Summing Up
Respondents to the December column produced such a lengthy list of reasons why managers fail to act on their predictions that it is a wonder that organizations are ever able to respond with the foresight needed to avert potential life-threatening future occurrences. Diagnoses were many; prescriptions were few.
The diagnoses ranged from "blatant procrastination and fear" (Nishant Miglani) to the triumph of "wishful thinking" (Edward Hare) to "the bias of hope over experience" and the belief of the leader that "I know it will happen, but not to me, or not on my watch anyhow." (Jamal Barghouti). A dominant theme concerned the bias in the market toward addressing short-term challenges, caused in large part by what Robin Chacko described as the "impatient" investor. As Sarang Kulkarni put it, "Short-term incentives are...a major factor in neglecting distant possibilities, because addressing such surprises inevitably involves a costly, multi-pronged solution strategy."
Carole Muller advances a more formal hypothesis: "Could it be that the bias towards immediate-but-less-threatening matters reflect what micro-theorists in economics call biased risk-evaluation?...[It's one in which the bias prevails that you] attach 'gain' to a probabilistic assessment and you trigger action; attach 'loss' to it, you get inaction." Pallavi Marathe elaborates on this thought pattern: "It takes a little foresight to be able to tell what may come, but it takes a whole lot of confidence and conviction to be able to act upon the vision and take preventive action." That confidence and conviction presumably has to be supplied by real leaders willing to bear the heat if predictions for which their organizations prepare don't come true.
What can be done about this challenge? Maree Conway has one prescription: "...organizations have no mainstream way of thinking about the future of their organization, and then acting upon their insights.... Organizations today need to schedule time on a regular basis to consider future implications for their companies...and then decide what action to take." Muller suggests, alternatively, that "traded companies be required—by regulating authorities—to include in their...financial report an...evaluation [of] business risk assessment...[possibly even] stating company action taken to prepare for the expected events." The latter would certainly encourage, perhaps at a substantial cost, what Conway proposes, as we've seen with recent legislative and regulatory rulings on corporate governance.
Can organizations take a systematic approach to the assessment of, and response to, predictions, particularly those involving substantial future risks? What role should corporate boards play in this process? Is such assessment the first step toward the ultimate test of true leadership, action to ameliorate projected risks? What do you think?
Original Article
Two years ago I participated in a disaster drill at Southwest Airlines. It was a simulation of a Southwest plane crash at the New Orleans airport. As part of the exercise, I boarded a plane in Dallas with Southwest employees assigned to assist victims and their families upon our arrival in New Orleans. Although Southwest has never had a fatal accident in its history, the odds are that it will sometime in the future. And the organization is ready to respond to what Max Bazerman and Michael Watkins would term a "predictable surprise."
For Bazerman and Watkins, as they describe in their new book of the same name, a predictable surprise has several characteristics. Among these are: (1) a large challenge that is knowable and will not solve itself, (2) something that is clearly getting worse over time, and (3) problems whose solution requires modest but certain costs in the short run versus large costs of unknowable certainty in the future. As examples of predictable surprises, they suggest such things as the rise of terrorism, compromises of auditor independence (and its implications for the general decline of trust in business), distortions resulting from government subsidies, global warming, rising medical costs (especially in the U.S.), growing retirement commitments (worldwide) and, on a more mundane level, the implosion of frequent-flyer mileage programs. (To this list, the authors of another new book, Seeing What's Next, probably would add the ability to predict industry change, especially that involving the development of disruptive technologies.)
Why do organizations led by people of vision fail to act upon such insights? Reasons advanced by Bazerman and Watkins are that organizations and their leaders: tend to undervalue risks, particularly those that lie in the distant future; are unwilling to make smaller investments now to prevent uncertain future risks with higher costs; have a bias for the status quo, regardless of how much they talk about the importance of change; and have a tendency to address problems after rather than before a predictable surprise.
Important trends are identified as part of nearly every strategic planning exercise. But the effort to address them too often stops there. If the ability to act in a timely manner distinguishes better performers from their competitors, what can be done to ensure that this happens? The authors suggest that once predictable surprises are identified, persuasive communication, coalition building (to mobilize people to confront the potential surprise), and structured problem-solving (to identify options and eliminate obstacles to action) are important. Finally, a crisis-response program may have to be devised, including the kind of rehearsals that I experienced at Southwest Airlines.
This work poses several questions for us. First, does it reflect your own experiences? Is there a bias to act on more immediate competitive threats while putting the longer-term but foreseeable demographic, social, and other trends aside? Does anyone in the organization have the responsibility to mobilize people to act on such trends (as opposed to identifying them)? What are the short-term incentives to do so? Can an organization systematically address this challenge given the pressures that it faces from investors for short-term performance? What do you think?
The ability to predict calamities that might befall us in the future and the ability to take precautionary measures to prevent the same are two separate things. It takes a little foresight to be able to tell what may come, but it takes a whole lot of confidence and conviction to be able to act upon the vision and take preventive action.The fear of failure is so deep-seated that managers often tend to take corrective action later than preventive action before, because lest their predictions fail, they would have a hard time convincing others about why they made a wrong prediction.
Prediction is the wrong word. Insight is better. People fail to act on their insights about the future because organizations have no mainstream way of thinking about the future of their organization, and then acting upon their insights. You need formalized processes before action occurs. Organizations today need to schedule time on a regular basis to consider future implications for their companies by exploring the external environment, looking at trends that may have an impact, analyzing the trends for their situation, and then deciding what action to take. It's called organizational foresight; a capacity that organizations need to learn, and they need to learn it now to be able to deal effectively with the challenges of the future.
Could it be that the bias towards immediate-but-less-than-threatening matters reflects what micro-theorists in economics call biased risk-evaluation? It affects decision makers as a kind of number-blindness whereby the likelihood of an event occurring in 1 out of 10,000 cases is read as "in 10,000 years of my lifetime" if attached to a context of loss (and biased decision-makers regard action as uncalled-for). But, if attached to a context of gain (say 1 out of 10 million cases) for a grand lottery prize (winning an unlikely call to tender), the decision maker will mobilize all teams night and day to "go for it." In other words: Attach "gain" to a probabilistic assessment and you trigger action; attach "loss" to it, you get inaction.
If this is the case, one way to address the issue would be for traded companies to be required—by regulating authorities—to include in their business and financial reports an additional, separate evaluation on business risk assessment that identifies relevant risk factors to their industry and states the action taken to prepare for the expected events. Companies lacking this report would certainly be regarded by professional analysts as being run by a less-responsible management team, which is somehow the message needed to be read between the lines. It's feasible, although a challenge, to agree on a normative set of rules for such reporting, though, as confidentiality is also an issue.
My experience is that there exists a general psychological tendency to overlook "predictable surprises" as things that happen in the normal course. "Prevention is better than cure" is hardly practiced and it is only when a surprise boils into a crisis that managers react.
While I would tend to agree with the element of "predictability" of certain "surprises," I would hasten to add that there is always an element of probability associated with any future event. And it is this perceived probability which propels or prevents actions.
The present is certain and so it attracts more attention and resources because outcomes are more predictable. Today, the business context of most companies is defined singularly by chaos—the state of highest entropy. With the number of uncertain scenarios multiplying, we find it difficult to accurately judge how effective our actions will be. With resources being scarce, actions are delayed till outcomes become more certain.
"A stitch in time saves nine"—does anyone even remember this anymore? Simply because we aren't really sure what we are saving and whether it really needs a stitch. If we could quantify accurately what we would save and which stitch to fix first, we would only be pleasantly surprised.
A quote from a book whose title escapes me says it well: "The core competency of executive management is wishful thinking." Playing it safe leads to the best payoff and explains why inertia often rules. Many so-called leaders lack imagination, a cause they can make others enlist to, and/or the courage to challenge the status quo.
One of the reasons for managers' reluctance to act on predictable surprises is inertia. The modern organization, for all its advantages, has a serious limitation: It fails the agility test. When IBM unveiled the PC in the early 1980s, it had everything going for it—a well-known brand, first-mover, deep pockets—and yet it failed to leverage on these strengths and allowed competitors to surpass them. Two decades later, the supreme paradox is that the company has sold its PC business to a Chinese company. If only managers had acted on the predictable surprises—that imitators would move in, someone would employ scale economies to bring down prices—the company could have been the market leader.
The second factor responsible for this crisis is time. For example, in IT enabled services, one of the well-known truths is that complete testing of software is rarely done, with enormous costs towards corrective maintenance being the norm after installation. Industry professionals have a ready excuse: They are under so much pressure for on-time delivery that they cannot think of testing. They are fully aware that the cost of "fixing" a software error after it has been installed in a customer's premises can be as high as 1,000 times the cost of fixing the same error during the analysis or design stages.
The third reason is the concept of organizations committing their resources to one method or technology to such an extent that they have no alternative but to carry on, irrespective of the consequences. A case in point is the plight of the giant steel companies in the U.S., when faced with the onslaught of small and efficient firms using arc furnace technology. The big companies had invested so much on traditional technology that they could not look back. Some vanished after a few years, others filed for bankruptcy protection, and some are a pale shadow of what they once were. All because managers failed to act on the predictable surprises.
I believe there is another reason why folks are afraid to discuss "The Emperor's New Clothes." In our company, we have to be cheerleaders and always exhibit the "rah rah" mentality. If you don't, you're either not a team player or you're a naysayer. It's all about playing nice with everyone. We are not supposed to openly discuss any chinks in the armor. Our executive team is not held accountable, and it experiences negative surprise after negative surprise—you'd think they'd learn. But it seems more important to be buddies with each other than to shake things up by saying that we should assess the plans for feasibility and instill some risk analysis in the planning fabric.
I think that blatant procrastination and fear (in some cases) offer more obvious reasons for failing to prevent predictable surprises.
But I also feel that lack of fear causes problems. If the intensity of an undesired eventuality is initially underestimated (which sounds pretty natural to me), execution towards prevention will suffer. So if managers can somehow force themselves to sense the consequences of the negative trends they identify, possibly even periodically—through simulation, perhaps—they can improve or at least sustain the overall effectiveness of their implementation.
Unfortunately, in my experience, which is mostly in manufacturing, the immediate problems and daily crisis override future challenges. The emphasis on strong cash flow and maximum profits leaves little money for the potential problem, and less manpower to work on future issues.
Time and money should be set aside for the challenges and growing problems that we know will impact us in the not-too-distant future. Business often defers to the next manager or generation to take care of the problem (much like the thinking around the U.S. budget deficit).
I think it is the bias in favor of hope over experience. Thoughts like: "I know it will happen, but not to me, or not on my watch." Those who are far removed from a bad experience are more likely to get caught unprepared. Fresh wounds and hair-raising close calls keep most people alert and more willing to act. It is hard to dislodge most humans (and cats for that matter!) from the laps of comfort. It takes faith bridled with discipline to overcome that tendency.
One of the reasons managers fail to act on their predictions is the simple "important-but-not-urgent" phenomenon. Daily, current problems take over managers' time and focus, so the consideration of future events of an uncertain nature is constantly pushed to tomorrow.
Another reason is denial: "This won't happen to me/us." Airlines are in the situation of being forced by law and the media to plan their responses in the event of a future crash. Also, the media coverage makes any crash a "real" event, something that actually happened to your competitor or alliance partner not so long ago.
I think there are multiple factors at play here. For instance, usually several future trends or predictable surprises can associate with any given situation—each association has a certain probability. And it is this probability, more than the surprise, that is hard to judge. A particular trend may get addressed if either the associated probability or the cost of the surprise is too high. But what happens to the surprises which are somewhere in the middle: How should we prioritize them, let alone address them?
Then comes the issue of miscalculating the cost of future corrective action. Short-term incentives are also a major factor in neglecting distant possibilities because addressing such surprises inevitably involves a costly, multi-pronged strategy for a solution.
To summarize, I believe we will continue to live surrounded by "predictable surprises."
The "Why Do Managers Fail to Act on Their Predictions" question may also have applications for managers in pre-employment testing. Predicting the future behavior/performance of a candidate has been called a disaster-prevention tool. When managerial derailment potential has been predicted, why do some managers fail to act before disaster strikes in the form of poor interpersonal skills, failure to build a team,
low efficiency, and costly turnover?
Let's also be sure to include the investor in the mix. One can appropriately describe the twenty-first century investor in one word: impatient. Since investors drive changes within a corporation (by demanding profits), corporations are forced to be flexible to prove their ability to counter immediate threats. Short-term solutions are implemented using as little capital as possible, since the risk associated with pumping in cash for a big measure is too high. This in turn encourages corporations to be innovative, aggressive, and "hip."
A dozen such maneuvers eventually evolve into one single, profitable, long-term solution, all the while complimenting the corporation's ability to "groove with the times." Figuring out a trend within these numerous solutions and pursuing that as a long-term direction for the company is what makes that company a solid investment ... for the twenty-first century's impatient investor.