When a crisis strikes, it can seem as if it has suddenly come from nowhere. But look through the debris and almost always you’ll find a seemingly obvious trail of clues that if acted upon could have prevented disaster.
The repeated calls from engineers that the O-rings joining the fuel boosters of the doomed Space Shuttle Challenger had not been tested in cold temperatures; long-running budget stress and time pressures leading to a hastily designed oil well being constructed underneath BP's Deepwater Horizon oil rig; the amassing data that consumers would rather stream movies than rent a DVD.
Yet so often companies miss the warning signs that indicate catastrophe is imminent. A new study from HEC Paris Business School and University College Dublin reveals why.
Using data gathered from interviews with financial advisers, bankers and regulators in the wake of the Irish banking crisis, the researchers found that rather than being oblivious to the clues of an imminent crisis, managers will often simply overlook them as something else or optimistically underplay the magnitude of the potential consequences.
In some cases they completely ignore them because they don’t align with their previous experience. The study highlights one particular interview in which a “bank manager talked about risk as a function of our memory [but] if you’ve never seen something happen before you don’t foresee it as a risk."
The report notes that the internal culture within a company can also play a role. Organisations that focus on short-term advantages (over long-term advantages) are more likely to miss signals, as are those that discourage “unwelcome information” or viewpoints that contradict the general consensus.
A delay in responding means that companies often miss the vital ‘recovery window’ within which to take action, meaning many responses come far too late.
However the researchers insist that crisis inertia can be overcome and offer a three-step framework to help managers and organisations get better at spotting and responding to the signs.
Learn to spot the distractions
Companies and managers should learn to “recognise the attention traps which distract us from noticing the signals”. This in turn will help them spot emerging trends. Resist the urge to prioritise daily over long-term issues. In practical terms this could mean organising candid interviews that invite participants to share their views freely, and that invite outsiders from other sectors to join.
Track the trends
Involve team members in scenario planning exercises that create and test multiple hypotheses. It’s not cost effective to pursue every potential anomaly, but by building a list of “trending topics” to keep an eye on, risk management teams can identify the signals that start to develop further.
Focus on impact over plausibility
The final step involves modelling the impact of emerging trends through simulation and modelling tools. In this stage, the “what-if” becomes the “how big” which should allow managers to move from contemplating whether something is even possible to evaluating the impact of these scenarios and defining the right actions to take should they become consolidated trends.
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