This post is based on a conversation between The McKinsey Quarterly and two business strategists; Lowell Bryan and Richard Rumelt. It’s part of a series of conversations they had about how the current economic downturn came about and what management lessons can be learned.
The first thing they say is it takes about five years for these things to unfold so what we are seeing now is just the beginning.
What struck me most closely was the example Richard Rumelt used because it is something I have witnessed time and again when management do not understand what the true purpose of performance measures is – they are just information and should be added to the mix of things like common sense, environmental predictions and any other number of factors. The people that develop performance measures make one fatal assumption – and this is the single biggest lesson we should take from the crisis – that human beings act rationally. They are not rational and do not make rational decisions, they like to think they do but most decisions are based on advice received and ‘gut’ instinct. If you surround yourself with poor advisers, or even worse ‘yes men’, and have no ‘gut’ guess what? Your decisions will tank. It’s your responsibility to develop your gut no one else’s. You should also pick a Mastermind Group you can trust, this is what all successful entrepreneurs have always done. Like the bank in the UK that put a Retail Chairman in charge of the Bank – that person’s gut was definitely on a holiday that day.
To prove the point Rumelt uses the Hindenberg Airship disaster to prove the point. He calls it the, “smooth sailing fallacy” and the public sector is one of the best at believing this particular fallacy. Prior to May 1937 when The Hindenberg Airship burst into flames in New Jersey it had made hundred of successful flights. If you had been on board on that last fateful flight no matter how hard you tried you would not have been able to predict the disaster. The smooth sailing fallacy is the fallacy that you can predict a future crisis by studying the bumps and wriggles of past flights.
If you want to see a disaster coming you have to look beyond the performance data and ask some simple questions like, “Is it really sensible to be flying this high in a wooden gondola slung under all that hydrogen gas?”. Rumelt says you don’t need hard data before you think like that, you just need common sense. It’s called risk management. some people get risk management some people don’t. The one’s that don’t are the one’s that buy into the ‘smooth sailing fallacy’. Or as Rumelt puts it, they mistake performance measures for reality. Competent management always looks deeper than just the numbers and measures. Incompetent managers merely focus on measures, body counts and quarterly earnings. That’s how we got into the crisis – we have to learn how to manage by not just looking at the performance meter.
