Without Warning

Underestimating a Silent Problem

June 22nd, 2010

Risk. Exposure. Liability. These are words that should be at the forefront of every conversation when a silent problem is identified ( a problem that has been avoided, neglected, gone unnoticed, or been intentionally silenced). The reason being, too often we underestimate the real impact a silent problem can have on an organization, and its share price. For instance, we need look no further than Bear Stearns, Lehman Brothers, Madoff, Toyota, and now BP. In each of these and 100s of other of instances, while the crisis on the surface appeared under control, in reality things were totally out of control. Such can be the impact of a silent problem.

In a recent Reuters article titled Wall Street Said Buy, Buy, Buy BP Stock As Gulf Crisis Unfolded illustrates how analysts often underestimate the financial impact of disasters that eminate from silent problems. The story states:

As early word of BP’s Deepwater Horizon blowout began spreading, investors panicked. After closing above $60 before the April 20 disaster, the energy giant’s shares plunged almost 20 percent in New York, to below $50, in just two weeks.

It is not hard to understand why. Even then, the out-of-control oil spill in the midst of rich fishing grounds and nearby resort beaches raised the specter of horrific damages and untold potential liabilities.

Yet, nearly to a person, the dozens of securities analysts who followed the British oil giant were unfazed. As BP (BP.N: Quote, Profile, Research, Stock Buzz) (BP.L: Quote, Profile, Research, Stock Buzz) shares continued to drop, most were screaming the same message: buy, baby, buy.

Credit Suisse, which had a “buy” rating on the stock at the time, did not even mention the accident in an April 28 report. The firm upgraded earnings estimates after BP reported strong quarterly results the day before.

A day later, with BP’s shares then down 11 percent, Citigroup’s Mark Fletcher weighed in. He argued that the decline was “disproportionate to the likely costs to the company, even assuming damages can be claimed.” In the same report, he estimated BP’s total share of the cleanup at just $450 million — today, conservative guesses put the figure at $10 billion to $20 billion.

Around that time, Morgan Stanley was among the chorus citing the strong rebound of Exxon (XOM.N: Quote, Profile, Research, Stock Buzz) shares after the 1989 Valdez tanker spill in Prince William Sound, Alaska, as a reason to be bullish. “We think the sell-off presents an attractive buying opportunity for investors with medium-term investment horizons,” the firm wrote.

All told, 27 of 34 analysts tracked by Thomson Reuters rated the stock “buy” or “outperform” as recently as May 11. The other seven rated the shares “hold.” There was not a single rating of “sell” or “underperform” among those tracked.

The BP crisis is horriffic. It’s impact will be felt for years, and probably decades. And when we look at the evidence, it was a problem being intentionally silenced, and no one screamed Wolf!

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BP’s Silent Problems Now Being Exposed

June 14th, 2010

Business consultant Pat Murray proclaims, “You stand for what you tolerate. Define your intolerables.” Well in a recently authored letter by two house democrats that have been leading the BP oil spill investigation, the concept of “what you tolerate” applies. According to a recent Washington Post article, it states,

– BP saved $7 million to $10 million using a more risky option for the well casing, or steel tubing. The safer option, known as the liner-tieback option, would have provided more barriers to prevent the flow of natural gas up the space between the steel tubes and the well wall.

– BP failed to install enough devices to center the pipe in the hole, which increased the danger of cracks in the cement surrounding the pipe. The American Petroleum Institute’s recommended practices warn that if the pipe, or casing, is not centered “it is difficult, if not impossible” for the cement to displace the drilling mud on the narrow side of the opening.

– BP decided against a nine- to 12-hour procedure known as a “cement bond log” that would have tested the integrity of the cement. Although BP had a team from Schlumberger, a leading oil services firm, on board the rig, BP sent the team home and told them their services were not needed.

– BP did not fully circulate drilling mud, which would have taken as long as 12 hours. That would have helped detect any pockets of gas, which later shot up the well and exploded on the deck of the drilling rig.

– BP did not secure the connections, or casing hangers, between pipes of different diameters.

The letter says that many of these decisions contradict the advice contained in other BP internal documents, which warned against the dangers of using certain types of pipe. And it reveals that even before the accident, BP engineers were struggling with unusual difficulties. On April 14, BP drilling engineer Brian Morel e-mailed a colleague, Richard Miller, saying “this has been [a] nightmare well which has everyone all over the place.”

In the book Without Warning, it states, “Silent problems absolutely define what you tolerate.” Quite simply, individuals inside BP were willing to “tolerate” actions and activities that did not pass internal standards. Instead of thoroughness, corners were cut. To achieve what? A deadline? A budget? An incentive clause? Whatever the reason, billions of dollars are now lost and thousands of lives are caught in the crosshairs. This at times is the tragic outcome associated with silent problems.

Bottomline: The BP oil spill was avoidable if they had taken the precautions necessary to ensure a safe well. Now they will pay the price for their neglect.

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Frustration

June 8th, 2010

The BP oil spill is ongoing. The pictures are becoming more vivid. The eventual outcome more dire. The ecological impact growing.

Yes, the BP oil spill is a disaster in every sense of the word. And because BP and the various response teams appear to always be playing a “too little, too later” scenario, a sense of frustration is setting in. Frustration with government’s response. Frustration with BP and its ever changing story. Frustration with the lack of progress. Frustration relative to what the future could look like.

Frustration is terribly debilitating. And yes, the BP oil spill is quickly becoming Obama’s Katrina.

Yes, there appears to be a lot of FRUSTRATION left in this story.

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Anatomy Of A Catastrophe

June 4th, 2010

Michael Roberto profiled the anatomy of a catastrophe over at his blog, and I found it to be insightful and definitely worth promoting. Here it is:

1. Catastrophic failures generally do not have a single root cause. They are typically the result of a chain of errors, mistakes, and small failures.

2. People and organizations often downplay ambiguous threats, i.e. warning signs, that crop out in the days, weeks, and months prior to the catastrophe. (Yes, we too often overlook weak signals starring us in the face.)

3. Organizations often have cultures that don’t promote sufficient candor and open dialogue. Thus, people with knowledge about critical risks may not speak up about their concerns regarding a potential failure. (This is an area that organizations could easily correct through training and other easily implementable processes.)

4. People with intuitive concerns about certain risks sometimes are dismissed because they lack extensive data to support their concerns. (It’s easy to dismiss someone under the guise of “You don’t know what you’re talking about.” Most of the time this is correct, however on occassion their wisdom can save the day.)

5. Organizations often overestimate how human and system redundancy they have in place to protect them from catastrophe. (Oftentimes, systems were adequate yesterday, yet insufficient for today’s needs. Finding the time and resources to examine the adequacy of systems and processes is difficult, yet important in a cash-strapped organization.)

6. People often underestimate the probability of what they perceive to be extremely low probability events. (This is where scenario planning can provide insights into the “What Ifs” of your world.)

7. Cognitive biases often distort managerial judgments, contributing to catastrophe. (I would also add that the emotional connection to judgements and decision-making often distort the outcome.)

If and when the BP Story slows and investigations into “What Really Happened” begin to emerge, the storyline will resemble that of Toyota, the financial crisis and numerous other stories. And the conclusion will be, “This too was preventable.” The technology to prevent it was present. The warning signs were present to take precautionary steps. The resources and conviction to move forward is what was missing. Hopefully, some day we will learn the lessons of Silent Problems.

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Everything Is Illuminated

June 3rd, 2010

I watched a neat movie last night, “Everything is Illuminated.” The story is about Alex, a young American jewish man that goes on a quest to find the woman who saved his grandfather during the Holocaust. If you haven’t seen it, it’s a wonderful story. The quirkiness of the characters make it come to life. It was at the very end that caught my attention though when Alex is reflecting on his journey on his return trip when he reflects,

I have reflected many times upon our rigid search. It has shown me that everything is illuminated in the light of the past. Alex

When I look into silent problems as far ranging as Madoff, to Toyota, to the financial crisis and countless others, its amazing how everything is eventually illuminated in the light of the past. Or in plain terms - the truth is eventually exposed. And what gets exposed is the numerous warning signs along the way. There was discontent amongst employees. There was a conflict of interest present. There was a bully in the mix that did everything in their power to keep the problem silent.

I’ve thought of and examined the context of these scenarios many times, and I realize there is a question we should be asking.

How can we illuminate problems in the present - so they can be acted upon?

This is the question we need to pursue, and one I focus on in the book Without Warning and on this blog. Because when we illuminate from the present, we can take action and hopefully avoid or at least mitigate the fallout from silent problems. And more importantly, many of the world’s problems could have been mitigated.

Your thoughts?

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Motivating Salespeople

May 26th, 2010

In my book Without Warning, I state, “I’ve seen simple plans work and thoughtful plans implode. The evidence is clear: this area is ripe for silent problems to mataterialize, especially if done incorrectly.” Over the past year, I’ve reached the conclusion that compensation and incentive plans is one of the most difficult areas for HR and business leaders to develop and implement. Too often the activity you desire and the result you receive are in conflict with each other. To reinforce this thought, I found an article by Dan Pink (author of Drive) interesting and spot on. Here are a couple of the key take aways.

In the early days of the company, Davidson created a fairly straightforward commission scheme. But, of course, salespeople figured out a way to game it – by pushing sales into the time period most advantageous for them, by underselling one month to show a bigger gain the following month, and so on. This wasn’t because they were unethical; it was because they were rational humans responding logically to a particular incentive structure.

So Davidson made the system more complex – and salespeople responded by increasing the complexity of their own behaviour. On and on it went, until both the management team and the sales force seemed more focused on the compensation system than on making great software and selling it to customers who needed it.

“By their very nature, individual commissions discourage collaboration. Why help ‘Mary’ close the deal when she’ll get the gains from the sale?” says Weinstein. “The comp plan was dividing people.”

But at both Red Gate and System Source, once commissions were no longer around, collaboration and commitment increased.

In the end, an elaborate system of commissions might have been the problem rather than the solution.

“Imagine you could construct a sales robot, programmed solely by the rules in any sales structure,” Davidson wrote on his blog. “How would it behave? It would steal deals off other salespeople, sell customers software they didn’t need, argue with its boss over its commission and backstab its colleagues. That wasn’t the behaviour we wanted, but our commission structure sent a strong signal that it was.”

Should every company eliminate commissions for its sales staff? Probably not. But should entrepreneurs, managers, and the rest of us step back every now and again and question the supposedly fixed laws of the universe? Definitely.

Complexity and simplicity are strange bedfellows - especially when it comes to creating incentive and compensation plans. Most business leaders and managers regularly tweak their plans in an attempt to achieve the incentive-motivation Holy Grail. That place where incentives achieve the motivation and results desired. But as Dan Pink points out, just maybe we need to rethink our plans as individuals like Deming, Jacques and others have been suggesting all along.

What are your thoughts?

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Whistleblowers & Pawn Brokers

May 24th, 2010

Have you ever seen a connection between whistleblowers and pawn brokers? Up until recently, neither had I. However it appears going forward, they’re kinda like cousins. A NY Times article titled Hedge funds betting on IRS whistleblowers makes the connestion. It states:

Hedge funds have found a new market to invest in: whistleblowers.

Informants who turn in tax cheats have to wait years to get their share of any reward from the IRS’s recently expanded whistleblower program. So hedge funds, private equity groups and other big investors are offering an alternative. They are essentially agreeing to buy a percentage of those future payouts in exchange for a smaller amount upfront to the whistleblowers…

While the market in whistleblower futures is in its infancy, investors have been requesting as much as 65 percent of any award an informant receives, according to lawyers negotiating possible deals. Although the IRS has long accepted tips from informants, until recently it seemed reluctant to investigate their complaints or reward them. For the five years ended in 2008, the IRS received about 80 whistleblower complaints a year and recovered an average of $155 million a year from tips in previous years, paying an average of $14 million annually in awards. Since sweetening its awards, the whistleblower’s office has been receiving more than 500 tips a year, involving far larger amounts.

I previously wrote about whistleblowers here and here. For instance I stated:

I’m convinced that whistleblower protections and rights will continue to gain in stature and strength under this administration.
I believe the whistleblower will become a primary tool for law enforcement in the future. In effect, the whistleblower becomes the low cost alternative to the investigative task force.
The whistleblowers role of exposing silent problems in organizations will grow in importance in the future.

If hedge funds start acting as pawn brokers when it comes to IRS Whistleblowers as the article suggests, the future role of whistleblowers has just been heightened. Yes, the whistleblower in the future will likely be an advocate of justice, a deterrent to crime, and a thorn for illegal businesses everywhere attempting to skirt the law. Beware!

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The Edge of What’s Legal

May 21st, 2010

In Minneapolis, businessman Tom Petters was recently convicted of running a $3.5 Billion ponzi scheme. He was a high flyer with a huge presence in the Twin Cities business community. What is interesting about this scheme is that Petters was attempting to pay off all of his debtors by leveraging legitimate businesses such as Sun Country Airlines and Poloroid. But the mountain was simply too high, and then the roof collapsed. One of his key employees turned Petters in and the rest is history. Today in the Pioneer Press, writer John Welbes quotes Hank Shea, a former federal prosecuter and teaches at the University of St Thomas Law School states:

White-collar criminals normally start out with minor transgressions and then progress to more serious crimes. “Don’t be focused on whether you can walk up to the edge” of what is legal.

Yes, the edge of what’s legal is a slippery slope. It’s a finite spot that too many people and businesses explore, only to find themselves unable to pull back from its magnetic force. It’s a spot where some venture in search of a competitive advantage, often with toxic consequences. It’s a spot where many problems become intentionally silenced, creating the long lasting risk of the silent problem phenomenon.

Bottom Line: Be wary of the “edge of what’s legal.” It’s often a trap.

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Silent Problems Play By Different Rules

May 17th, 2010

Have you ever noticed that problems that have been silenced tend to play by a different set of rules? When a problem that is being silenced is exposed, a strategy to keep it silent appears to be standard protocol. A case in point, I’ve discussed the silent problems over at Toyota repeatedly over that past 6-months. Quite honestly, records reveal that Toyota historically has tried to silence problems. This past week another story surfaced. This one out of the Associated Press, it states:

Toyota officials were looking to attack the credibility of witnesses who testified before Congress about sudden acceleration problems in the automaker’s vehicles, according to a report in Washington Post.

The Post says it obtained documents that show Toyota sought to create a public relations campaign based in part on polling that questioned the integrity of two witnesses. Such polls are used by businesses and politicians to test the weaknesses of their opponents.

The Post identifies the witnesses as Sean Kane, a Massachusetts safety consultant, and David Gilbert, an auto technology professor. Each criticized Toyota’s handling of the problem.

In response, Toyota told the Post it never produced advertisements based on the polling.

When I read stories related to silent problems like these, I’m not surprised by what is considered a possible defense/offense. Everything is placed on the table so to speak. Everything is calculated. Risk and opportunity measured. After all, once a problem has been silenced - a change in the game plan cannot occur midstream. Because this would be considered guilt, which carries a high degree of financial risk and exposure.

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5-Attaboys Displaces 1-Awe S…

May 12th, 2010

The impact that silent problems (problems that are being avoided, neglected, are going unnoticed or are being intentionally silenced) tend to be profound and damaging. Their impact can affect performance areas ranging frm profitability, to employee engagement & turnover, to customer satisfaction. This morning I came across an interesting article by Bob Sutton that highlights this effect. The article is titled Bad is Stronger than Good - The 5:1 Rule. It states:

“Bad is Stronger Than Good” is the title of one of my favorite academic articles, which shows that negative information, experiences, and people pack a far bigger wallop than positive ones. I touched on this theme in The No Asshole Rule and dig into in detail in the forthcoming Good Boss, Bad Boss. But perhaps the most important finding for most of us is the research on romantic relationships and marriages: unless positive interactions outnumber negative interactions by five to one, odds are that the relationship will fail. Scary, isn’t it?

Several studies found that when the proportion of negative interactions in a relationship exceeds this “five-to-one rule” divorce rates go way up and marital satisfaction goes way down. The implications for all of us in long-term relationships are both instructive and daunting: If you have a bad interaction with your partner, one (or apparently two, three, or four) positive interactions aren’t enough to repair the damage. It apparently takes at least five — at least over the long-term. Related studies on workplaces suggest, along similar lines, that bosses and companies will get more bang for the buck if they focus on eliminating the negative rather than accentuating the positive (although the latter is important, the best evidence suggests that more effort and resources should be focused on getting rid of bad people and experiences).

When we leave silent problems to sit and ferment, it takes a lot of good will to neutralize them. And in most instances, we come up short. Yes, the odds are against you. In fact I would suggest that the longer they remain silent, the challenge could easily approach 10, 15 or maybe even 20 attaboys to neutralize an entrenched silent problem. That is a high mountain to climb.

This is simply one more reason why silent problems should be dealt with proactively, not reactively. And conducting a silent problem audit is an effective means to completing the task.

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