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?
