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Tuesday, August 23, 2011

How to Prevent Self-Inflicted Disasters

strategy+business magazine

All too often, companies unintentionally create their own worst crises. With a little awareness of your organizational DNA, you can avoid that fate — and the headlines that go with it.

by Eric Kronenberg

LabuĆ„ Cygnus atratus II pri hoteli Hubert v Ge...Image via WikipediaDuring the last few years, a number of well-publicized “black swan” events — highly destructive calamities that seemingly come from out of nowhere, and that are diverse enough to include oil rig explosions, automobile recalls, major production delays, financial meltdowns, and at least one phone-tapping scandal — have had immense negative effects on the companies involved. … After the event, the leaders of the company often have to admit: “We did it to ourselves.”…

Self-inflicted black swans have occurred in many industries in widely varying circumstances, but always with one common factor. …Typically, a number of people within the company knew about the situation and saw the potential downside in advance; if this knowledge had been acted upon with diligence and in a timely manner, the problem could have been prevented. Often, these companies had formal procedures in place designed to avoid these precise risks, but the procedures were routinely ignored or bypassed by employees.
How could companies that knew better fall into these traps? Because the perception of risk diminishes over time. It’s not unlike the dangerous habit of texting while driving. … Companies that get into similar habits — overlooking or sidestepping their risk management practices — are similarly primed for a self-inflicted black swan. …
An Introduction to Organizational DNA

…The organizational DNA framework is a vehicle for understanding the formal and informal elements that drive and constrain day-to-day behavior in your company. (See Exhibit.) This framework, introduced by Booz & Company in the early 2000s, … Like molecular DNA, organizational DNA has four “bases”: components of activity that fit together like building blocks. They determine how an organization executes — what changes it can make and what actions its members can take. The four bases are:
  • Decision rights and norms. The rules and practices that govern how actions in an organization are shaped and focused.
  • Motivators and commitment. The values and principles that drive employee behavior and engagement.
  • Information flow and mindsets. The patterns of thinking and communication that inform what people do in an organization.
  • Organizational structure and networks. The links and connections that guide how people work with one another throughout the hierarchy.
When put together, the formal sides of each organizational DNA base make up the official part of the organization’s operating model: …These are the documented, official standards for company operations across all levels.

… The informal sides of each base have an equally strong impact. These include the norms that people keep in mind about what matters and who is important, the commitments that individuals make about why they care, the mindsets that people (and groups) adopt that shape their perceptions of their work, and the networks through which people in a company develop relationships.

Companies with self-inflicted crises nearly always have formal elements in place that are intended to help the organization avoid accidents and problems: reports, explicit procedures, and watchdog and prevention measures that prevent catastrophes when nominally followed. But the informal elements determine the way that policy is implemented. In many cases these unwritten rules, values, standards, and workplace routines treat these formal procedures as bureaucratic overkill. … Like the driver who texts in traffic, the company gets away with noncompliance for a long time, while the effectiveness of its procedures gradually erodes. The crisis doesn’t occur until a long time after the noncompliance began.
The Key to Capability
… Here are four starting points, each based on one of the building blocks of organizational DNA:

1. Clarify who is responsible for which decisions, taking into account the influence that informal leaders already have (decision rights and norms). The decision rights for large, unrealized risks are probably unclear, because by their nature, these risks involve long-term concerns with an uncertain payoff. …

To establish a more appropriate group of decision rights, you may need to set up a cross-organizational team to manage information on significant risks. Make sure that some members of this team have the requisite decision rights to ensure that practices are put in place and that people comply. Other members may be influential people who have no formal role in preventing risk, but who are personally committed to the idea and well connected informally.

Formal decision rights should be backed up by informal discussions to establish general agreements. For example, what if a contractor sees a practice that seems dangerous? Whom should he or she inform? What if that person doesn’t act on it? Who should then step in? Once these informal general agreements have been reached, design the formal decision rights to complement those agreements.

2. Align incentives and other motivators to promote awareness of potential risks and their prevention (motivators and commitment). Because incentives are rarely designed with self-inflicted black swans in mind, they may produce conflicting priorities. The CEO of a financial institution may be charged by the board with looking out for long-term health, but individual traders are compensated on the short-term revenues they generate. Or a manufacturing company may have a safety-conscious culture alongside a high-pressure production schedule; managers who can’t keep up are seen as letting everyone else down.
It’s not easy to resolve these tensions, and people often rely on both formal and informal support. If the company has established rules about the priorities and rewards involved in anticipating risk, and if most people are regularly exposed to informal conversations about the dangers of cutting corners, they are more likely to avoid peril. It also helps when people involved in a complex situation can meet openly to hash out the issues and think together about ways to resolve the tension between being fast and being safe.

You can often find evidence of poorly aligned incentives by talking to managers in the field. Have they “normalized” their view of problems, discounting the idea that catastrophes could happen and letting excessive risk become business as usual? …

To redesign motivators and commitments may require an explicit review of your organization’s gaps and inconsistencies. How closely aligned are the promotion and bonus structures with the behaviors you want to promote? Do employees care about short-term gain only, or do they have long-term growth and the preservation of their jobs in mind? …

3. Create formal and informal communication channels to raise awareness of current conditions on the ground (information flow and mindsets). In preventing self-inflicted black swans, one central challenge is ensuring that senior decision makers can get an accurate, timely, and independent overview of “ground truth”: the realities of project progress and potential problems. … In most companies, executives receive messages selectively filtered and tailored to what people believe they want to hear. …

…These challenges can be overcome, but only by establishing open communication channels — both formal and informal — through which senior leaders can interact with lower-level employees to get their perspective. Regular review meetings will not suffice; it takes regular interaction, ideally in casual face-to-face settings, to give senior management an accurate picture of what is happening.

This kind of conversation also gives lower-level personnel a clear understanding of management goals — and improves their judgment about which types of problems are worth reporting, and how to report them. … The point in all this is to broaden the flow of information to and from senior management, as well as around the organization generally.

4. Set up better reporting relationships and prevention guidelines, using work-arounds as diagnostics (organizational structure and networks). When under pressure to produce, employees often develop work-arounds, shortcuts that allow them to sidestep the formal checks and balances of risk prevention. After a work-around has been in place for a while, it becomes second nature; people almost forget that the old rules exist. …

The presence of a work-around can provide a valuable clue that some process is unclear or cumbersome and needs to be either enforced or changed. … [Talk] to people directly about the reasons that work-arounds have developed, and institute new policies that address the underlying issues.

… If you find yourself continually defensive about queries from the public or from regulators, that’s a clue that you have a deeper internal issue to explore. …
An Ethic of Integrated Action
Very early depiction of Cygnus atratus, given ...Image via WikipediaIn companies primed for a self-inflicted black swan, some or all of these problems may exist side by side. …

An organizational DNA analysis doesn’t prevent any particular crisis; instead, it gives you a better capability for identifying whether your organization is vulnerable to all such crises. This type of analysis is equally useful for other problems that require organizational change: building a high-performance organization, moving into new markets, or adopting a more coherent strategy. You can’t immediately change the way your organization behaves by simple fiat. But with a close look at the core elements of your organizational DNA, you can recognize the design steps that can lead to better behavior very soon.

Author Profile:

  • Eric Kronenberg is a partner with Booz & Company in Florham Park, N.J. He specializes in developing capabilities for program and project management, engineering and design, and manufacturing and construction in multiple industries, including aerospace and defense, energy, and transportation.
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