In 1995 the change management guru John Kotter cited research that only 30 % of change programmes are successful[i]; 12 years later in 2007 a McKinsey survey[ii] of 1546 businesses found that this failure rate had not improved. Change management is failing to change and the lack of proactive risk management is the single biggest reason that projects fail to deliver the benefits envisaged at the start.[iii]This short blog argues that real risk management has nothing to do with crunching numbers in the Monte Carlos programme, nor has it got anything to do with the establishment of a risk register. Risk and opportunity management is fundamentally a human process conducted around decision making, and in the same way that you can’t log every decision you make, you can’t log every risk you manage.
Risk Management is a process that humans undertake every day. I will tolerate the risk to my heart of a bacon, sausage and fried egg sandwich, whilst others will mitigate the risk of heart disease by eating porridge. Some people cycle to work assessing that the opportunity for a work-out is greater than the risk of being knocked off of their bike. Risk management is that simple. By simply making better decisions some of our risk management errors will disappear. So what is a good decision? A good decision can be viewed from an input and an output perspective:
- The quality of the decision making process.
- The effectiveness of a decision outcome on achieving an objective[iv].
In the current vogue of risk management there is too much focus on the input perspective, industrialising decision making through the exploitation of Microsoft Excel. What we really need to do is focus on the latter – the outcome. To illustrate this outcome I will use Brad Pitt’s decision to advertise Chanel No.5 over Christmas. If I can cast your mind back to the black and white Christmas add, Brad, facing away from the camera, muttering profound statements that were more ‘incomprehensible’ than ‘inevitable’. This isn’t strictly a business change case study, but I do think that it does illustrate how the reputational risk of doing a perfume advert was overlooked owing to poor decision making.
Making good rational decisions is easier said than done. Firstly we need to acknowledge that no human being can be rational. Every decision that we make as Human beings is filtered through the Limbic system in the brain and the Limbic system is responsible emotional based memories. The second reason that humans fail to make good decisions is owing to the psychological field of heuristics and by recognising heuristics we will hopefully be able to overcome the tricks our mind play when making decisions[v][vi].
As humans we are riddled with a virus of optimism about the future, and recognising the symptoms of this virus is important to allow us all to make better decisions. This is where Brad enters the blog. The first cause of optimism bias is anchoring. Anchoring is putting too much emphasis and weight on the first information that you hear. It is obvious how anchoring led our fictional Brad Pitt to make this bad decision – a creative in an Ad agency somewhere said, “Brad…this ad will shake off your reputation as barely sentient eye candy once and for all”, and so Brad delved into the project with two scented feet. Likewise, in a competition for funding or project approval, project proposals are created that accentuate the positive and this can lead to over optimism. How could he have avoided this heuristically laid trap? Simple steps like making sure that you pursue other lines of thought in addition to the first one, and seeking information from a variety of people and sources before making a decision. But this will only work when a second form of optimism bias is recognised – that we reward optimism and interpret pessimism as disloyalty. Brad may have had an assistant who had the courage to pipe up, “Brad this isn’t a good idea…..”. That assistant was probably sacked. An optimistic second assistant was probably promoted for displaying suitable lackeying toadyism. A related, but similar heuristical trap is to seek information that supports the existing point of view, and so Brad probably went to his secretary, who wears Chanel No.5 to confirm that the ad was a good idea. To avoid this trap in decision making you should seek to examine all of the evidence with equal rigour, listen to dissenting voices, ask respected colleagues to argue against you, and avoid ‘yes-men’. What are the other traps that can cause optimism bias? One human trait is to take credit for positive outcomes whilst attributing negative outcomes to external factors. In general people exaggerate their abilities and the level of control that they have over the situation and tend to deny that chance has any part to play in the outcome. The Chanel No.5 advert presents Brad a man who feels about his own screen presence the way that the emperor Nero felt about his talent for the violin. He truly believes that his performance as a perfume can overcome a crazy concept, awful direction, and terrible script to win over public opinion. To avoid this trap of optimism bias, project owners should position and estimate where a project would fall along the reference class’s distribution. Other actors have done perfume adverts; had Brad based his decision on the perfume adverts of his peers in the past, he may have made a very different decision. Nicole Kidman’s career never fully recovered from her own Chanel advert in 2007, Emma Watsons advert for Lancome similarly dived.
Another form of optimism bias is the tendency to focus on our own decision rather than on the competitive environment. We ignore competitors’ capabilities and plans. The market for perfume are men, it is men that do last minute emergency Valentine’s Day gift purchase to satiate his female partners anger. As a man, I’m far more likely to buy a perfume that will turn my wife into Charlize Theron than Brad Pitt. Brad forgot about his competitive environment.
Before this blog degenerates further into Brad bashing, I think that I have made my point, and will now cease with my analogy. There are other decision making traps that can influence the way that we make irrational decisions. These include a preference for the status quo; ask yourself, would you have selected the status quo had it not already been the status quo. Sometimes people try to maintain the status quo by justifying bad decisions made in the past by making choices that justify those original flawed choices. How many times have we heard of the rogue investment banker who throws more money at risky and bad investment strategies to protect their original decisions? The decisions fail anyway.
So to conclude, where you read risk management read decision making as all risk management is the series of decisions. Note that it is impossible for us to make a rational decision, but acknowledge that by being aware of heuristical traps and our own irrationality then can make better decisions; in this way we are alleviating risk. Oh, and don’t reward bad advertising by buying Chanel.
[i] Kotter, John P. “Leading change: Why transformation efforts fail.” Harvard business review 73.2 (1995): 59-67.
[ii] Aiken, Carolyn, and Scott Keller. “The irrational side of change management.” McKinsey Quarterly 2.10 (2009): 100-109.
[iii] Simon, P. “How to get total commitment to risk management from your project team” 9th Project and Risk Management Conference
[iv] Murray-Webster, Ruth, and David Hillson. Managing group risk attitude. Gower Publishing Company, Limited, 2008.
[v] Hammond, John S., Ralph L. Keeney, and Howard Raiffa. “The hidden traps in decision making.” Harvard Business Review 76.5 (1998): 47-58.
[vi] Lovallo, Dan, and Daniel Kahneman. “Delusions of success.” Harvard business review 81.7 (2003): 56-63.