“If at first you don’t succeed, destroy all evidence that you have tried.”
Most entrepreneurs love to embrace new buzzwordy business styles.
Lean six sigma.
Lean six sigma flat org charts with no titles.
I’ve dealt with all of these types of organizations in my professional career.
Creating an organization that embraced failing fast was the most difficult one.
Why is that?
We hate losses.
Just as we saw in “Why Past Performance Indicates Your Future Investing Actions,” we get more pain out of losing something that we get joy out of winning or earning an equivalent amount. In the book Thinking, Fast and Slow, Nobel Prize winner Daniel Kahnemann posits that the ratio of pain to joy is 2 to 1. For example, if you lost $100, you’d feel twice as much pain as you would joy at winning $100.
So, in an organization, no matter how fast you fail, failure is still failure.
As an entrepreneur or a small business owner, you usually only have the capital to make a limited number of small bets to try to make what you’re producing catch on. While ideally, the first thing you go after will catch wildfire and make your organization explode with demand, you probably have a set of opportunities to pursue that you manage much like an investment portfolio.
If one of your efforts is going to fail (which some invariably will), then you want to find out sooner rather than later. You want to save money. You want to reinvest that capital in something else which might work out. You don’t want to starve other projects of funds that could help them reach a tipping point.
Therefore, you want your people to take risks, find out what works, and, just as importantly, find out what does not work.
But, once a project fails, no matter how hard you try, there is a stigma.
The word failure has negative connotations. You’d rather not fail at all. Failing fast is the lesser evil to failing slowly, but it’s still worse than succeeding.
What Happens to the Manager Who Has Failed Fast?
To understand the organizational conflict that occurs when failure occurs, we need to look at two perspectives.
First, we need to look at the manager himself.
He’s invested a lot of time and political capital into his project.
He’s likely to be looking out for his self-interest, and when the project fails, he’s likely to compare himself to the other managers who have successful projects.
He wants to be successful.
His gut reaction is going to be something like this:
If we could only invest a little more [time/money/manpower] into this project, we can turn it around.
Let’s compare this to the business owner’s perspective.
The business owner should be happy that a failed project wasn’t dragged out longer than it needed to be.
But, he, too, is disappointed that a project failed.
He must compare the manager of the failed project to other managers, many of whom may be succeeding in their projects.
While, strategically, he wants the organization to take risks so that they can reap the rewards, it’s easy to become very myopic about the successes and failures of each individual endeavor.
The sunk cost component
As we saw in “There Are Times When Saving a Dollar Isn’t Worth It,” once we have committed resources to a chosen path of action, we tend to incorporate how much we’ve already spent in determining whether we should change courses or keep going the same way.
In a business, how much you have spent on a project is irrelevant to the future prospects of that project’s success. The only metrics that should feature in a decision about whether to continue a project are:
- How much will it cost from today going forward?
- What is the probability of success?
- What is the outcome if we succeed?
Yet, both a business owner and a project’s manager can quickly become tethered to the sunk cost fallacy. The project manager will because he thinks that his immediate career prospects may be tied to the pending failure, and the business owner because he looks at the P&L and immediately feels regret about the spending decision, whether or not he should.
As a business owner or entrepreneur, your challenge is to separate out the process, the manager, and the failure, and evaluate each independently so that the manager does not receive an unwarranted negative halo effect from the failed project.
How to separate out the process from the person
There are a couple of activities that you can pursue to help sort out whether or not it was the manager that caused the failure or if the manager did a good job in averting a long, costly disaster.
- Document all assumptions before making a decision. It’s very easy to have 20/20 hindsight about a failed project. As we saw in “Monkey Brain Knew It All Along,” our limbic systems are very good at revisionist history. We tend to think that we had thoughts, in retrospect, that we never actually had. Therefore, to prevent ourselves from rewriting history into one that did not happen, we need to document all of our assumptions and beliefs when we make the decision, not afterwards.
- Conduct a “premortem.” One of the ways to fight a sunk cost fallacy, according to Thinking, Fast and Slow, is to conduct a “premortem.” In this exercise, the team pretends, before a project starts, that the project has failed and identifies all of the reasons that the project failed. By looking at the potential causes of failure, the team can work to mitigate those causes before they occur. Additionally, the team may uncover vulnerabilities that it had not previously considered.
- Conduct an after action review. Once the project has been terminated, bring the team back together to evaluate what went right and what went wrong. This is not to be a witch hunt, and you, as the business owner, need to ensure that the participants understand that the intent is to improve processes to either reduce the mean time to failure or to prevent failure in the first place, not to put heads on the chopping block. This will help you understand what was avoidable and what was unavoidable in the process.
- Anonymous 360 reviews. Have people in the project write up anonymous evaluations of those above, beside, and below them in the project. Use anonymity so that you can receive an unbiased and unprotective view of what it was like inside the project.
None of these are guaranteed to prevent projects from failing, but using them all together should help you to understand what transpired to make a project fail.
Even with that knowledge, it is still a psychological trait for us to want to assign blame, and the manager is the most likely target.
Therefore, once you have completed the evaluation of the project, you need to decide how to frame your thinking.
Instead of thinking “this manager failed” or even “this project failed,” if it is truly a case of the manager causing a project to fail fast rather than experience a long, protracted, slow death, think instead:
This manager saved the company [$X/Y days/Z resources] by shutting down the project.
That framing will help you put the manager in the correct light and also positively impact your evaluation of him as well as his own feelings about his future job prospects.
Being unaware of the psychological impacts of failing fast will cause you to blame managers who may have taken correct actions and create a culture of fear and risk aversion – antagonistic to success in an entrepreneurial organization.