Archive for May, 2010
When is the Exam?
Ever been caught in a situation for which you were not prepared? Ever dream where you forgot to attend a certain class at school, did not go for months, and then remembered, and the exam was to be in one hour, forgot the room, hadn’t studied, and then … panic? It can be unnerving. It evokes a very special anxiety, an unforgettable sensation. This type of anxiety is different than a surprise calamity that came from nowhere and it was something you could not have prepared for. The anxiety that comes from being unprepared is different because the consequences are typically very severe, sometimes disastrous, but very possibly preventable, had we prepared for it or to be surprised. It is but one dimension of the cost of unreadiness. That cost of unreadiness is terrible, nightmarish, fraught with self doubt and remorse, and becomes overwhelming when it is basking in the public eye. Sometimes, others suffer because of our unreadiness.
Unreadiness has different faces; the most distinguishable differences often exist between those that serve the interest of shareholders and those that serve the interests of the public. There are events of unreadiness that are shared among sectors. One that is hard to escape is capturing our attention because it painfully highlights a frightening level of apparently ubiquitous unreadiness. One indicator of the issue is the overwhelming amount of rhetoric and buzzing about from spectators to visible execution from those jumping into the fight as ready and agile gladiators.
The current crisis with the river of oil gushing upward in the Gulf of Mexico is a behemoth that resists constraints and carries dimensions of destruction that will change economies, lives, careers, communities, and perhaps the lens through which we view ourselves. It behaves much as Pandora’s Box, opened and releasing unbridled and irreversible calamities. There are overlays of causes, inclusive of a stated strategy to reduce dependence on foreign oil, one that may have created or perpetuated cozy questionable regulatory behaviors with the offshore drilling permitting and oversight process. There will be plenty of time for blame to be delivered. Right now, however, it is a distraction from the priority plugging the spewing hell.
Plenty of pundits are weighing in with “who is in charge, which is guilty, how much should we punish ….” Yet the still small voices of, “we can help, we have experts, I will lead, follow me lads” can’t be heard or remain silent. When no one is ready, everyone is guilty. It comes back to the eternal conflict between decision making systems, values, paradigms between the world and rules of economics and the world ruled by the rules of variability, uncertainty, the laws of physics, today’s engineering, and yesterdays science. It is very much about yesterday’s science and yesterday’s patterns applied to tomorrow’s problems. We create black swans from white ones, by the decisions we make (might want to read the book … “The Black Swan” by Nassim Nicholas Taleb) and what we chose not to consider in those decisions.
David Brooks, the columnist, has articulated several times that extraction of energy resources (oil, gas and coal) continues to have costly risks, albeit acceptable by consumers so far. The laws of physics make that undeniable. The coal mine disaster, the current oil geyser, Somali pirates hijacking tankers, refinery fires; there are many. Yet, energy is essential to life as we want it to be and as we need it to become. Our current demand is not likely to drastically change anytime soon, but maybe our strategic objectives should. The 800 pound gorilla in the room is too big to avoid. What we are witnessing are the secondary effects of harvesting and extraction economies and technologies. All extraction and harvesting sources have to be converted and that process leaves scars. Whether lumber, pulp, agriculture, food, minerals, fuels, all leave scars.
So our gorilla wonders about our choices. Do we set the same standards across the choices? Do alternatives share the same decision hurdles? Do they share the same oversight and regulatory burdens? How does the consumption immediacy of today reconcile with tomorrow’s predictable constraints?
Consider one example. If oil and coal had to meet the yoke of regulation from cradle to grave that the nuclear generation alternative endures, we would have very different behaviors. Today, the cleanest and safest choice is treated like the red-headed stepchild, a behavior not shared by the rest of the technologically literate world. We unknowingly or passively take on the risks of oil spills and mining accidents, but howl at the thought of a geologically sound repository site for spent fuels and continue to foster an onerous permitting process for new generating facility construction. It’s a tough one to reconcile. Balancing the laws of economics with the laws of physics is tough enough, but when mixed with the laws of political electability, it can become next to impossible. This issue is more about tomorrow than about today.
But the nuclear debate did not get us Pandora’s Gusher, unreadiness did, cut corners did, questionable regulatory behavior and integrity did, poor situational awareness did, and maybe some hubris did. There seem to be some choices, and none are cheap, fewer easy. Raising the standards of readiness call for a different way to plan, manage, and reward. It means ensuring with preparedness and responsiveness rather than insuring with financial instruments and distributed risk coverage. The risks and consequences are radically different. Again, we can pick the laws of physics, build agility, and respond; or the laws of economics, acceptance of fragility, and react. There are differences between managing from fear or confidence.
The 800 pound gorilla wonders about how we will decide. When we have tough choices, do we seek affirmation or confrontation? What will be the costs of our unreadiness tomorrow?
“The art of war teaches us to rely not on the likelihood of the enemy’s not coming, but on our own readiness to receive him; not on the chance of his not attacking, but rather on the fact that we have made our position unassailable.” Sun Tzu
Thoughts?
A Gulf of Inconvenience
The oil well disaster events of the last weeks have been nothing short of ugly. In the background, the echoes of simplistic politicians ranting “Drill, baby, drill!” strike discordance with the fears and unavoidable harm playing out in the Gulf and spotlighted on the nightly news. Congressional hearings into the events are fraught with finger pointing at those called to testify and between those testifying with blame becoming the volleyball, destined to be set up, passed, and slammed until it hits a score. In the meantime, on-the-fly brainstorming is generating and testing ideas to stop the river of oil spewing from its lifelong imprisonment below the surface of the sea; and has rendered predictable disappointments. There are lots of spectators watching, pundits blasting, gladiators battling to survive the ordeal, and some hiding from repercussions.
In the ensuing panic and spotlight, another scary dimension reemerges, how ready are we to tackle what we have not experienced before? Executives of the drilling operations confess, in retrospect, inadequacies in the analysis, evaluation, and preparation for the failures leading to the explosion and the current river of oil. It is messy, the oil spill, the accompanying chaos, and the level of activity to assign blame from the bleachers and the court of public opinion. There is one huge problem with the court of public opinion; it is typically concerned with assigning retrospective blame and exacting a full measure of justice. Often that justice comes as punishment for the convicted and increased regulation for everyone else. On the other side of these events, we will have to contend with choices about getting less and paying more. I wonder what the real cost of our current energy enriched lifestyle might be? I believe we all may experience some level of repugnance and disapproval of these energy extraction accidents, indeed very ugly, but are they a dark side of the convenience we enjoy? These events could have certainly been less likely, with different choices by the operators, their leadership and our shopping demands.
I want to be safe and comfortable, living the convenience that energy provides, but may be reluctant to bear the total costs. I don’t believe that I am alone. An interesting aspect of this scenario is fundamental to situations many industries may be facing. Do we create strategies with aggressive goals that lead to optimistic planning and biases in risk analysis? How much does the business strategy influence the science of decision making? Specifically, how are the random surprises of the variability in Mother Nature considered? When Mother Nature does not want to behave according to plan, do we change tactics? Do we change with deliberation or desperation? After all, when any of us are running behind schedule, the rise in anxiety and fear of failure is inescapable! How then, are choices made? Where do we anchor our thinking and decision making? How far do we explore the expensive options that Mother Nature may present, particularly when behind schedule and sunken investments are climbing!
What happens often is the juxtaposition of goals and decisions driven by the laws of economics and the subsequent actions driven by the laws of physics. We run the business with an economic lens, but Mother Nature can only behave with the physics lens (we can add the other sciences like chemistry, mathematics, geology). Sometimes we have to guess about what Mother Nature is going to do, and we’ll be wrong to some degree, sometimes really wrong. It happens to most of us, but we don’t necessarily think about it when things are going well at the well. As this plays out, we will discover poor decisions and we may be tempted to assign sinister or evil behind them. Right or wrong, we will seek blame and justice. Ugly positioning, influence peddling, legal battles, insurance nightmares and extended stalling strategies await us … these are driven by the laws of economics.
I want to be careful and keep the broad brush of judgment put away. I believe that regulation will constrain future actions and better protect us from harm, at a price. I still wrestle with my, or our, lifestyle and business decisions against this backdrop. Do I have the right scale when I choose? So, what price are we willing to pay and what risks are we asking some to bear?
How wide is the gulf that separates our convenience?
“Destiny is no matter of chance. It is a matter of choice: It is not a thing to be waited for, it is a thing to be achieved.” William Jennings Bryan
Thoughts?
What If?
There may be a really big storm brewing. It may be a signal from a political barometer, or positioning, real outrage… not sure, but the thunder is increasing. The last few months have stoked the fires of outrage, anger, frustration, and deteriorating confidence from a public that may feel that they may have been too trusting. Mine disasters are prompting a more diligent review of whether laws were broken and whether responsible regulators did not regulate, or were distracted when they should have been focused. The oil spill disaster is challenging the process of due diligence and the veracity of permitting submittals, leaving people scrambling to solve the should-have-been foreseen or explicitly considered in operational risk assessments. The financial crisis and the ensuing Goldman Sachs nightmare is ringing lots of alarm bells around the public service halls, prompting the questions of, “Did we do enough? Were we diligent in our responsibility? Where will the light of review shine next?” I suspect that readership will skyrocket for Government Accountability Office (GAO) reports that have been ringing the bells for regulatory reform, transparency, accountability, and better oversight for many years. The scary part of a pendulum swinging is that it often has an axe attached at the end. The court of public opinion is a feeding frenzy for responsible and irresponsible media.
The challenges ahead are not easy, simple, or clear insofar as right or wrong, the role of government, and the balance between protecting the public trust and preserving an environment that is economically fertile for business. The polarity of positions makes the task of finding societal answers that are workable frighteningly complex, requiring agile minds, principled players, and strategic balance. The ravages of unemployment and a riskier economic outlook may stoke the fires for those in search of the guilty. Anger and the search for public justice enjoy a history of harming too many innocent in search of the guilty.
For those enterprises where compliance is a large economic investment or burden, consider getting ahead of this storm. For those who were doing “just enough to get by,” change is likely around the corner.
Compliance brings three categories of costs:
• The Cost of Non-Compliance. That is all the bad stuff that happens when someone is caught and held accountable for breaking the rules.
• The Cost of Compliance. This is a really big number that captures all the activities and costs associated with understanding the rules, complying, or doing whatever is necessary so as to not be found in non-compliance. This usually has many, many more hidden costs that the explicitly budgeted costs.
• The Cost of the Fear of Non-Compliance. This one is very nasty as it captures all the unnecessary, just in case, better look it over, get more reviews, run it by the lawyers, get lots of extra approvals, let’s have a meeting, and endless tons of costs and constraints heaped on because we are afraid of getting in trouble.
Far too many of the assurance and compliance systems rely on “detect and correct.” The unfortunate consequence of control and contain systems that rely on downstream checks and inspections is that they will always fail to some degree. That means that sometimes we learn that we’re dead before we learn that we’re sick. Yep, failure is what tells us that something is wrong. The smarter folks are applying the principle of “predict and prevent.”
Now, what if the yoke of regulation and compliance is about to get heavier, and those who are responsible for guardianship of the public trust are under greater scrutiny, might they also be thinking about their own fear of non-compliance? What’s the cost to everyone else if that is true?
Where are our enterprises? Is this something to think about, or something to think through?
“A man does what he must – in spite of personal consequences, in spite of obstacles and dangers and pressures – and that is the basis of all human morality.” Winston Churchill
