Let’s answer the following questions. At your company:
- Is information actively sought? The opposing view should be genuinely welcomed.
- Are managers punished when they deliver news of failures or other bad news? The company should ensure that people involved in failing projects are not shunned or avoided.
- Are responsibilities shared? It is not enough that you deliver results; you must help others as part of your job.
- Is cross-functional collaboration encouraged and rewarded? Such incentives should be formalized, with managers’ effort tracked.
- Do failures trigger inquiries into the root cause? Such inquiries shouldn’t stop at “human error,” but result in better tools and decision processes to prevent future errors.
- Are new ideas are welcomed? They should be systemically tested.
- Is failure treated primarily as an opportunity to improve systems? Lessons learned from failure should be implemented.
You get the idea. The more of these questions you answer “yes” to, the better your organization is. I’ve adapted the list of questions from these DevOps experts. But the implications obviously go beyond software development into organizational health.
Ron Westrum describes three types of organization. Depending on how many yesses you had, your company probably lies somewhere between the two extremes.
Employees working in a pathological environment won’t have a sense of control. Too much stuff is subject to politics. As the community breaks down, fairness in decision-making also suffers. Tasks pile up, and there are even more politics, and even more energy expended, until everyone is burned out. Perpetually exhausted. Deeply cynical. Nothing matters except for the paycheck—which is not even sufficient to compensate for everyone’s pain.
How could an organization sink so low? In part, we can pinpoint the responsibilities of its leaders. But the destructive culture of an organization also depends on the business logic of the company. There are companies that are driven to reduce errors at all costs, so they treat any deviations from expectations as bad news. In such an environment, it’s very easy to slide toward a pathological dynamic. You can talk about psychological safety. You can run a retreat to build trust and discuss vulnerability. But it will always be an uphill battle. People default to the blame game.
Then you have organizations whose existence depends on unexpected wins. That’s right. These are organizations that need to deliver on today’s results. But they know that they also need to make constant bets on outsized windfalls. They deliberately create lucky breaks, every day. And so they must improve their betting averages. It’s easier to become a learning organization in this context. Let me explain with some examples.
If you are fragile, you can’t be agile
I’ve never realized how wide the margin of error being tolerated by venture capitalists is. It’s a magnitude unthinkable for most operating companies. A friend who’s in the VC industry once spoke to my class, a group of executives from a traditional manufacturer. This traditional manufacturer was aiming to create “disruptive innovation.” And the executives wanted to learn from startups to be agile and experimental. They also wanted to become more visionary.
Then one manager pointed at the financial projection of a startup and asked my VC friend, “How much do you expect this startup to meet the financial forecast in this PowerPoint?”
My VC friend had invested in this startup.
“They are going to miss it,” said my friend.
“Two to ten million? I don’t know.”
There was dead silence in the audience. For an operating company, missing earnings by a few percentage points would be enough to send its share price into a plunge. If an executive missed their forecast by two million, given the size of the revenue of the startup, their head would roll.
The divide between the two worlds is this: Venture capital firms win only through outsized upswings that happen infrequently. Most of their bets won’t work out. One jackpot will save the day. On the other hand, the traditional manufacturer in my class is making small profits every quarter, and that’s fine. But one catastrophe will wipe out years of goodwill and good fortune.
In other words, my VC friend makes a living through unexpected outcomes. The traditional manufacturer ekes out a living by eliminating variations. Nassim Taleb would describe the manufacturer as “fragile,” because it breaks under uncertainty. So it can’t move fast, let alone be agile. The VC firm, on the other hand, is anti-fragile. It profits because of uncertainty. If everything is perfectly predictable, with zero uncertainty, there would be no venture capital industry, no angel investors, and in fact, no entrepreneurs—only bureaucrats with Excel spreadsheets. It would be a sad world.
To be anti-fragile is not hedging, it’s creating options for outsized upswings
I’ve read a fair number of business books. But sometimes an idea is so powerful it changes the way you look at the world. Nassim’s Antifragile is one of those.
Here are three charts he drew that explain everything.
Imagine this is company A. You can see small gains and variations most of the time. Occasionally, there is a big bad outcome. For a commercial bank, for example, uncertainty can hit hard. A single loss can wipe out all previous cumulative gains.
Imagine company B. It’s a robust company. It experiences small or no variations through time. Never a large one. For most operating companies, this is Nirvana. Executives dream about having control over their environment and eliminating all uncertainties so they can focus on delivering predictable income growth. It’s small and incremental. “Don’t be greedy; be prudent,” they tell themselves.
And yet, with so many uncontrollable factors—technological changes, regulatory changes, consumer behavior changes, economic changes, climate changes—managers who think they are running company B will find themselves in a place more like company A. It’s just a matter of time.
Then you have company C, which looks like this:
Uncertainty benefits a lot more than it hurts company C. A venture capital firm, for example, expects to lose money on most investments. It just needs one big break to make everything pay off. Company C is the exact opposite of company A.
In short, company A tries everything to eliminate variation. Company C tries everything to create options. Here’s the thing: You don’t need to be a VC firm to look like company C. You just need to think like a VC and then work hard to create those real options. After all, an operating company can create options through investing, not in startups, but in internal projects it decides to fund.
Why is Amazon still a monopoly when so much has been written about it?
If strategic secrecy is of any value, if not telling your competitors how you run your company helps, Amazon should be in trouble. So many books have been written about it. Former executives publish many details of how its management team behaves, or how projects are evaluated and funded. But no one seems able to copy Amazon.
And I think it’s because even Amazon doesn’t know ahead of time which projects will pay off. What competitors know about what Amazon is doing doesn’t really matter. Jeff Bezos admits the three big growth drivers—Marketplace, Prime, and AWS—were bold bets and the payoffs were big surprises. And failure is part and parcel of this sort of invention.
I’ve recounted here the long list of failings at Amazon, and the list is still growing. Many projects looked good and then backfired terribly. Amazon’s Fire Phone is one of those. And that’s the point. Bezos wrote, “We’ve made mistakes, doozies like the Fire Phone and many other things that just didn’t work out. I won’t list all of our failed experiments, but the big winners pay for thousands of failed experiments.”
What Bezos calls experiments are not experiment inside the R&D lab. These are real products launched in the marketplace, with tens of millions of dollars invested in marketing, distribution, and customer support. And Amazon keeps launching them, even if most of them will continue to fail. Why? Because these are options. Only a tiny percentage of them will become big like AWS, but Bezos knows that no one can tell the difference between a diamond and dud in advance.
“Outsized returns often come from betting against conventional wisdom, and conventional wisdom is usually right,” Bezos said. “Given a ten percent chance of a one hundred times payoff, you should take that bet every time. But you’re still going to be wrong nine times out of ten.” AWS is exactly what turn Amazon into a profitable enterprise after 20 years of existence. Using a baseball metaphor, Bezos explained that “occasionally, when you step up to the plate, you can score one thousand runs. This long-tailed distribution of returns is why it’s important to be bold.” In business, unlike in the natural world where there’s a physical limit, a long tail in economics can be really long, with an extreme exponential outcome.
How betting changes the way we learn
When you see your business actually survives on chances, you become aware of things that you can’t control. There’s probably less hubris. There’s less pride about a company’s tradition. All you want to do is to improve your betting average. And if someone in the company fails in a project, you want to know if they have learned something useful and will apply it the next time. That requires an objective inquiry, not scapegoating. You simply can’t survive as a pathological company of the kind described our first table. It’s a business logic that necessitates a culture of curiosity, because otherwise the enterprise will collapse very quickly.
What Amazon shows is that option thinking is not limited to a VC firm. Innovation is a game of chance. There’s never complete information, unlike in a chess game. Business is playing poker. And so an operating company that is not thinking and creating outsized options is setting itself up for an eventual failure.
Thank you for reading—stay well.
P.S., When investing in options, it’s best not to hype up those options to your investors. The more hype you do, the less margin for error there will be. Have you seen a company that successfully carries out its experimentation in “stealth mode?” These are companies that invest in things without speaking about them too much. Or have you seen counterexamples where companies hype up things too early and get themselves into an impossible situation? Share your thoughts with us. We love hearing from you.