Category: Risk Management

Too much positivity increases Risk

The article Organizational Culture: An Overlooked Internal Risk in Business Week has useful data about how employees tend to hide bad news:

  • Nearly half of executive teams fail to receive negative news that is material to company performance in a timely manner because employees are afraid of being tainted by being the bearer of bad news.
  • Only 19 percent of executive teams are always promptly informed of bad news material to company performance.

The article points out that the corporate culture drives this behavior and the employee intent is not likely malicious. Clearly, there is a confirmation bias in most organizations.  The article points out that there are likely to be several reasons for this:

  1. It affirms your preexisting emotions (you wanted the meetings to go well and believe in the strategy)
  2. it reflects well on your own performance (it’s your job to communicate in a compelling way)
  3. it is not incorrect (generally speaking, the meetings went very well)
  4. perhaps you don’t believe your CEO is interested in hearing contrary feedback.

The survey shows that breaking down this communication barrier brings measurable benefits to the organization. The article suggest that managers should encourage employees to speak up, help eliminate the fear of retaliation (through actions, not just words) and educate employees how to speak up / escalate issues constructively.

So what specifically can be done?  We can encourage skepticism and questioning in R&D teams.  We can reward failure to encourage risk taking and communication of bad news.  Furthermore, a questioning environment actually is shown to drive innovation.


Toyota’s ‘Devil’s Advocate’ Policy Looks to Restore Quality

We have talked about Toyota recalls and the announcement by Mr. Todyoda to fix the problems.  You might recall that Mr. Toyoda’s solution to reducing errors was to increase quality control.  Well, Toyota has followed through.  The article Toyota’s ‘Devil’s Advocate’ Policy Looks to Restore Quality provides some details.

 The ‘devil’s advocate’ approach to vehicle design is a key element of the new Toyota. Under the plan, the company gives engineers four extra weeks to tear down and evaluate new vehicles.

The goal is to use the car in ways the owner’s manual doesn’t even consider.  That’s because Toyota found out the hard way last year that customers use cars in unpredictable ways. It traced some unintended acceleration cases to gas pedals being jammed by stacked floor mats — an ill-advised practice for which Toyota engineers didn’t plan.

Interesting! So, if the customers use the car in an unpredictable way, why think of it AFTER the design is complete? Also, if the use is unpredictable, how can you account for it? If it can be predicted, why not change design objectives to address those use cases?  You might have guessed it: I do not believe this way of implementing a devil’s advocate process will do much to mitigate risks of recall.

But not everyone agrees Toyota has solved the problems that led to last year’s crisis. One skeptic is Mr. Ditlow of the Center for Auto Safety. He said Toyota’s new approach to dealing with complaints of quality glitches such as unintended acceleration still is “pretty much the same-old, same-old.”

What is needed is a new process to manage automotive R&D.  You might also recall that the root cause of the recalls was NOT poor quality control, but a large increase in complexity or vehicles being developed. I believe that adding extra quality control steps at the END of development does little to address the complexity.  Here is what I suggest:

  • Make sure the system objectives are defined correctly.  Use the devil’s advocates in helping balance and guide objectives.
  • Link objectives to detailed requirements across the entire system hierarchy
  • Link requirements to risks of failure.  That is, perform concurrent risk assessment and integrate quality control in the design process.  
  • Integrate devil’s advocates in the risk assessment process and fix it while there is time!

If you don’t do this, you run into many problems.  The so-called Toyota Devil’s Advocate quality control process did this :

Toyota and the supplier switched to crisis mode. They designed a new pinchless wiper and the Yaris still made the scheduled start of production in November.
“We really had to push hard,” recalled Katsutoshi Sakata, Toyota Motor Corp.’s lead executive for quality research and development. “But there’s a new mindset here that we will address even the smallest of issues.”

We can surely do better.


Risk Test: 7 Answers You Need to Know | Big Fat Finance Blog

This blog post has an interesting Risk Test: 7 Answers You Need to Know.  The questions are posed for finance/CFO risks, but are equally valid for R&D risk management as well:

The science of risk management continues to evolve. Lessons learned from past failures are being leveraged to ensure that a company’s risk management is built on the right foundation and evolving in the right direction.

Without further ado, here are the questions:

  1. What is our risk taxonomy?
  2. How do we quantify risk?
  3. What is our risk appetite?
  4. What return are we generating for the risks we take?
  5. How do we separate responsibility for risk-taking from responsibility for risk management?
  6. How do we include risk when we compensate risk-takers?
  7. How do we ensure that our risk management is performing well?

Historically, R&D risk management is somewhat fragmented.  Some informal risk management during R&D and a lot in quality control at the end of the process.  However, the process sometimes lacks rigor and is not comprehensive.  A taxonomy for R&D risks will go a long way in helping.  As the author points out, no taxonomy is perfect.  But any disciplined use of a taxonomy will help answer the remaining questions as well.

More on this later…


Categorizing Project Execution Risks

Here is an interesting article in the Project Management Journal about types of risks in project management:

  1. Strategic risks: Those that relate to project goals (short-term or long-term)
  2. Operational risks: Those that relate to project operations, individual outputs and results
  3. Contextual risks: Those from circumstances outside of the project that may influence the scope of work and the performance of the organization. Examples are competing projects, change in ownership and management, legislation and governmental directives, media attention,  market conditions, and accidents.
As is the case in most activities, project managers tend to focus on operational risk at the expense of strategic risks:

In this study, risks are categorized as risks to operational, long-term, or short-term strategic objectives, and, by studying a dataset of some 1,450 risk elements that make up the risk registers of seven large projects, we examine how operational and strategic risks are distributed in the projects. The study strongly indicates that risks to a project’s strategic objectives rarely occur in the project’s risk registers, though project success and failure stories indicate their importance.


An Epidemic Of Failing To Manage Growth

The article An Epidemic Of Failing To Manage Growth in Forbes.com suggests that lot of the ill that befell companies like Toyota, Dell,  BP was because they grew too fast and did not manage growth because they were too profit driven.

Their chief executives appear to have unquestioningly accepted the Wall Street axiom that growth is the greatest corporate goal. Growth is always good, we hear. Bigger is always better. Companies either grow or die, and public companies must show ever increasing quarterly earnings.

The solution, according to the author is to manage risks from growth:

1. Conduct an annual growth risks audit as part of its budgeting and strategy processes. The audit’s results should be disseminated to all managers, so they can be sensitive and alert to early warning signals. Leaders must constantly convey what cannot be compromised by growth.
2. Have business unit leaders create independent cross-functional teams that report directly to them and are responsible for monitoring the risks of growth and implementing risk management and mitigation plans, which should take effect when predetermined alarms are activated. These teams cannot have conflicting responsibilities and should not be responsible for producing growth. The teams must be measured and rewarded for managing the risks of growth.
3. Base a meaningful percentage of the compensation of all senior leaders and management on successfully managing the risks of growth.

I am not sure I agree.  The problem is not really growing too fast – it is that there are no processes and tools to manage the type and volume of work that needs to be performed.  In fact, growth might actually be required to survive in many industries.

For example, for an R&D driven firm, how does one “manage the risk of growth?” Does one slow down product development?  If that happens, the firm might loose competitive positioning.

Does one address smaller market niches?  This is difficult to do in a product platform driven world. Most companies have learned to target the top niche first and then use the platform to cover a broader range of lower-end markets.  Just look at most cell phone providers like HTC or computer providers like Dell.  They all come out with high-end models at high prices and then migrate the technology to lower-end models.  So, the company rarely has a choice to slow down R&D.  If that is the case, what will growth audits do?

A better solution would be to invest in risk management processes and tools that identify and address risks introduced through increasing pace of R&D.

What do you think?


Managing Project Execution Risks (wonkish)

The Project Management journal has an article called Managing risk symptom: A method to identify major risks of serious problem projects in SI environment using cyclic causal model.  The article lays out an interesting framework for managing project execution risks in large system integration (SI) environment.  Some of the concepts are work remembering.

Serious problem projects (SPPs) often occur, particularly in a system integration environment, and it is difficult to prevent them, since the relationships among phenomena that occur throughout the project life cycle are extremely complicated. Our goal is to make it easier to identify major risks by distinguishing phenomena that are sources of future SPPs from phenomena observed in actual field projects. By choosing several events whose causal relation is known to be cyclic, we constructed a causal model and clarified that it can contribute to the easier recognition of SPPs empirically, by analyzing actual SPP cases.

The overall message is to anticipate major problem spirals by the analyzing events, understanding if the problems are root cause of a death spiral or a derivative of the death spiral and then taking effective action not only to mitigate the problem (event) but also the underlying death spiral.

The paper is a bit difficult to read – probably because I am not familiar with Japanese project management terminology and because of Japanese English….  However here are the major take aways:


Risk events have different consequences depending on the development phase.  The article divides the project into three pages upper (proposal / award), middle (early development), lower (detailed development and launch).

The article lays out a model with three types of consequences of risks based on the phase (Devil Spiral and Death Spiral):
When an event occurs or it is anticipated, the article suggests to map them to the model based on the phase of the project and then determine if it is a Derivative event – a result of the spiral (as per the article a case that is derived from a death spiral) or an Accelerating event – a root cause that accelerates the spiral.  Once done, the idea is to actively manage events, understand the nature of the spiral and take counter measure to prevent the spirals from accelerating.
Finally, here is an example of the completed analysis:

Rewarding Failure

The Kellogg Insights from Kellogg School of Business has an article justifying Bonuses Despite Billion Dollar Bailouts:

Eisfeldt and Rampini’s research suggests that their function is less about the past than the future. Bonuses provide managers with an incentive to be honest about their own performance and about the firm’s prospects earlier rather than later, when shifting capital to more productive managers and more productive uses can have the greatest impact.

Clearly, large bonuses in failing financial institutions is a touchy subject and I would like to stay away from it.  However, there is definitely a case for rewarding failure in R&D.  If all R&D efforts are successful, than the organization is not taking large enough risks and would likely not be able to compete long-term.  Managers need to drive a healthy risk appetite, while managing overall exposure.  Furthermore, if failures are not exposed early, more money is normally wasted in keeping wasteful projects alive.  It also means that the R&D culture is not accepting of failure and that is a dangerous path.

One effective approach to encouraging/managing risk is to tie some fraction of executive compensation to “Wasted Development Effort.”  The idea here is to recognize that some R&D should fail and that the executives should be encouraged to talk about it.  If the term wasted development effort does not sound appropriate, consider Technology Path Elimination.  My boss a few years ago came up with this term and it sounds much better: Encouraging R&D organizations to eliminate technology paths that will eventually lead to failure.  Thoughts?


Akio Toyoda – Toyota’s plan to repair its public image – washingtonpost.com

In an article in the Washington Post,  Mr. Akio Toyoda laid out
Toyota’s plan to repair its public image.  Within this article, he lays out four steps to fix the R&D and quality processes (Review existing ops; Improve quality control; Listen to customers; Share data):
First, I have launched a top-to-bottom review of our global operations to ensure that problems of this magnitude do not happen again and that we not only meet but exceed the high safety standards that have defined our long history. As part of this, we will establish an Automotive Center of Quality Excellence in the United States, where a team of our top engineers will focus on strengthening our quality management and quality control across North America. 
Second, to ensure that our quality-control operations are in line with best industry practices, we will ask a blue-ribbon safety advisory group composed of respected outside experts in quality management to independently review our operations and make sure that we have eliminated any deficiencies in our processes. The findings of these experts will be made available to the public, as will Toyota’s responses to these findings. 
Third, we fully understand that we need to more aggressively investigate complaints we hear directly from consumers and move more quickly to address any safety issues we identify. That is what we are doing by addressing customer concerns about the Prius and Lexus HS250h anti-lock brake systems. 
We also are putting in place steps to do a better job within Toyota of sharing important quality and safety information across our global operations. This shortcoming contributed to the current situation. With respect to sticking accelerator pedals, we failed to connect the dots between problems in Europe and problems in the United States because the European situation related primarily to right-hand-drive vehicles

It is an interesting plan, however, I am not sure how easy it is to implement.  There are fundamental cultural traits that drive behavior (both R&D culture and national/ethnic culture).  I once consulted with a Japanese multinational with operations in the US.  There was significant conflict between the two operations and the engineers in the US felt powerless to do anything to customize products for local demand.  I have heard about how difficult it was for the Japanese to understand the US pick-up truck market.
Reviews are only useful if there is a concrete plan and metrics to implement the changes identified.  Quality control has to be tied to R&D in the first place to actually deliver.  In a multiorganizational complex automotive development, it is extremely difficult to get a handle on all the R&D and communicate it effectively to quality.  Finally, it is easy to say that we will share information, but very difficult to do.  More information is not necessarily better – one needs ability to drill down to the necessary information and context for what the information means.
How would you try to change R&D management to drive change?

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Why don’t businesses experiment more

In a very interesting column in the Harvard Business Review, Dan Ariely writes about why organizations are willing to listen to experts and consultants but not do some experiments themselves and find the best answer:

I think this irrational behavior stems from two sources. One is the nature of experiments themselves. As the people at the consumer goods firm pointed out, experiments require short-term losses for long-term gains. Companies (and people) are notoriously bad at making those trade-offs. Second, there’s the false sense of security that heeding experts provides. When we pay consultants, we get an answer from them and not a list of experiments to conduct. We tend to value answers over questions because answers allow us to take action, while questions mean that we need to keep thinking. Never mind that asking good questions and gathering evidence usually guides us to better answers.

This is a very interesting observation.  I have often wondered why people higher such highly paid consultants.  One point that Dan does not make is an ability to CYA – the consequences of failure are much lesser if someone else (an outside expert) made the decision.  I guess people are recognizing this:

Despite the fact that it goes against how business works, experimentation is making headway at some companies. Scott Cook, the founder of Intuit, tells me he’s trying to create a culture of experimentation in which failing is perfectly fine. Whatever happens, he tells his staff, you’re doing right because you’ve created evidence, which is better than anyone’s intuition. He says the organization is buzzing with experiments.