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How to manage failure in times of uncertainty


Building resilience against startup closure and innovation failures



The ongoing COVID-19 pandemic has reminded us once again how vulnerable we are to Black Swan-type of events. Coined by the Lebanese-American finance professor, author, and former options trader, Nassim Nicholas Taleb, “Black Swan” events refer to unpredictable or unforeseen events with major and wide-spread consequences to the society. Similarly, the current crisis has not only disrupted our everyday lives but also caused irrevocable changes to businesses and early-stage innovation projects. Thousands of previously thriving startups have found themselves in dire straits and many entrepreneurs, R&D managers, and innovation professionals will be seeking new innovation opportunities once this crisis is over. But highly disruptive events, such as this pandemic, will continue to occur in our volatile, uncertain, complex, and ambiguous (VUCA) world; therefore, the question is no longer if, when, or why such events occur but rather how resilient our response mechanisms are. After interviewing dozens of serial entrepreneurs and innovation executives with failure experiences in their past, and reading over one hundred practitioner-focused and academic articles and studies about innovation failures as part of my Ph.D. studies, I’m sharing below what I consider best practice in developing the right corporate culture toward failure and becoming resilient against failure in innovative organizations.

The FIFAA FailureTM Management Cycle

By implementing and iteratively applying simple but highly effective tools and practices throughout, what I call the FIFAA FailureTM Management Cycle (see Figure 1), even risk-averse organizations can learn to treat failures as allies and utilize them as ammunition for creating successful new ventures and novel innovations.



Figure 1. FIFAA FailureTM Management Cycle



The concept refers to a five-stage cycle of managing foreseeable, intelligent, fast, actual, and accepted (FIFAA) failures by using specific tools and techniques to address them throughout the lifecycle of an innovation project or venture. My set of recommendations includes the following components:

Stage 1. Prevent foreseeable failures by

Conducting Before-Action Reviews (BAR)/pre-mortems

BARs (Darling et al., 2005) or pre-mortems are methods that should precede the start of any new project, particularly innovation projects where the “liability of newness” (Stinchcombe, 1965) poses extra uncertainty and constraints in the development of new innovation ideas. In addition to aligning team members with the intended results and revisiting previously identified lessons learned, the objective of a BAR is to help surface all the potential risk factors the team foresees throughout the project. Subsequently, the most critical ones should be addressed based on the severity of the damage they could bring about and their likelihood of happening.

Establishing No Fail Zones

“No fail zones” provide a clear indication to the team as to which parts of the process, domain, or organizational unit allow experimentation and those where failure is not tolerated (McGrath, 2011). Designating such domains encourages team members to freely try out new ideas without fearing repercussions if objectives are not met. It is also the right tool for managers to convey the message that the company tolerates or even rewards “intelligent” failure (discussed below) without promoting an “anything goes” culture.

Positioning innovation projects as pilot projects

By “selling” and promoting an innovation project as a pilot project internally within an organization, expectations (often unrealistically positive ones) are lowered regarding the outcome of the project. While failure is the most likely outcome of any innovation initiatives, pilot projects never fail because they are designed to generate new knowledge instead of delivering successful innovations (Zbrodoff, 2012).

Stage 2. Design intelligent failures by

Running experiments with uncertain outcomes

Experiments are the most effective way to discover new knowledge about the unknown. Naturally, they may lead to unwanted results for the organization; however, because new knowledge is captured that would otherwise not be possible to gain, they can rightfully be called “intelligent failures” (Matson, 1991; Sitkin, 1992). In order to facilitate an accurate sensemaking process and avoid burning valuable time and resources, experiments should take place within familiar domains to the organization and be of modest scale, i.e., learning about one new thing at a time.

Applying hypothesis-based testing

After clearly defining what success and failure might look like from the perspective of a desired outcome, the testing of carefully constructed assumptions is the most powerful method to find out what works and what does not. This technique is most suitable when multiple scenarios are already available for testing, each representing basic assumptions.

Stage 3. Prototype for fast failure by

Using theoretical, virtual, minimum viable prototypes and a minimum awesome product in this exact sequence

Prototypes come in many forms and with varying levels of fidelity and complexity. Depending on the development stage of a solution idea, an appropriate prototyping method must be selected for best answering specific questions or assumptions before a subsequent test can be performed with a prototype of higher level fidelity. Ultimately, these continuously refined prototypes should converge to nail the problem, provide answers about what to build and how to build it, and ensure that customers really want and are willing to pay for the offering (Furr and Dyer, 2014).

Applying the principle of Limited Blast Radius

When implementing new ideas or methods into existing offerings or practices, it is important to ensure that only a limited number of customers and a limited part of the organization are impacted should negative consequences arise. This agile principle, called the “limited blast radius,” allows teams to try out innovative ideas in small-scale and without jeopardizing the quality of the standard offering to mainstream customers (Glozic, n.d.; Kniberg, 2014; Mankins et al., 2017). The tool allows for quick and valuable feedback to the back office about new requirements and space for improvement.

Letting others fail for you

Learning from others’ failure is often the least costly way of discovering negative knowledge, i.e., knowing what doesn’t work. By launching an innovation challenge with a prize incentive (McKeown, 2018), either a winner is announced, who delivers a new innovation by successfully fulfilling the pre-set criteria or the challenge remains unsolved while providing invaluable, second-hand experience and new information about how not to approach such a given challenge, which is an equally powerful way of learning (DARPA, n.d.).

Stage 4. Learn from actual failures by

Periodically conducting After-Action Reviews (AAR)/post-mortems/retrospectives

AAR is a tool that facilitates team learning from completed projects regardless of the project ending in a success or failure. Its main objective is to capture the discrepancy and the causes between the intended and actual results, followed by the team to decide on what practice should be sustained or improved (Darling et al., 2005). Because there are specific requirements to an AAR to deliver effective results, both in terms of content and facilitation style (e.g., being factual by using metrics and data, not allowing blame or focusing only on the negatives), it is highly recommended to use an unbiased external facilitator (Agan, 2014). Other than making AARs routine exercises, a true learning organization captures the identified lessons learned in a knowledge management system that might vary from simple checklists to full-fledged corporate databases.

Applying the ‘5Whys’ technique

Developed by Taiichi Ohno, the mastermind behind the Toyota Production System, the “5Whys” technique helps to fully understand the root-cause of a problem or failure, before coming up with solution ideas. By asking the question “Why?” at least five times not only corrective actions can be developed to address problems on a surface level, but also preventive measures can be developed and implemented, avoiding the iteration of the same failure or problem (Institute for Healthcare Improvement, n.d.).

Stage 5. Pivot on the basis of accepted failure by

Knowing when to break the “escalation of commitment”

A recurring theme during the interviews I’ve had with entrepreneurs and innovation professionals has been the importance of knowing when to stop pursuing an idea. Being blinded by over-enthusiasm and perhaps the favorable conditions that existed at the time of launching an innovation project, it is easy to lose track of constantly changing market conditions and customer needs that can rapidly undermine the rationality of pushing an innovation forward. Whether this irrationality is measured by the amount of bad money thrown after good or by lost opportunity cost, having periodic reality checks where the team revisits the project’s initial success definition and criteria and compares them with the actual situation, provides strong indication about when to break the so-called “escalation of commitment,” (McCarthy et al., 1993) i.e., irrational decisions such as increasing investment even when external conditions or feedback suggest otherwise.

Choosing the most appropriate type of a pivoting technique

When the existing product configuration, business model, or strategy is proven to be ineffective, the team must decide to pivot, i.e., making a strategic change in direction. Whether it is changing the revenue model, moving from an application to a platform, addressing a different target group, focusing on a single feature, or expanding the functionality from one feature to multiple ones, just to name a few, innovation teams must utilize the learnings they have created along the way to try out new assumptions and strategic hypotheses about the modified offering (Ries, 2011). A significant increase in customer engagement is the indication the team needs as a sign of being on the right track (Furr and Dyer, 2014).

Identifying and reutilizing strategic resources

In times when a more drastic pivot is necessary (e.g., sourcing the next innovation idea after painful termination of a venture or an innovation project), analyzing the failed project for resources that can be reutilized in a subsequent venture or project could also prove to be a worthwhile exercise. Resources, such as newly acquired competence, a personal or professional network, IP assets, new innovation ideas, and access to distribution channels or customer data can provide necessary prerequisites or even the very cause for starting a new business or project. AARs or post-mortems should be amended to include such analysis, where cognitive mapping tools are one of the proven techniques to facilitate the capture of previously acquired reusable strategic resources (Elmquist and Le Masson, 2009).

Managing false negatives

Revisiting older, previously terminated innovation projects could also supply organizations with new inspirations or innovative ideas. Some of these projects may have been discontinued based on false evaluation while in other cases a positive change in one or more fundamental conditions might trigger the rebirth of a project. By having a systematic management approach for addressing false negatives in an organization, including the creation of a platform through which external collaborators can also become involved, organizations can harness precious new innovation opportunities (Chesbrough, 2003).

By applying the above techniques throughout the FIFAA FailureTM Management Cycle, startups and mature organizations can maneuver themselves into a position where they are better equipped to sustain their innovation performance even in times of crisis. Make no mistake, COVID-19 will not be the last crisis we have to face in our lifetime and it’s better to be safe than sorry when the next one hits us in the face.



References:

Agan, T. (2014). The Secret to Lean Innovation Is Making Learning a Priority. Retrieved from: https://hbr.org/2014/01/the-secret-to-lean-innovation-is-making-learning-a-priority


Chesbrough, H., (2003). Sometimes Success Begins at Failure. Harvard Business School Working Knowledge. Retrieved from:

https://hbswk.hbs.edu/item/sometimes-success-begins-at-failure

Darling, M., Parry, C., & Moore, J. (2005). Learning in the Thick of It. Harvard Business Review. Vol. 83 Issue 7/8, p84-92. Retrieved from: https://hbr.org/2005/07/learning-in-the-thick-of-it


Defense Advanced Research Projects Agency. (n.d.). Retrieved from: https://www.darpa.mil/about-us/timeline/-grand-challenge-for-autonomous-vehicles


Elmquist, M., Le Masson, P., (2009). The Value of a ‘Failed’ R&D Project: an Emerging Evaluation Framework for Building Innovative Capabilities, R&D Management 39, p.2.

Furr, N., & Dyer, J. (2014). The Innovator's Method: Bringing the Lean Startup Into your Organization. Boston Mass.: Harvard Business Review Press.

Glozic, D. (n.d.). Limit the Effect of an Outage by Using Limited Blast Radius Practices. Retrieved from: https://www.ibm.com/garage/method/practices/manage/practice_limited_blast_radius/Microservices-practice

Institute for Healthcare Improvement.(n.d.) 5 Whys: Finding the Root Cause: IHI. Retrieved from: http://www.ihi.org/resources/Pages/Tools/5-Whys-Finding-the-Root-Cause.aspx

Kniberg, H. (2014). Spotify engineering culture (part 2). Retrieved from: https://labs.spotify.com/2014/09/20/spotify-engineering-culture-part-2/

Mankins, M., Garton, E., Mankins, M., & Garton, E. (2017). How Spotify Balances Employee Autonomy and Accountability. Retrieved from: https://hbr.org/2017/02/how-spotify-balances-employee-autonomy-and-accountability

Matson, J. V. (1991). The Art of Innovation: Using Intelligent Fast Failure. University Park, PA: Pennsylvania State University. McCarthy, A.M., Schoorman, F.D., Cooper, A.C. (1993).

Reinvestment Decisions by Entrepreneurs: Rational Decision-Making or Escalation of Commitment? Journal of Business Venturing 8, 9-24. Retrieved from:

https://www.gwern.net/docs/sunkcosts/1993-mccarthy.pdf

McGrath, R. G. (2011). Failing by Design. Harvard Business Review. Vol. 89 Issue 4, p76-83. Retrieved from: https://hbr.org/2011/04/failing-by-design

McKeown, G. (2018). Innovative banking app inaugural winner of new tech competition. Retrieved from: http://www.irishnews.com/business/2018/04/11/news/innovative-banking-app-inaugural-winner-of-new-tech-competition-1300663/

Ries, E. (2011). The Lean Startup: How Today's Entrepreneurs Use Continuous Innovation to Create Radically Successful Businesses. New York: Crown Business.

Sitkin, S. B. (1992). Learning Through Failure: The Strategy of Small Losses. Research in Organizational Behavior 14. p. 231-266.

Stinchcombe, A.L. (1965), ‘Social structure and organizations’, in J. March (Ed.) Handbook of Organizations, Chicago, IL: Rand McNally, pp.142-193.

Zbrodoff, S. (2012). Pilot Projects—Making Innovations and New Concepts Fly. Paper presented at PMI® Global Congress 2012—EMEA, Marseilles, France. Newtown Square, PA: Project Management Institute.

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