Celebrate it more often

November 26, 2018

At school, if I got 90 percent in an exam, my dad would ask, “Why didn’t you get 100 percent?” In many businesses, we expect leaders and managers to get 100 percent in everything they do. Just as if they were doing math problems. In a world with much certainty, this math problem approach has been successful. However, this approach only works when we do not have large market uncertainties and large technological uncertainties, and only produces incremental improvements
to performance.

Why only incremental results? Imagine you consider trying a new exam method, and this may give you 100 percent in the long term, but in the short term, your results may fall to 80 percent. Would you choose it? I can say with confidence: you would not. The technical term is ‘loss aversion’, which means we feel the pain of losses at least twice as much as we feel the pleasure of gains. This excellent video (https://www.youtube.com/watch?v=vBX-KulgJ1o) shows we need to have at least twice as big a gain to take the risk of a loss.

So, to improve your exam score to 100 percent, a 10 percent improvement, most people would only be willing to risk a 5 percent drop.

but some successful companies celebrate failure

So, we are all hard-wired to avoid risks and failure. Why then should leaders and senior managers risk failure? According to a 2018 article, by Bruce Skaggs, Charles Manz, and others, On the folly of punishing A while hoping for A: Exploring punishment in organizations, “Fortune 500 companies like Google and Apple repeat the mantra ‘don’t be afraid to fail’, and seek out members with entrepreneurial orientations who will not simply operate within but strive to alter status quos…”

Google went even further when they created a company called X. Have a look at their website (https://x.company/), which explains they are a ‘moonshot’ factory. A moonshot is an ambitious, exploratory, and ground-breaking project undertaken without any expectation of near-term profitability or benefit, and without a full investigation of potential risks and benefits, often a breakthrough technology. As you will see in this 15-minute TED talk (https://www.ted.com/talks/astro_teller_the_unexpected_benefit_of_celebrating_failure), Google X certainly celebrates failure:

“We work hard at X to make it safe to fail. Teams…get applause from their peers. Hugs and high fives from their manager, me in particular. They get promoted for it. We have bonused every single person on teams…from teams as small as two to teams of more than 30.”

So, does this mean that leaders in all organizations should start celebrating all failures?

two kinds of operations in business; only one encourages failure

Success in business comes from one of two kinds of activity: ‘exploit’ and ‘explore’. Why should we care about these? According to James March, way back in 1991, organizations need to exploit sufficient old certainties to ensure their current viability, and at the same time, explore new possibilities enough to ensure their future viability. Firms need to both explore and exploit to meet the challenge of disruptive change.

Yan Chen’s article discusses these two activities with the table below summarizing some differences between exploit and explore.

exploit explore
Google example Google focused on exploiting core business: search ads Google X focused on exploring moonshot projects: self-driving cars, storing energy in salt
working with knowledge using what is already known: existing businesses or existing ways of doing business discovering what is yet to know:

new businesses or new ways of doing business

working with value focus most on what is creating most value now

focus least on what is not creating value now

discovering new sources of value temporary falls in revenues and profits
working with failure and risk low rates of failure

low-risk taking

high rates of failure

high-risk taking

As you can see, one kind of operation abhors failure and the other adores failure.
strive for short-term success long-term success
managing for costs, profits innovation, growth
controls margins, productivity milestones, growth
competencies operational entrepreneurial

 

So, should leaders in all organizations start celebrating all failures? No, and yes. No, leaders should not celebrate all failures in exploit operations (just incremental failures); Yes, leaders should celebrate most, if not all, failures in explore operations—as Google X is doing.

 

why is it tough to encourage failure in just one part of the organization?

Inside the organization, James March notes:

  • what is good in the long run is not always good in the short run
  • what is good for one part of the organization is not always good for another.

The part of the organization that exploits current resources produces most short-term financial results. Typically, executives are rewarded with bonuses for performance, so they will be reluctant to take the risks of failure essential to explore activities.

But there are deeper issues when James March considers the returns from the two activities:

exploit explore
positive often negative
proximate distant
predictable uncertain

 

Returns are easier to see for exploit activities, so organizations tend to increase their exploit activities and decrease their explore activities. They naturally lean towards avoiding failure instead of celebrating failure.

Outside the organization, some reasons encourage more exploit activities and less explore activities. Nicole Jackson and Opal Leung (2018) identify an obvious reason: does your organization work in a high-compliance setting like hospitals, insurance, or pharmaceutical? These settings do not allow for ‘adventurous innovations’ and celebrating failure.

so when should we explore and celebrate failure?

more often: because exploring is more important when there is market uncertainty and technical uncertainty. Read any newspaper, search the web, or read social media and you will be bombarded with market uncertainty and technological uncertainty.

more often: because AI is set to change many industries radically. At first, bringing the biggest changes to industries like transport, healthcare, cybersecurity, finance, customer service, ecommerce, and recruiting. So, in 2018 and for the next five years, most organizations need to explore and celebrate failure more often.

how can you celebrate failure more often?

A 2013 review of research by Charles O’Reilly and Michael Tushman provided evidence that setting up structures with independent divisions to exploit and explore increases performance. These results are more beneficial during times of uncertainty. Based on 15 examples including IBM, Cisco, Ciba Vision, HP, and SAP and smaller companies, their 2011 article sub-titled How Managers Explore and Exploit gives practical advice:

In brief:

01           senior management teams own the strategies to explore and exploit. Their financial bonuses depend not only on the exploit division but also the explore division. They are financially motivated to celebrate failure too.

02           separate structures and practical methods of managing the certain conflicts and hard choices on allocating resources between the two parts of the business (exploit and explore).

03           leaders can manage the conflicts and are willing to shift resources from exploit to explore units; leaders are willing to shift resources from activities with low chances of failure to higher chances of failure.

what if we don’t celebrate failure?

Unless you are Google X, few reward failure. It is tempting to do what is easy, not what is important.

A 2018 provocative review, The folly of punishing A while hoping for A, of Steve Kerr’s original work, commented those with successes get promotions and those who take risks and fail often do not get promotions. If we punish people by not giving them promotions, then they will take fewer and smaller risks. We are more likely to make incremental improvements and less likely to make breakthrough improvements. With AI, there will be many potential breakthrough improvements. So, if you do not celebrate failure, maybe your competitors will make these breakthrough improvements.

Finally, author Kerr has a sign on his desk that sends a powerful message about what happens if we fail to celebrate failure:

If you’re careful enough, nothing bad or good will ever happen to you. – Ashleigh Brilliant.