
The second lesson derived from Phillip Tetler’s the Good Judgment Project and almost sounds like someone channeled their inner Howard Sklar and his maxim of “Water is Wet”. It is that “self-critical, open-minded forecasters do a better job than narrow-minded overconfident ones.” He goes on to further note that dwelling on our own fallibility is not something people do very well; whether it involves hanging out with our friends or on cable news. The result is that “Confident, eye-catching forecasts are the snack food of analysis”. Unfortunately, this is even more true in the business world.
Finally, forecasters must always remember that more than one outcome is possible. A strong possibility may be a possibility but it is not a certainty. One way to overcome this bias is to develop alternative scenarios. Richard Lummis, host of the podcast 12 O’Clock High-a podcast on business leadership has called this the “devil’s advocate” role at the business planning table and that every scenario-planner should create at least two contradictory alternatives to their rosier, positive scenario. Super forecaster Tetlock has noted that “Superforecasting Requires “Counterfactualizing””.
The ultimate point is that in any forecast there must be preparedness for contra-events. Elizabeth Holmes, founder of Theranos, famously said that if you have a Plan B as a back-up, you have already lost. I find that to be worse than not helpful in any setting, particularly the business setting. No matter what your forecasting or scenario planning model shows, prepare for other results. For any Board of Directors overseeing a compliance program or managing any type of risk, it all begins by asking questions.
Tomorrow we will continue this exploration of the continuum of risk in compliance by considering risk assessments.
Forecasting is the initial tool to use in the continuum of risk management techniques.Click to tweet
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© Thomas R. Fox, 2017