"Lone Wolf" Behaviour - A Risky Move in Energy Buying

October 2008

Following an election result that was disappointing for the Liberal Party of Canada, Liberal leader Stéphane Dion is being criticized in some circles for acting as a "lone wolf". The indictment is that he decided the central policy theme for his party in the election against the advice of his caucus and the party's policy experts. The stakes were high - a bold and successful policy initiative could have vaulted the Liberals ahead of the Conservatives when they were underdogs heading into the election. But the gambit failed, and the Liberals suffered one of the worst defeats in their history. Now Mr. Dion has resigned.

Some analysts point to eroded support in key Liberal strongholds as an indication that, beyond merely losing the election, Mr. Dion's election strategy has hurt the party going forward. It appears, at least in retrospect, that Mr. Dion risked more than the Liberal Party could afford to lose.

"Lone wolf" behaviour is not uncommon in organizations. It results when a decision-maker has a view of the risks and rewards of a certain decision that is different from the view held by the organization itself. There may be risks that the decision-maker doesn't recognize or understand, or he may simply believe the odds of success are greater than others perceive.

Energy markets are characterized by very high price uncertainty and that creates risk for organizations that are significant energy consumers. Lone wolf energy buying behaviour can magnify this risk. What does lone wolf energy buying behaviour look like? It takes several forms:

• A buying strategy that relies heavily on the ability to foresee the direction of the market, or the timing of market movements.
• Procurement objectives that are unrealistic and unachievable.
• A discounting of the probability of adverse price movements, or the possible magnitude of these movements.
• A focus on a few narrow objectives, rather than broader considerations (for example, an objective of "minimizing price" as opposed to "controlling costs to less than or equal to the budget value").

To avoid lone wolf behaviour and its consequences, Aegent recommends to clients that they use a buying team rather than relying on one decision-maker. A buying team made up of representatives from key functional areas (purchasing, facilities or plant management, finance) helps to ensure that the buying decision is based on consideration of all the risks the organization can tolerate.

###pRiskSensor© model helps to quantify price risk, so buyers can rely less on "gut feel" and look to rational analysis to assess risk.
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Even just having an independent, objective advisor like Aegent gives energy buyers the opportunity to hear a different point of view, and get a "reality check" from time to time.