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Five key lessons for boards from the Carillion collapse

February 14, 2018

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The sudden collapse of a business like Carillion has raised questions about financial reporting controls, auditor vigilance and exactly who should have acted sooner. The government is embarrassed by exposure to public infrastructure projects across several departments, while many smaller sub contractors will never be paid for work they’ve done. The board of Carillion must bear much of the blame so what could they have done to avert this crisis?

  1. Accept collective responsibility – Boards are made up a experienced directors selected on merit to deliver commercial success in the form of profit and shareholder dividend. The executive members operate the business on a day-to-day basis, while the non-executive members offer balance and wider perspective tasked with holding the executive to account on behalf of the shareholders. Together both groups collectively share responsibility for the business model, its strategy and risks. it is not acceptable to blame the Finance Director or auditors alone, the board is a culpable entity.
  2. Separate governance from management – Distinction is often hazy but it is worth quoting from the British Standard for Effective Governance of Organizations (BS 13500): ‘Management is about getting work done, whereas governance is about ensuring that the right purpose is pursued in the right way and that the organisation continuously develops overall.’ A board should know if suppliers are being paid late or that bill payments are being made with credit: a cash-flow problem demands attention, not as an emollient to shareholders, but to address inherent structural problems.
  3. Respond to warning signs – Some are obvious but not all: a rapid turnover of chair or FD is pretty obvious and demands question, but so too does hedge fund activity in shorting your share price. If professional investors are betting on your share price collapsing in the future what information do they have that you don’t? Boards can suffer from optimism bias and ‘groupthink’ and justify ‘inside knowledge’ for why they know better, but these viewpoints can prove to be delusional. Responsible directors ask probing questions even at the risk of making others around the table uncomfortable.
  4. Challenge experts – Just because the Head of Risk says that risk is being managed it doesn’t mean he’s right. Risk is not a concept that all directors understand equally and that is a good thing. Perspective is a valuable tool in risk appreciation, especially as once recognised controls for handling it can be pretty straightforward. The same goes for assertions from the FD, Head of Internal Audit or indeed Head of Sales. Future business is never certain until the cash is in the bank. This is something Enron learnt to its cost. Even Tesco now understands that external auditors can be wrong also.
  5. Prevent the death spiral – This can be quite fast and consists of five stages: it starts with shares being sold in volume forcing the price down and reducing market capitalisation. Lenders get nervous and refuse further loans so the cost of borrowing increases. Ratings agencies downgrade your stock and cash flow stalls, this is the liquidity crisis often known as the Wall. Death can be averted through cash injections but white knights are scarce, the fifth and final stage is administration. Boards need to prevent this death spiral through listening to investors not just their own executive team.

There is an ominous sixth lesson for boards as well: avoid performing so poorly as to attract the attention of a Commons select committee. MPs will ask probing questions you should have had the temerity to ask, a press and wider public will be amazed at your lack of scrutiny. In order to take ‘robust decisions in uncertain times’ collective leadership must be competent and capable.

Written by Garry Honey, founder of Better Boards, CEO, Chiron Reputation Risk and SAMI Associate. The views expressed are those of the author and not necessarily of SAMI Consulting.

If you enjoyed this blog from SAMI Consulting, the home of scenario planning, please sign up for our monthly newsletter at eSAMIsignup@samiconsulting.co.uk and/or browse our website at http://www.samiconsulting.co.uk

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The Future of Work in Cities

February 7, 2018

On a rather blustery and damp day at the end of January, a large group of people gathered at City Hall for the Centre for Cities launch of the 11th edition of Cities Outlook, their annual analysis of economic data for the UK’s 63 largest towns and cities.

IMG_0560© Cathy Dunn

This year’s standing room only event – not sure whether it was it the lunch provided, the view or the topic which encouraged its popularity – took as its focus The Future of Work in Cities and the impact increasing automation may have.

The session was opened by Chief Executive, Andrew Carter, who gave a short summary of the key points in the report, which is a comprehensive overview of UK cities and one of the first to look at them from an intra-national perspective.

With regard to the rise of automation, it is clear that northern cities will be more affected with 1 in 4 jobs likely to be lost rather than the 1 in 7 loss projected in the south. And even between cities across the UK there is a marked variation, this is something that we as a country need to act on now rather than waiting.

Gemma Tetlow, FT Economic Correspondent, looked at the data from a national perspective, saying that overall 60% of the UK population are positive about automation but are, nonetheless, worried that robots will destroy jobs in the coming years. She voiced concerns about whether polices and funding are really available to support the changing environment and also the impact that the Brexit effect has on the ability of organisations to commit to any one particular strategy.

We then heard from Marvin Rees, Mayor of Bristol, who sees cities having an increasingly important role in opening up of resources with place leadership at a local level growing. He sees the ability to harness the collective possibilities of a national and international network of cities as growing in importance in the coming years and indicated that he felt the cost of getting this wrong might turn out to be higher than we may expect.

And finally, Naomi Climer, President of the IET, discussed how the potential for inequality is clearly there but we should remain optimistic overall as the possibility of creating meaningful work does exist. Investment in technology also needs investment in skills and there are good examples of organisations doing just this and enhancing the skills of their workforce. This led on the topic of education and how best to teach schoolchildren about automation, programming and coding and whether it is possible to have a root and branch overall review of the educational curriculum rather than constant (and largely ineffective) tweaks.

We then followed up with a lively question and answer session covering a range of topics from Universal Basic Income to the environmental impact of technology. There was, though, considerable focus on education and training and the need for access to lifelong learning along with the previously mentioned curriculum overhaul. In this year of engineering we should indeed spend time and effort on the requirements for STEM skills and encourage their take up at primary school in order to build a skilled and effective population in years to come.

Written by Cathy Dunn, SAMI Principal.

The views expressed are those of the author and not necessarily of SAMI Consulting.

If you enjoyed this blog from SAMI Consulting, the home of scenario planning, please sign up for our monthly newsletter at eSAMIsignup@samiconsulting.co.uk and/or browse our website at http://www.samiconsulting.co.uk

Reporting risk

January 31, 2018

In this blog, Garry Honey, SAMI Associate and CEO of Chiron Risk, looks at how risk is reported and examines some alternative ways of mapping risk.

Disclosure of risk has always been a challenge for listed companies, this was recognised by the FRC when it introduced ‘materiality’ and ‘proportionality’ in previous iterations of the corporate code. The financial crash of 2008 prompted the code to improve risk reporting so the past 10 years have seen more emphasis on this. A new FRC publication on Risk & Viability reporting, from the Financial Reporting Lab, acknowledges the way risk reporting has evolved of late. Apart from the ‘inherent tension’ between revealing useful information to investors and highlighting weakness for competitors to exploit, is the underlying question of confidence and competence.

In disclosing risk, investors expect to see a strategy in place to handle it together with a management team capable of delivering it. Risk is finally being rehabilitated alongside strategy, something the Strategic Report was designed to encourage. Risk had initially been treated as a compliance or control function, a topic with potential to unsettle investors rather than inspire them. In talking to investors the Financial Reporting Lab has finally confirmed what has been known in the City for years: namely that investors expect companies to take risk so they look for a mature conversation about risks consciously undertaken in order to deliver an attractive return on investment. Risk is an inherent part of the investment conversation; combined with strategy it forms the vision of a profitable future for the company.

The Risk & Viability report, based on consultation with investors, sets out areas in which risk reporting can still improve. The main one is the challenge to convince investors that the management team know their own limitations, being realistic about what can and cannot be achieved. There are only four strategies for tackling risk (avoid, manage, mitigate and transfer) but how many risk reports actually match each principal risk to an appropriate handling strategy? Admittedly much risk reporting in the UK also has to take account of jurisdictions where reporting rules are different, but this comes back to the purpose of risk reporting rather than liability in foreign courts. It should not be left to a regulator to specify the types of risk to be disclosed, a company should decide what disclosures would be beneficial to investors and other key stakeholders.

Communicating risk that is both useful to investors and compliant with regulators should not be impossible. Unfortunately much risk reporting still relies on the Heat map or risk matrix (see fig 1). This categorises risk according to probability and severity which satisfies insurers and CFOs as it relies on financial cost or loss as the key spatial determinant. Presenting top 10 principal risks on a heat map focuses attention on the urgent and important risks, and as such is a valuable tool in board meetings to determine priority tasks. Investors, however, expect more than this as it only gives a snapshot in time: it doesn’t take account of the dynamics of risk and certainly doesn’t indicate what management are going to do to combat it. This model is rather outdated and there is a better model which gives investors a more reassuring picture of response to risk.

GH Blog 30 Jan Fig 1fig 1

This advanced model has found favour among a number of corporations keen to show investors that there is some strategic thinking about risk. In short it moves the conversation away from just identifying risks as a passive statement towards an approach known as active risk management. This is shown in fig 2 which employs two different axes: ease of control and ease of prediction. In this way risks can be shown in a way that makes the response strategy self-evident: mitigate, measure, monitor and manage. The latter category naturally covers risks that are easier to control or predict. The significant difference is between the hard to control but easy to predict and their opposites the hard to predict but easy to control. This distinction helps differentiate between financial and strategic risks, some of which are shown as examples in fig 3.

GB blog 30 Jan Fig 2fig 2                        GH blog 30 Jan Fig 3fig 3

The conversation about risk which follows the mapping thus focuses on increasing control of those risks identified as financial, and increasing prediction among those identified as strategic. In this way more of the risks in the yellow boxes are migrated to the green box as they ultimately become operational and by implication manage-able. This approach allows a company to show that effective risk management is not only about increasing control but also increasing predictive skills through consideration of alterative futures via foresight. Risk as future uncertainty deserves this approach and investors welcome it.

The Risk & Viability report from the FRC also found that investors want to know how companies are preparing to address some of the generic business risks such as Brexit impact. It will not be enough to show that the risk has been identified or that contingency has been made for a Hard Brexit or ‘No deal’ exit from the EU in 10 months time. Investors want to see not only that alternative outcomes have been envisaged but that each alternative scenario is described within the context of a compensatory risk appetite adjusted to the marketplace. The dynamics of risk as a future outcome require new reporting that is not afraid of discussing alternatives. We live in uncertain times.

Written by Garry Honey, CEO, Chiron Reputation Risk and SAMI Associate. The views expressed are those of the author and not necessarily of SAMI Consulting.

If you enjoyed this blog from SAMI Consulting, the home of scenario planning, please sign up for our monthly newsletter at eSAMIsignup@samiconsulting.co.uk and/or browse our website at http://www.samiconsulting.co.uk

Bad Decisions

January 24, 2018

This was the title of an interactive seminar, led by Professor Paul Moxey, around the topic of how to avoid cognitive bias – or at least limit its effect on decisions.

“A cognitive bias refers to a systematic pattern of deviation from norm or rationality in judgment, whereby inferences about other people and situations may be drawn in an illogical fashion. Individuals create their own “subjective social reality” from their perception of the input.” (Wikipedia)

The seminar identified many types of cognitive bias, before focusing on three factors.

First, managers in organisations often are encouraged – by culture or by financial rewards – to develop an optimistic cognitive bias, leading to disaster for the organisation. Examples include Kids Company where “The Chief Executive and Trustees relied on wishful thinking and false optimism and became inured to the precariousness of the charity’s financial situation“ and HBOS where “The FCA Final Notice found that the Corporate Division had a culture of optimism, incentivised revenue focus rather than risk and viewed risk management as a constraint on the business rather than essential to it” . This optimism bias is often found in organisations that encourage groupthink rather than encourage challenge or diversity of thought. The Bay of Pigs invasion of Cuba is a classic example.

Second, there will be many more examples of corporate damage or failure arising from a cognitive bias among senior staff. One example discussed was when they hold the belief that all risks from IT system failure should be dealt with by the CTO and his team whereas of course senior staff also have a responsibility. Many current examples of system failure arise from human error, due to insecure handling of passwords leading to unauthorised access, so that hackers can create rogue transactions and flood systems, taking them down. And loss aversion must be responsible for some of the major cost over-runs on IT and other projects before a halt is called. We worked on an anonymised case to discuss the cognitive biases that could have caused failure of governance.

Third, a source of bad decisions, often aligned to cognitive bias, is the use of small samples to derive or support other experimental results, as described by Daniel Kahnemann and Amos Tversky. Many people are innumerate but even those who have many numerical skills quite often fail to spot when this is happening. It was suggested that expressing results as both a number and a percentage helps, either alone can be misleading.

How to guard against cognitive bias and make better decisions? Our list is as follows:

  • Define the problem you are trying to solve and check whether other perspectives see it differently.
  • Use views of the future to develop a set of possible options
  • Test the options against all the stakeholders, not just the actors
  • Look for counter evidence on the future and current position, what are you not seeing?
  • Make a decision and explain in detail to all stakeholders – be prepared to revise if necessary
  • Use a pre-mortem technique – imagine yourself in five years time and the decision had been a disaster – why could that have been? How can you make it successful?

The list looks long but can be implemented within a week, and most decisions can wait a week!

Written by Gill Ringland, SAMI Fellow Emeritus.

The views expressed are those of the author and not necessarily of SAMI Consulting.

If you enjoyed this blog from SAMI Consulting, the home of scenario planning, please sign up for our monthly newsletter at eSAMIsignup@samiconsulting.co.uk and/or browse our website at http://www.samiconsulting.co.uk

A Conference on Anticipation

January 17, 2018

It was amazing.

Anticipation 2017, a conference on a topic that is not taught at undergraduate level at any university in the UK, held at University College London, with several 100 participants, over three days.

The brief was “a unique, radically interdisciplinary forum for exploring how ideas of the future inform action in the present. It brings together researchers, policy makers, scholars and practitioners to push forward thinking on issues ranging from modelling, temporality and the present to the design, ethics and power of the future”.

Who was there? Computer scientists and physicists, social scientists, town planners and architects, futurists and strategists, educators and risk managers —-

The conference was organised into multiple streams with titles such as Foresight and strategic ignorance, Modes of foresight in informing public policy and decision-making, Education and anticipation, Making futures matter: materialising anticipation, Innovations and their consequences – a very broad spectrum of participants and approaches. I dipped in and out of as many as I could and emerged with a few impressions, some of which are below. The proceedings are to be collected on the web site http://anticipation2017.org/

First, high energy and enthusiasm from speakers and audiences so that many sessions ran over into heated debate as conversations spanning across disciplines rolled out into the hall ways – and a varied demographic in terms of age, ethnicity and global location of “the day job”.

Second, the crucial importance of STEM (science, technology, engineering and mathematics) education in the western economies since WWII, now in developing countries, and the need for reframing STEM education for the post carbon era. STEM education was seen as needing a new language and purpose – to provide skills in thinking about the future – as we face the anthropocene. Once people are exposed to the ideas of accessing different futures, there is then the difficulty of building images of the future such that individuals can relate to them.

Third – to my shame I had not come across the Centre for the Study of the Sciences and the Humanities at the University of Bergen, http://www.uib.no/en/svt. Members of the Centre (from Italy, Canada, Netherlands, and Norway) presented an entire session covering an eclectic range of topics under the heading of “The old is dying and the new cannot be born”, on the future of governance. Contributions covered the ethics of scientific publications, governance issues raised by contention over fishing rights in the Canadian Pacific, how can questions about the sense or otherwise of ongoing expenditure on cancer research be usefully discussed.

One of the outcomes of the conference was “to convene a group who are interested in teaching Anticipation Studies at undergraduate level. If you would be interested in getting involved in such a group – sharing ideas and curricula, developing joint activities, then please email Lucy or Katherine at this email address (anticipation-2017@bristol.ac.uk) with ‘Anticipation UG’ in the subject header so that we can involve you as this develops. Please flag what you might want to get out of and contribute to such a group.”

Written by Gill Ringland, SAMI Fellow Emeritus.

The views expressed are those of the author and not necessarily of SAMI Consulting.

If you enjoyed this blog from SAMI Consulting, the home of scenario planning, please sign up for our monthly newsletter at eSAMIsignup@samiconsulting.co.uk and/or browse our website at http://www.samiconsulting.co.uk

Reputation damage – will they never learn?

January 10, 2018

Listening to David Davis trying to clarify what he had said on TV last month reminded me that lessons about audiences and messaging have perhaps not been learnt. It is over 25 years since Gerald Ratner’s High street jewellery chain was brought down by careless talk, so for younger readers it is worth recalling the basic lessons which David Davis has clearly forgotten.

Ratner was speaking to an audience of financial journalists about his company’s excellent sales figures, it was after lunch when he incautiously attributed his profitability to the fact that his products were ‘crap’. While this went down well with hardened city hacks, it wound up in the tabloids where Ratner’s customers naturally sensed they were being exploited. Within weeks sales plummeted and the rest is history. Ratner had failed to appreciate that sentiments aimed at one audience cannot be prevented from reaching others where interpretation is often more hostile.

Now back to David Davis at his TV interview in December, barely 48 hours after the Brexit deal had been signed in Brussels. Playing to a Sunday lunchtime domestic audience Davis was keen to point out that this agreement signed on Friday was not legally binding and was only a signal of intent. Why would he do this? He was addressing an audience not only of middle- Englanders who watch Sunday lunchtime TV, but also trying to please the Brexit ultras in his own party, many of whom like Michael Gove, had already gone on record to claim the deal could be undone if people didn’t like it.

In Europe the message did not go down well, Dutch and German politicians took the message that the UK was not playing with a straight bat, and inevitably signalled that this was not going to augur well for negotiations about future trade. Davis’s ‘unhelpful’ comments were quoted back to him by Nick Ferrari on LBC at which point Davis tried to claim that he had been misquoted. Davis then took to the Commons to clarify his position realising that in trying to appease Brexit ultras he had threatened the credibility of the UK with Brussels. One might have thought that the government had learnt a lesson from the preceding week: the UK tried to keep Belfast out of the loop preferring to work with Dublin, right up to the point where Belfast found out.

At the time of writing I have been reading an account of Luther and the impact his work had on the Catholic Church in the early sixteenth century. An attempt to reconcile the theological stance of Lutherans with the traditional Catholic Church in 1530 resulted in the Augsberg Confession. This was a statement of agreement which not only provided us with word ‘protestant’, but was ‘the result of many compromises and was purposely inexact in many places’. Historians have commented on the similarities between the early sixteenth and twenty-first centuries, specifically social impacts of both printing press and the Internet, but obfuscation and compromise are also common features.

The challenge in a world of 24 hour rolling news is to recognise that messages intended for one audience will inevitably reach another. The David Davis debacle shows that this lesson has still not been learnt. Sentiments for a domestic audience channelled through national media, will be relayed to an international one, especially on such a sensitive topic as Brexit. Given all the diplomacy exhibited by Davis to date his attempt to appease a domestic audience so soon after an international agreement shows how much the UK capitulated to Brussels. Politics aside, the lessons of Ratner, and Augsberg, must be learnt.

Communicating forward plans to all audiences requires careful thought, drawing on both these historic lessons and views on future strategy, in various scenarios, to guide us towards robust decisions.

Written by Garry Honey, CEO, Chiron Reputation Risk and SAMI Associate. The views expressed are those of the author and not necessarily of SAMI Consulting.

If you enjoyed this blog from SAMI Consulting, the home of scenario planning, please sign up for our monthly newsletter at eSAMIsignup@samiconsulting.co.uk and/or browse our website at http://www.samiconsulting.co.uk

What’s Hot in technology: 2018

January 3, 2018

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Looking forward into 2018 here are the thoughts of David Smith, Chief Executive of Global Futures and Foresight and SAMI Associate. He is always worth listening to on technology futures, so we post this as the first of our 2018 blogs.

  1. Hashgraph

Blockchain will undoubtedly create waves in 2018 and beyond, from the Bitcoin express through to practical uses in smart contracts and across countless industries. This is not to suggest that this new technology will not in time be supplanted itself by competitors offering improved features. Hashgraph, for example, claims to work at 50,000 the speed of blockchain, whilst proving mathematically fairer and using less energy. 2018 will see an explosion in rival technologies underpinning new cryptocurrency and ledger systems.

  1. Shoppable social

The lines between retail, social network and entertainment will blur to an even greater extent in 2018 than we have seen thus far. Amazon has already launched a shoppable social network called Spark whilst Buy+, a Chinese virtual reality shopping experience backed by Alibaba, engaged over 8 million users within a week of launching.’ Social video, and other virtual interfaces, could represent the future of retail since 2019 is expected to see video comprising 85 percent of net traffic and 50 percent of commerce arriving via mobile.

  1. Data becomes toxic

Data competency has already ordained winners and losers and in 2018, it will continue to do so, albeit from new perspectives. Data volume will overwhelm all but the most prepared since average human knowledge is doubling every 13 months – meaning, within a couple of years, the total information volume may double every 11 hours. Allied to volume is a common vulnerability in many data models. Many lack explicit consumer consent – especially via apps, and few have equivalent to ‘key facts’ in financial services. As consumers realise the value inherent in their data, the unspoken legal risk in data models will upend all but the most prepared. What data we hold and how we use it will be the life and death of our companies.

  1. Employees+

Perhaps with an eye towards automation or else simply improving their marketplace standing, 70 percent of employees say they would consider mind and body-boosting treatments if it improved their job prospects. Although futuristic sounding, smart drugs such as modafinil are already reportedly widespread in academia, industry and beyond. HR policies may need revisiting to place guidelines for brainhacking and other routes employees will be seeking to gain an edge.

  1. Self-inflating structures

With housing shortages contributing to acute market misalignments in some advanced economies, and the need for ‘insta-infrastructure,’ following catastrophes around the world, a new built form paradigm is required. Furthermore, companies will increasingly value flexible solutions to their office space issues. 3D printing already provides a platform for addressing these issues. In 2018, more tech-based solutions will appear to compliment it, such as MIT’s self-inflating structures project that works as a ‘…functional tool for things such as distributed assembly processes, transportation of goods, emergency response and architecture.’ Flexibility in the built form could radically redraw the economy; in 2018 we expect proto examples of this change of direction to hit the headlines.

  1. Interaction 4.0

The way we will buy, build and use technology is changing rapidly, which means the teams and ecosystems that build it and run it will need to change too. Designers should be especially cognizant of this. In 2016 mobile net use overtook computer net use, whilst by 2020, ‘…50 percent of all searches could be voice searches, and around 30 percent will involve no screen whatsoever.’ VR, holograms, AR and haptics will all feature; 2018 will see the omnichannel become a lot more crowded.

  1. New consumer industries (from colliding technologies/industries)

Consumers ‘…demand experiences, not just products, and have become active participants at every stage of the value chain.’ In many cases this erodes industry boundaries and creates new markets at the intersections of collision, such as wellcare where health, wellness and beauty collide. There is no one single technology that is singularly driving this Hot trend; rather the realisation that B2B2C markets are reconfiguring into delivering desired consumer outcomes. How to organise for this – in terms of aligning organisation structure to technology provision – will be key.

  1. Photonics

As an intermediate step on the path to quantum computing, photonic computing could provide the ‘…same accuracy as the best conventional chips while slashing the energy consumption by orders of magnitude and offering 100 times the speed. By 2020, larger systems capable of achieving multiple Exaflops are forecast to arrive. That would enable even handheld devices to have AI capabilities built into them without outsourcing the heavy lifting to large servers, something that would otherwise be next to impossible.’ All data could therefore be processed in near real-time, at the edge of networks such as the IoT. IT strategies, consumer behaviour and the architecture within which to operate would all shift as a result, some in unpredictable ways.

  1. Personalised analytics

With McKinsey estimated around a third of the current CEO remit is already outsourceable, and examples of mass automation of management roles already appearing with hedgefunds and beyond, 2018 will see a clamour from professionals seeking to future-proof their roles. Ironically, A.I may provide an answer. ‘Personalized analytics (will) become mirrors and lenses for refocusing professional effectiveness, says MIT research fellow, Michael Schrage MIT research fellow. ‘Michael envisions selvesware serving the role of a perpetually present leadership coach providing real-time advice on executive behaviour.’

  1. Machines have their own bank accounts

There can be little doubt that widespread automation brings about a raft of societal and ethical questions. Hitherto fringe ideas will gain currency as the automated economy takes hold. The rights of robots to the fruits of their own production may become one such issue in the near future. The Commonwealth Bank of Australia is reportedly looking into the implications of a future in which ‘…machines have their own bank accounts and pay for replacement parts and engineers to service them,’ whilst the European Union has already called for ‘the consideration of a Civil Law Rule of Robots’. Intellectual property rights could flow from this, suggesting machines could become their own economic agents in the near future to a degree currently considered unthinkable.

Written by David Smith, Chief Executive, Global Futures and Foresight.

The views expressed are those of the author and not necessarily of SAMI Consulting.

If you enjoyed this blog, sign up for our monthly newsletter at eSAMIsignup@samiconsulting.co.uk and/or browse our website at http://www.samiconsulting.co.uk

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