When things go wrong: Key Ideas

We make mistakes because our brains are not suited to the processes of rational decision making.

If errors happen, we need to ensure that they have some positive impact; we need to learn from them.

Although blame is a natural reaction, it benefits the business to create a no-blame culture.

A no-blame culture implies that those who get bad results, but make decisions in the right way, should be rewarded.

The smart organization builds up its collective learning and decision-making ability to ensure a brighter future.

When things go wrong: Moving forward

Decision making is focussed on the future.  It is always forward-looking.  All actions in business should be focussed on what is to come:  on realising postive future outcomes and avoiding negative ones.

Better risk management and decision making are means to this end; they are tools to help you achieve your goals by looking forward, not back.

At the highest level, better decision making means better strategic direction for the business.  Strategy is about finding new answers the question 'what shall we do?'  By enhancing your understanding of risk, you can be as sure as possible that the answers you find will take the answers you find will take the business forward to a brighter future.

Through learning and practising, you will be able to move forward and achieve positive outcomes by taking decisions and managing risks more effectively.

When things go wrong: The smart organisation

Consultants and researchers David and Jim Matheson identify research and development (R&D) as a key area of decision making for business success.  R&D decisions affect any areas where innovation (rather than improvement) is required.  This principally means creating and marketing new products and services, but also includes designing the new processes and systems that will make them possible.  'Processes' could mean manufacturing processes, but it could also refer to strategically critical aspects of the business, such as its decision making processes.

Essentially, R&D is about ensuring that the business moves forward.  As we have seen, potential strategic risk downsides include

• failing to innovate,
• failing to achieve renewal, or
• putting processes in place that fail to allow for the right kind of development.

The Mathesons suggest three levels of 'smart' R&D:

Technology strategy:

• How will you support existing products, generate new ones and develop radically new ones?
• Will technology be developed or supplied from inside or outside the business?
• What skills are required?

Portfolio strategy:

• Which R&D projects will be funded?
• Which will not?
• How will resources be allocated so that they provide the best R&D value?
• How will you balance short-term business needs with long-term renewal?

Project strategy:

• How will you ensure that each individual project delivers maximum value?
• How could commercial concerns (as well as technical, budget and timescale issues) be brought in?

Nine principles of smart R&D

They also propose nine principles of smart R&D, or the attributes that businesses need in order to be capable of making strategic decisions:

• Value creation culture:  the business has a purpose that everyone understands; this purpose is the test of whether strategies and actions will deliver value for the business and its customers.
• Creating alternatives:  for each decision, there must be a good set of competing alternatives; these must be created if they don't exist or aren't apparent, and carefully evaluated
• Continual learning:  change is certain, and everyone must learn from new situations and information rather than feeling threatened by it.
• Embracing uncertainty:  since there are no facts about the future, everyone must learn to live with and recognize uncertainty, measure and evaluate it, and understand what they are doing.
• Outside-in strategic perspective:  rather than thinking about where the business is and then where it should be going (inside-out), consider the big picture first and work back to the business (outside-in)
• Systems thinking:  use tools and techniques (such as the decision tree) to simplify the complexities involved in strategic decisions as far as possible and enable insights (but not so far that objectivity is lost)
• Open information flow:  any type of information may be important, so information needs to flow, unrestricted, to all parts fo the business, the habit of hoarding information as a source of power must be driven out.
• Alignment and empowerment:  rather than micro-managing every action through 'command and control' systems, aim to involve people in decision making through participation, while building alignment through common understanding of goals
• Disciplined decision making:  build processes that recognise the need for strategic decisions to be made before it is too late; then apply systematic, disciplined processes to making those decisions.

The Smart Organisation: by David and Jim Matheson

When things go wrong: Collective learning

Unless you have successfully eliminated a risk, there is always a probability, however, small, that negative outcomes will happen.  The impact can range from the highly specific and individual (such as personal injury) to the general and communal (damage to the reputation of the business).  Any negative consequences are regrettable, but we can make them worse if we don't learn from them.  By failing to learn the lessons of our mistakes, we allow negative outcomes to extend into the future, instead of limiting them to the present.

The learning that comes from considering the outcomes of decisions is likely to be collective rather than individual.  Individuals who frequently make a large number of decisions that are similar in nature, and stay around to observe the results, are best placed to learn from them.  Weather forecasters and poker players are examples of this rare breed.  Managers, unfortunately, are much less likely to make frequent decisions of a similar type and be able to learn from them.

In business, individuals are likely to move on, get promoted or retire before the consequences of their most significant decisions play themselves out to a conclusion.  This makes it vital to embed the learning from major decisions in the organisation, rather than leaving it to individuals:

• record the information that supports decisions
• document the decision making process
• document responses to problems arising
• share information between decision makers

Measures like these help to prevent information about how decisions were taken from being lost when the decision makers leave the company.  Losing such information could potentially pose a major strategic risk to the organization, since it could result in big mistakes being made again and again.

The recording of information about decisions needn't be a huge undertaking.  Even brief notes on how a decision was taken can be illuminating when returned to a later date.  As we've seen, people have a strong tendency to 'edit' their memories to fit their own perspective.

When things go wrong: Lessons for risk management

The responses to risk will vary from business to business and from risk to risk, but they tend to fall into one of these categories:

• eliminating risks
• tolerating risks
• minmising risks
• diversifying risks
• concentrating risks
• hedging risks
• transferring risks
• insuring risks.

Deciding which of these responses is appropriate in any given situation requires careful analysis of the risk in terms of probability, impact and potential outcomes.


If the downside result of a specific, foreseen risk occurs, you will want to look at the way you analysed it and chose your response, and the effectiveness of the chosen response.  Consider questions such as: 


1.  Are there any clear lessons for your estimates of probability?  (For example, has an event that was regarded as extremely rare happened twice in a week?)


2.  How accurate was your assessment of impact?

• Was it more or less severe than anticipated?
• Did it affect areas you didn't predict?
• Did it have consequences of a different nature than those you expected?

3.  Were the plans and processes made to deal with operational risks effective in practice?

• Should they be improved?
• What alternatives are there?

4.  Could operational problems occur again?

• Is the situation different now?
• If not, how should it be changed?

5.  Did you choose the right response to the risk?

• How has it worked out in practice?
• Do you need to choose a different response in future, or just make the chosen response work better?

6.  If you chose to tolerate a risk, was this the right decision?

• Was it based on enough probability and impact information, or information of sufficient reliability?

7.  If you chose to try and minimise a risk, what effect did this have on its impact?


8.  Can you demonstrate the link between your decisions and the positive results for the business?


9.  If you chose to hedge against a risk, how good was the hedge?  How balanced were the different risks against each other?


10.  If you chose to diversify risks, was the extra effort worthwhile?


11.  If you chose to concentrate risks, was the saving in effort worth the extra exposure incurred?


12.  If a risk was transferred, did the third party accept responsibility when things went wrong?


13.  What knock-on effects are now apparent?

• Is the outcome fully known (or knowable), or is it still unfolding?
• What new risks have arisen?
• What new decisions now need to be taken?

When things go wrong: Lessons for decision making

When things go wrong, an important area of learning is the decision-making process itself.  With the benefit of hindsight, you can consider how efective your processes for making decisions were.  Consider questions such as:

• how likely is it that you were influenced by a taken-for-granted frame?
• do you need to rethink the way you regard risks (i.e. as opportunities or threats)?
• are there any lessons in terms of the way you regard outcomes (i.e. as gains or losses)?
• did you identify all the alternatives, or has it become clear that unconsidered alternatives would have been better?  how can you ensure that your future decision-making frames cover these alternatives?
• what information has come to light that could help to reduce the subjectivity of your probability assessments in futures?
• how can learning be enshrined in the business and made easily available and usable for future decisions?
• are downsides and/or upsides in line with expectations? are there any unforeseen dimensions or knock-on effects in the outcome?

For any of these questions to be answered effectively, it's crucial that you have an objective record of your original decision making processes.

When things go wrong: Towards better decision making - measuring success

What to use to measure success - quality of decision making or results?

The implications for businesses are profound.  If it is the quality of decision making , rather than results, that are the measure of success, then those who take decisions in the right way should be rewarded, even if they make mistakes.  They should also be given more decisions to make in the future, not fewer.

This doesn't mean automatically promoting people who get bad results.  it means:

• encouraging better decison making and making it clear that it will be rewarded
• setting boundaries to limit the impact that mistakes can have; acknowledging and actively managing the risk of mistakes
• avoiding or limiting exposure to fatal downsides (doctors and airline pilots, for example, need systems to help them avoid errors)
• when rewarding people, considering the way decisions have been taken as well as the results of decisions
• questioning the business benefit of punishing those who get bad results
• weighing the negative impact of mistakes against the learning and development they can bring.

It is important to remember that none of this means ignoring poor results or mistakes.  Financial loss or commercial reverses are bad for business.  But failing to learn can be worse.  The focus of management has to be the future, and what can be learned from the present and past to help shape the future.  By focussing on learning and better decision making, the business is doing everything it can to do to avoid bad result in the future, rather than simply reflecting what has happened in the past.

When things go wrong: Towards better decision making - quality of decision and the role of chance

Business results are the outcome of the interaction between our decisions, our actions and chance. Even if we make no error, there is always the cahnce that a bad outcome will result from a 'good' decision. For example, we might play dice game version A (http://spreadsheets.google.com/pub?key=te9MzyHoIN6EyuoHmfDxMaw&output=html) ten times and lose every time, despite having established that hte risk had a positive expected value. But how would such a decision be regarded in business?

 

If we were rewarded solely on results, with no attention paid to the way we took our decisions, our $10 loss would look pretty bad.  Our performance report might read as follows:  'Despite your poor results, you played this game again and again, throwing good money after bad on the off-chance of things somehow coming right.  You recklessly gambled company money on an uncertain future.  Your poor results are evidence of your bad judgement.  What were you thinking?'

 

But if we were rewarded on the quality of our decision-making process, our actions would appear in a very different light, resulting in a different review:  'Although results have been poor, due to circumstances beyond your control, the quality of your decision making was excellent.  You obtained all the information that you could on possible outcomes, and the probabilities of each, and took a decision on that basis.  The negative results, though disappointing, have not bankrupted the company.  You will be rewarded on the basis of decision-making quality.'

 

The flip side of this is that people might make decisions on impulse, or randomly, and still get good results by chance. 

• By rewarding or promoting these individuals, the business risks having lucky managers rather than competent ones - fine, until their luck runs out. 
• Also, although spontaneous decisions may turn out to bring some business benefit, they don't teach us anything.  We can't use them to improve the way we take decisions, or to instruct others.

When things go wrong: Towards better decision making

In business, we tend to judge people by the results of their actions.  Many performance management systems are oriented in this way, placing a strong emphasis on management by results.  Realise upsides and you reap rewards and promotion; realise downsides and you are blamed and maybe even fired.

To most managers, this seems a natural way to 'encourage' and 'motivate' people to 'improve'.  If we reframe the argument in terms of decision quality, rather than result quality, the picture changes.  People's 'mistakes' indicate that they are willing to make decisions, and it is only by making decisions and observing the results that we can improve.  We learn about novel, unfamiliar or complex things through experiment and error.

A study of financial traders showed, it is a serious error for decision makers to assume that bad results mean a bad strategy, just as it is to asume that making money was because you have a good strategy.  In business, as in markets, luck plays a part, and the best managers are like the best traders in having an accurate and sufficiently modest view of which results to attribute to skill, and which to serendipity.

Business results are the outcome of the interaction between our decisions, our actions and chance.  Even if we make no error, there is always the cahnce that a bad outcome will result from a 'good' decision.  For example, we might play dice game version A (http://spreadsheets.google.com/pub?key=te9MzyHoIN6EyuoHmfDxMaw&output=html) ten times and lose every time, despite having established that hte risk had a positive expected value.  But how would such a decision be regarded in business?

When things go wrong: Some themes of a no-blame culture

Some themes of a no-blame culture include:

• discussion of risk (and responsibilities for them) before problems arise, rather than afterwards
• emphasising collective responsibility and shared business goals
• aiming for insights and understanding about decisions, arrived at through a process of co-operation and collaboration
• acceptance of a joint commitment for taking specific actions, with no-one putting their 'head on the block' (regardless of any individual responsibilities that are assigned)
• using tools (such as the decision tree) to generate and confirm a joint commitment to decisions
• taking risks in an informed way, with full knowledge of the potential consequences
• when problems arise from particualr decisions, remembering and re-stating the reasoning that went into those decisions
• aiming to draw collective learning rather than individual advantage from mistakes, problems and negative situations
• using passive language to defuse tensions and sidestep the assignation of blame (e.g. 'there is a problem' rather than 'so-and-so has made a mistake')
• understanding that creativity, innovation and new directions imply some freedom to make mistakes
• thinking of ways to reward people on the basis of how well they take decisions, not the results of those decisions.

When things go wrong: No blame, as blame is counterproductive and damaging

Blame is counterproductive and damaging for several reasons:

• it has a negative emotional impact on the person concerned, making them more likely to 'self-regulate' their future behaviour in a limiting way
• it closes down the discussions that should result from mistakes
• it shifts the spotlight away from analysis, learning and objectivity
• it discourages other people in the business from taking any kind of risk, whatever the expected value.

If decisions are based on careful, objective consideration of probabilities and impacts, and the potential downside of a risk is accepted because of its positve overall value, then there should be no blame if this downside actually comes about.

Decision tools such as the decision tree create joint commitment to an action, so that no one person's position or reputation is on the line if things go wrong.  In effect, this approach transfers business risks from the individual decision maker, who has much to lose from downsides occurring, to the business as a whole, which can absorb the impacts of downsides ( both financial and reputational).

Good risk management is about being prepared for problems, which in turn helps to avoid a culture of blame.  By valuing control, analysis and objectivity, the focus can be kept on the problems that everyone in the business faces together.

When things go wrong: No blame

Errors arise when individuals make decisions, but their root causes are deeper than how 'competent' we are at the point when we make decisions.  Their sources include :

• the tools available to help us make decisions (such as the decision tree)
• the information we have at our disposal
• our psychological make-up; our values; the way we use information; the frames we deploy; our memories and how we regard past events
• the organisational contex:  corporate values; support systems; the way decisions and their results are analysed and rewarded.

When things go wrong attribution makes us simplify all this hugely, by seeking the causes of negative outcomes in other people.  There is always pressure to demonstrate a response to downsides, and people often find it hard not to blame those who took decisions perceived as having led to them.   Our brains like simple causal stories, not ambiguous complexity, and it doesn't get much simpler than attributing downsides to the actions of someone else.  The implication is that error has arisen because an individual is deficient in character or ability ('look what you've done!).

Because  being blamed gives rise to negative emotions, and often leads to some kind of sanction or punishment as well, people who make errors tend to blame them on circumstances or events, rather than themselves ('it's not my fault!').

Neither of these all-too-familiar 'natural' perspectives on error is useful in improving the way we make decisions, or the way we respond when things go wrong.  Refraining from blame is a crucial part of informed decision making and good management. 

When things go wrong: Human errors

Preventing errors by good decision making is not easy. Our brains aren't computeres; they are poor at calculating probabilities, thinking of different possible outcomes and holding lots of information. Situations that are complex, or constantly changing, confuse us even further.

Our 'natural' decison-making processes are often false friends in business. To help our brains get to grips with uncertainty, we have to create mathematical and logical structures. The fact that these are hard to understand indicates how 'unnatural' they are for us. Our brains are designed for self-preservation -taking decsions quickly, under pressure - to ensure survival. To do this, we take 'cognitive shortcuts' that allow us to cut through the information we're facing and reach a decison. The problem is that we often make the wrong choice.

It's the same story with error prevention. When things go wrong, many 'natural' responses, such as blaming others, are self-preservation impulses. They won't help us to learn from our mistakes or share learning with others. To do so, we have to overcome our 'natural' responses and adopt approaches that can, at first sight, seem counter-intuitive.