From Risk to Resilience: Learning to Deal With Disruption

To prosper in the face of turbulent change, organizations need to improve how they deal with unexpected disruptions to complex supply chains. Companies can cultivate such resilience by understanding their vulnerabilities — and developing specific capabilities to compensate for those vulnerabilities.
Joseph Fiksel, Mikaella Polyviou, Keely L. Croxton and Timothy J. Pettit

In an interconnected, volatile, global economy, supply chains have become increasingly vulnerable. Disruptions — even minor shipment delays — can cause significant financial losses for companies and substantially impact shareholder value. Globalization has made anticipating disruptions and managing them when they do occur more challenging. The potential risks of disruptions are often hidden, and the potential impacts may not be understood. This often results in “black swan” events that can be understood only after the fact. As author Nassim N. Taleb has warned, “Our world is dominated by the extreme, the unknown, and the very improbable ... while we spend our time engaged in small talk, focusing on the known and the repeated.”1

Although companies originally moved production offshore to countries such as India and China to take advantage of lower labor costs, events like Iceland’s 2010 volcanic eruption and the Japanese tsunami in 2011 have shown that the vulnerabilities of extended supply chains are real and serious. For example, according to the U.S. Federal Reserve, 41% of Minnesota manufacturers said that Japan’s tsunami had affected them negatively.2 As a result, many manufacturers have reevaluated their sourcing options, and some are shifting operations back to their home markets. While these companies perceive other advantages to reshoring, including improved responsiveness and domestic job creation, reducing their exposure to risk has been an important driver.

The reality is that supply chain practices designed to keep costs low in a stable business environment can increase risk levels during disruptions. Just-in-time and lean production methods, whereby managers work closely with a small number of suppliers to keep inventories low, can make companies more vulnerable due to the lack of buffer capacity. For example, many companies that followed the lean inventory model were severely impacted by Japan’s tsunami: Within a week, General Motors Corp. temporarily shut down its Chevrolet Colorado and GMC Canyon plant in Shreveport, Louisiana, because it lacked components supplied from Japan.3

Supply chain practices designed to keep costs low in a stable business environment can increase risk levels during disruptions. Just-in-time and lean production methods, whereby managers work closely with a small number of suppliers to keep inventories low, can make companies more vulnerable.

While companies tend to focus on the supply side of their operations when scanning for potential risk factors, they also need to pay attention to the customer side. Increasing demand volatility is an important factor that can affect a company’s operations and ultimately its revenue. For example, in March 2013 Cardinal Health Inc., a distributor of pharmaceuticals and medical products based in Dublin, Ohio, announced that its contract with the drugstore chain Walgreens would not be renewed. Walgreen Co., based in Deerfield, Illinois, had been one of Cardinal Health’s largest customers, accounting for more than 20% of revenue for 2012. The news caused Cardinal Health’s share price to plummet by 8.2%.4 However, the company was able to recover quickly and continue its growth thanks to deliberate efforts to expand and diversify its customer base.

Coping With Supply Chain Risks

Traditional methods for coping with supply chain risks are based on the notion of stability as the “normal” state of affairs: Events such as explosions or floods are seen as unwanted deviations from the norm. In recent decades, most large private enterprises adopted systematic approaches to managing their risks, notably through insurance and active mitigation of supply chain risks. The importance of risk management was elevated by a number of high-profile disasters, including the deadly release of poisonous gas from a Union Carbide plant in Bhopal, India, in 1984, which resulted in thousands of deaths. Further motivation came from standards set by nongovernmental organizations such as the International Organization for Standardization and from government legislation, including the U.S. Securities and Exchange Commission’s requirements for disclosure of “material” business risks and the German “Law for Control and Transparency in Business Entities.”5

A more integrated approach to risk management, called “enterprise risk management (ERM),” became popular in the mid-1990s and has been widely adopted by large corporations.6 It gives company executives a detailed and comprehensive view of the risks associated with different business activities, enabling managers to make more informed decisions about how to manage risk portfolios. Another risk management process, known as business continuity management (BCM), incorporates elements from disaster recovery planning and crisis management, including how to respond to disruptions and maintain backup capacity for operational systems.7

While processes such as ERM and BCM can help companies avoid supply chain disruptions and recover normal operations quickly, they also have serious limitations. To begin with, they rely too heavily on risk identification. In a complex and turbulent global supply network, many of the risks that a company faces are unpredictable or unknowable before the fact. These “emergent” risks are often triggered by improbable events whose causes are not understood, and their potential cascading effects are difficult to understand a priori. Clearly, it would be impractical for companies to identify and investigate all the potential risks that may be hidden in their global supply chains.

Second, ERM and BCM depend on statistical information that may not exist. Risk assessments are limited by the quality and credibility of the assumptions upon which they are based, and faulty assumptions or data can lead to misallocation of resources. Of particular challenge are low-probability, high-consequence events for which there is little empirical knowledge; managers may underestimate the probabilities of these events or the magnitudes of their consequences because they have never experienced them.8

Third, the traditional ERM process of risk identification, assessment, mitigation and monitoring is based on a simplified, “reductionist” view of the world. Each risk is identified and addressed independently, and hidden interactions are seldom recognized. This procedural approach can lull organizations into a false sense of complacency that could be shattered by an unexpected event (for instance, an oil spill in the Gulf of Mexico). The complex, dynamic nature of global supply chains requires constant vigilance to discern systemic vulnerabilities, as well as exceptional agility and flexibility when disruptions occur.

Finally, traditional risk management is predicated on the goal of returning to a stable operating condition; risks represent potential deviations from this “normal” state. However, a more realistic view is to recognize that every disruption represents a learning opportunity that may suggest shifting to a different state of operations. For example, a company that anticipates increased flooding in Southeast Asia might migrate its supply base elsewhere. Identifying latent opportunities in the risk landscape will enable a company to exploit those opportunities faster than its competitors.

The Need to Cultivate Resilience

We believe that organizations need to improve how they deal with supply chain complexity and unexpected disruptions so that they can prosper in the face of turbulent change. Organizations tend to become less resilient as they grow more complex. However, they can cultivate resilience by understanding their supply chain vulnerabilities and developing specific capabilities to cope with disruptions. They can try to emulate some of the behaviors seen in natural systems — tolerance for variability, continuous adaptation and exploitation of opportunities created by disruptive forces. Resilient systems don’t fail in the face of disturbances; rather, they adapt. Depending on the type of disturbance, the adaptation can be rapid or gradual.

A decade ago, authors Gary Hamel and Liisa Välikangas described the quest for resilience as seeking “zero trauma.”9 Few corporate managers believe that zero trauma is a realistic goal today, but some now recognize that resilience can be an important success factor that complements their traditional risk management processes. We define resilience as “the capacity of an enterprise to survive, adapt and grow in the face of turbulent change.”10 In practical terms, resilience means improving the adaptability of global supply chains, collaborating with stakeholders and leveraging information technology to assure continuity, even in the face of catastrophic disruptions. Resilience goes beyond mitigating risk; it enables a business to gain competitive advantage by learning how to deal with disruptions more effectively than its competitors11 and possibly shifting to a new equilibrium.

A classic example of supply chain resilience occurred in 2000 when one of Finland-based Nokia’s key cellphone part suppliers suffered a major fire. By identifying the crisis quickly, Nokia was able to secure alternative supplies and modify the product design to broaden its sourcing options. By contrast, Swedish multinational Ericsson, which was reliant on the same supplier, lost about $400 million in sales due to its slowness in crisis response and eventually exited the cellphone business.12(However, Nokia subsequently made serious missteps in its efforts to compete in the smartphone market and ultimately sold its devices business to Microsoft Corp.)

Supply Chain Vulnerabilities and Capabilities

Our SCRAM (supply chain resilience assessment and management) framework enables a business to identify and prioritize the supply chain vulnerabilities it faces as well as the capabilities it should strengthen to offset those vulnerabilities.

Over the past seven years, we have worked with a number of companies, including fashion retailer L Brands Inc. (formerly known as Limited Brands), Dow Chemical, Johnson & Johnson and Unilever to develop a comprehensive framework for assessing supply chain vulnerabilities and addressing them through enhanced resilience capabilities. (See “Supply Chain Vulnerabilities and Capabilities.") To develop our taxonomies of vulnerabilities and capabilities, we studied existing literature and also conducted interviews and focus groups with managers and employees at Limited Brands and other companies that had experienced supply chain disruptions.13 Subsequently, we identified linkages between specific vulnerabilities and capabilities, enabling us to suggest proactive strategies for improvement, and we developed an assessment tool for business use.14 The resulting framework, which we call supply chain resilience assessment and management (SCRAM), is based on an explicit characterization and prioritization of an organization’s vulnerabilities and capabilities. (See “About the Research.”)

About the Research

We have been researching the concept of enterprise resilience for more than seven years. This article synthesizes the managerial implications of that research and describes how the practice of enterprise resilience can help companies to manage their global supply chains in an increasingly turbulent business environment. Our initial research led to the development of the SCRAM tool for supply chain resilience assessment and management, which we validated with data from seven global manufacturing and service organizations. Mixed-method triangulation was used to identify specific linkages between the inherent vulnerability factors and controllable capability factors, enabling the tool to produce recommendations for capability improvement to overcome high-priority vulnerabilities. After the initial research phase, we worked extensively with Dow Chemical to establish a process for implementing the tool, which has been applied in more than 20 of its business units. We gained additional insights through interviews and interactions with other organizations, including Zurich Financial, Johnson & Johnson, Owens Corning, Shell Oil and Unilever.

Identifying Resilience Factors and Linkages

Based on our research, we identified six major types of supply chain vulnerabilities, which we define as “fundamental factors that make an enterprise susceptible to disruptions.” A frequently cited factor was turbulence. In the context of our framework, turbulence is defined as changes in the business environment that are beyond a company’s control, including shifts in customer demand, geopolitical disruptions, natural disasters and pandemics. Another category of vulnerability isdeliberate threats, such as theft, sabotage, terrorism and disputes with labor or other groups. Additional vulnerabilities came from external pressures that create constraints or barriers (such as innovations, regulatory shifts and shifts in cultural attitudes); resource limits that have the potential to constrain a company’s capacity (such as availability of raw materials or skilled workers); thesensitivity and complexity of the production process; and the degree of connectivity in the company’s supply chain, which implies a need for coordination with outside partners. Finally, supply chains are vulnerable to disruptions that could affect their multiple tiers of customers and suppliers. (See “Supply Chain Vulnerability Factors.”)

Supply Chain Vulnerability Factors

Our framework includes six major vulnerability factors, each broken into subfactors. Vulnerabilities are typically inherent to the business and difficult to avoid.

In addition to helping us formulate the list of vulnerabilities, focus groups also helped us define a list of capabilities that companies can call upon to respond to their particular vulnerability patterns. In all, we identified 16 relevant capabilities, which we define as “factors that enable an enterprise to anticipate and overcome disruptions.” These are: (1) flexibility in sourcing, (2) flexibility in manufacturing, (3) flexibility in order fulfillment, (4) production capacity, (5) efficiency, (6) visibility, (7) adaptability, (8) anticipation, (9) recovery, (10) dispersion, (11) collaboration, (12) organization, (13) market position, (14) security, (15) financial strength and (16) product stewardship. (See “Supply Chain Capability Factors,” for explanations of these 16 capabilities.) Using the lists of vulnerabilities and capabilities as a template, we tested them at eight companies to understand their interrelationships, with the goal of creating a managerial tool for improving performance. We identified 311 separate “linkages” whereby specific capabilities can counteract specific vulnerabilities.

Supply Chain Capability Factors

The framework includes 16 capability factors, each of which is broken into subfactors. Companies can strengthen appropriate supply chain capabilities to offset the vulnerabilities they have.

Our resulting SCRAM framework provides a general methodology for companies to identify their most important supply chain vulnerabilities and to set priorities for capabilities that need to be strengthened. For example, a company that faces unpredictable market demand could strengthen a number of capabilities: flexibility in manufacturing to satisfy surges in demand; accurate, up-to-datevisibility of demand status to support timely decision making; early anticipation and recognition of market changes to enable strategic responses; and close collaboration with customers and suppliers to ensure coordinated action. Similarly, a company concerned with dependence on a complex supply network could work on flexibility in sourcing by identifying alternative sources, flexibility in manufacturing by reducing lead times, and anticipation by recognizing early warning signals of possible disruptions. Based on the results of their SCRAM analysis, managers can develop a portfolio of capabilities to address important resilience gaps and strengthen overall competitiveness.15

Putting the SCRAM Framework to Work

Although similar organizations are likely to share some similar features, different companies — and even business units within companies — will have their own distinct profile of vulnerabilities and capabilities. An organization with high vulnerabilities that does not have adequate capabilities will be overexposed to risks; in response, it should invest resources in improving the particular capabilities in question. Conversely, an organization that faces low vulnerabilities but invests heavily in capabilities may be eroding its profits unnecessarily. (See “Finding the Zone of Balanced Resilience.”) Clearly, there is no “one-size-fits-all” approach. Organizations need to pursue a balanced resilience strategy by developing the right portfolio of capabilities to fit the pattern of vulnerabilities that they face.

One company that has incorporated the SCRAM framework into its way of doing business is the Dow Chemical Co. Since 2010, Dow has implemented this framework at more than 20 of its global business units, achieving significant business benefits. For example, after applying the SCRAM process to its P-Series family of glycol ether products, Dow identified several disruption scenarios, including a production site shutdown, a raw material supply outage and an internal raw material allocation shortage. The company developed a simulation model to test the consequences of these scenarios and was able to confirm a 95% service level with its existing capabilities. Moreover, the analysis revealed opportunities for reduction of fixed assets and working capital, resulting in $1.1 million in annual savings.16 Another Dow business used SCRAM to improve its resilience to raw material supply shortages and identified more than $1.5 million in preventable losses.

The SCRAM approach represents a systems view of supply chain dynamics, helping companies to understand the inherent vulnerabilities that could lead to disruptions and the capabilities that are within their control. By learning from experience and developing a better understanding of their vulnerabilities and capabilities, companies can reduce the frequency of disruptions and the severity of their impacts, resulting in increased customer satisfaction and reduced supply chain operating costs. While reducing inherent vulnerabilities may be difficult, there are many options for improving capabilities. The cost of the improvements must be balanced against the expected supply chain performance benefits.

Early adopters of resilience thinking have already demonstrated how they can augment traditional risk management practices with new capabilities that help them to anticipate, prepare for, adapt to and recover from disruptions. In some cases, they are able to treat disasters as opportunities for gaining competitive advantage. For example, before the 2010 eruption of the Eyjafjallajökull volcano in Iceland grounded millions of air cargo shipments, DHL, the international shipping company, had an emergency plan in place. It was thus able to rapidly redirect 100 flights from its hub in Leipzig, Germany, to destinations in southern Europe that were less affected, and also to shift many deliveries to ground vehicles. Ultimately, DHL was able to avoid significant financial impact while strengthening customer loyalty.17

Early adopters of resilience thinking have already demonstrated how they can augment traditional risk management practices with new capabilities that help them to anticipate, prepare for, adapt to and recover from disruptions.

Building resilience is not a substitute for other methods of ERM. Rather, it is an ongoing process that enables companies to embrace change in a turbulent and complex business environment by expanding their portfolio of capabilities. The field of supply chain resilience is still young, and there is a great need for additional research, both to understand the resilience of complex industrial systems and to develop innovative methods and technologies for improving enterprise resilience.18This research will benefit from drawing upon multiple disciplines, from ecology to social sciences to systems engineering. From a management perspective, executives need to understand the cost-benefit trade-offs associated with building capabilities in order to judge the return on their resilience investment; this will require additional empirical research. Finally, there is a need to expand resilience thinking into other aspects of enterprise management, such as organizational resilience and behavior change. Establishing a culture of resilience will help companies to thrive in an age of turbulence.

REFERENCES (18)

1. N.N. Taleb, “The Black Swan: The Impact of the Highly Improbable,” 2nd ed. (New York: Random House Trade Paperbacks, 2010).

2. U.S. Federal Reserve Board, “The Beige Book” (April 13, 2011), www.federalreserve.gov/monetarypolicy/beigebook.

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Benefits of Internet Marketing for Small Businesses

Getting on the internet marketing bandwagon can prove to be the best decision an entrepreneur decides to take when they start their new business. This is because this form of marketing aligns along with the nature of customers who make decisions regarding purchases. Marketing through internet allows the business to build a relationship with their customer and even their prospects. This method of communication with both is cost effective, regular, and is a form of mass marketing. Here are some more benefits of internet marketing for small businesses online.

Convenience for International Customers and Prospects

The internet allows you to do your business around the clock and that too internationally. No more worrying about getting your store open on time anymore, or about keeping an eye over your employees. By offering products directly to the customers online, you are allowing them a convenient option of shopping. They can easily browse though all categories, read through the product descriptions, and talk to an active customer representative when they need help. Not to forget the payments options, which they can select, according to which one is best suited for them. If they have the experience they were expecting from your services, they will refer your website to more customers, increasing the amount of traffic.

Costs

Doing business online and doing business in a physical retail outlet has differences when it comes down to the cost. When you own a store online, you do not need to hire many employees; one or two are enough. In addition, you will not need to buy displays, shelves, freezers, coolers, or anything which may increase the amount of money you are investing. An online store needs someone who can attend to customers, someone who is handling calls and emails, and a couple of helping hands who are stocking the inventory in the warehouse. No need to pay rents, property tax, and major saves on utility bills as well.

Social Platform Advantages

Internet marketing allows an online business owner to make the most of the internet in almost every aspect. Free publicity through platforms like Facebook, Twitter, LinkedIn, YouTube, drive massive numbers of traffic back to the business’s website. If everything is properly managed, the business will be a major success, and majority of the reason behind this success is going to be none other than internet marketing.

5 Ways to Massive Profits with Brad Sugars

This instructive and astute montage centers around Brad Sugars’ formula for the 5 Ways to Massive Profits. The author of “Instant Cashflow” and “The Business Coach,” Brad Sugars explains step-by-step his “business chassis” to increase profits and build an amazingly powerful, super-producing, profit-yielding business

The Pro-Active Approach

A proactive strategy in a business involves anticipating the dynamics of the market and the probable changes in competition, well in advance. This approach includes predicting and identifying the change before it actually occurs and adopting a suitable alternative strategy as a result.

This approach revolves around the concept that it is essential to be well aware of the dynamics of the market, and thus, take actions to prepare in advance, and shift the organizational responses to different altered environmental factors.

Businesses that are active in the technological industry; need to keep abreast of the new ideas being introduced within the market, and design appropriate plans of action to quickly adapt to an ever changing market environment.

Adopting a proactive approach helps spend time and money in the right way, while building the organization. It helps the organization save both, time and money, in the short and long term as well. With a clear idea of what to expect in the future, an organization and its employees are prepared with a strategic plan, to counter the effects of a major policy change or critical alteration in the industry procedures.

By opting for a proactive approach, a business can build the company right, from the start, by designing a structure which is well aligned to their own goals, mission, vision and objectives, with the future in mind. This will help the organization take every business decision on the basis of their short and long term objectives that are planned in advance, keeping the probable changes in the market dynamics in mind.

A reactive approach is tantamount to giving a reaction, once a major change has taken place in the market. It is just like opting to change the entire outdated software and technological system within the company, after the latest advancements have taken the industry by storm; speeding business processes and leaving you unable to cope.

As opposed to this, an organization which works with a proactive approach, will update its system processes with the first proved advantage of the new technological systems, and will improve their efficiency to increase their market share, where a reactive approach organization is still scrambling to regain their former clients.

Given the marked differences in both approaches, which approach would you want to opt for in your business?

by Brad Sugars

The 5 Levels of Entrepreneurs

My definition of a business is a commercial, profitable, enterprise that works without me. 80% of businesses fail within 5 years of start-up and most fail because the owner didn’t know what to do. Business is like a game,  if you want to play the game, you need to learn the rules. You need to learn from someone who’s succeeded at the game, not from scorekeepers (accountants), the rule makers (lawyers), the spectators (employees), the money holders and collectors (Bankers) and not from D- grade players (business owners who are just going to fail).

Here are the 5 Levels of Entrepreneurs to give you a framework that’ll allow you to understand yourself and the thoughts you have that got you to where you are now, as well as the tools to grow from where you are now to where you want to be…

Level 0 – The Employee

Everyone starts here but it’s not the most recommended strategy for wealth creation. Your income is at the mercy of someone else’s decision on how much they decide to pay you. Many employees relate to money that it is scarce, that there never seems to be enough, but that’s not true if you look a little deeper.

Level 1 – The Self-Employed

Here is the first jump someone takes from being an employee to being-self employed, however it is quite common that people will get stuck here. Rather than it being their business, they’ve become an employee to their own business. You get stuck working IN the business rather than working ON the business.

Level 2 – The Manager

You’ve finally grown your business and now have employees and you’re starting to feel like your business has started gaining momentum… It’s easy to get stuck on this level as well, especially when you find yourself working harder, longer hours, doing your own work and fixing other people’s mistakes. In order to get out of this level you want to work on your systems, you must have good systems that allows the business to function smoothly.

Level 3 – The Owner/Leader

If a business stops growing, it begins dying. As the Owner/Leader you have more time on your hands than you ever had before. Previously your focus was on cashflow and now your focus will shift into profit. At this level you will now be receiving profits rather than making and/or earning money.

Level 4 – The Investor

Investors have a very different way of thinking when compared to those on previous levels. As an investor you make your money selling businesses, not running them. You buy the business, build them up and then sell them to other people. Look for the best investment return.

Level 5 – The Entrepreneur

This is the most exciting level to be on. At this level you begin making money by raising capital. You use other people’s money to build paper assets like shares, franchises and licenses. Sell the dream, and then work like heck to make it a reality. Never give up. Stay focused and committed and always keep your mind focused on what isn’t real but soon will be.

Trust yourself and your team, to turn it into a reality.

Brad Sugars

http://bradsugarsblog.com/

Reducing Unwelcome Surprises in Project Management

Many project challenges and failures catch executives by surprise. But not all such surprises are truly unforeseeable — if you know where to look.

Why do so many projects fail to meet their goals for time, cost and performance? Regardless of the answer, many project managers and their executive sponsors seem to be surprised when a new project gets off track: “Why didn’t we see that coming?” Even projects that employ sophisticated techniques for risk management can encounter surprising derailments. Those methods, while powerful, can only manage known risks. But projects are new and unique. What about the things that we don’t even know that we don’t know? These “unknown unknowns” — often called “unk-unks” — are lurking in every project, just waiting to emerge, surprise and derail plans. To what extent are they inevitable? What could we do better?

Project knowledge comes from learning about the project — its overall context, its goals and objectives, the process for achieving them, the people, tools and other resources to be deployed, and how all of these affect one another. This learning begins in the planning stages. One might think that planners would consider all of the scenarios, evaluate all of the options and identify all of the risks — but that is seldom the case. Many planners resist wasting resources on planning projects that may never happen. Even after a project gets the green light, a typical attitude of many managers is: “We’re already behind. We know what we need to do. Let’s get started!” As a result, the distinction between what is knowable about a project and what is actually known can be quite large.

Many so-called “unk-unks” aren’t really unk-unks at all. Rather, they are things no one has bothered to find out. Indeed, there are two kinds of unknowns: unknown unknowns (things we don’t know we don’t know) and known unknowns (things we know we don’t know). (See “Converting Knowable Unk-Unks to Known Unknowns.”) Every project has some of both. The techniques of conventional risk management apply only to the known unknowns. Yet some unk-unks areknowable and can be converted to known unknowns through a process of directed recognition.

Converting Knowable Unk-Unks to Known Unknowns

Some “unknown unknowns” are actually knowable. With directed recognition, they can be converted to known unknowns — to which the conventional techniques of risk management can then be applied.

This article provides an overview of the targets, methods and tools — the where, why and how — of directed recognition. (See “About the Research.”) First, we introduce six project domains in and around a project where uncertainty resides (and where recognition of that uncertainty should occur). Second, we describe six characteristics that increase uncertainty in projects and explain whythey make unk-unks more likely. Finally, we present 11 techniques for converting knowable unk-unks into known unknowns. The goal is to reduce the unwelcome surprises in project management.

About The Research

Our research develops the theory of knowable unknowns by synthesizing transdisciplinary theories and findings. We began by positing a conceptual framework composed of key factors that drive unk-unks, as proposed in the scholarly literature on operations management, project management, systems engineering, product development, complexity and risk management. We explored the subfactors of each of the factors, their relationships to each other and additional factors that should be added. Specifically, we conducted an extensive literature search of papers about areas including complexity theory, systems engineering, economic theory, behavioral psychology, knowledge management, software development and process engineering; keyword searches of “disasters,” “technological failures,” “knowledge gaps” and “unpredictable surprises,” which led us to broader, relevant literature on the economic theory of contingencies and contracts, sociology and behavioral psychology of individuals and groups, chemical processes, and knowledge management; and a Google search of “unknown unknowns.” Our objective was to see if there was something about a project that prevented its managers from recognizing that there could be potential unk-unks. While finding many sources and drivers of unk-unks, we also came across a variety of methods and tools for detecting knowable unk-unks. Our explorations uncovered many factors, indicators and circumstances contributing to the likelihood of unk-unks in projects. In response, we iteratively reconfigured our initial framework by revising our conceptual groupings.i

Where the Unk-Unks Are: Six Project Domains

Projects operate as systems. Project outcomes and performance result not only from individual project elements but also from how the elements work together. Every project has at least five key subsystems,1 which are enmeshed in the project’s broader context or environment. These five subsystems plus the project’s context comprise six important domains, each of which contains both known and unknown unknowns.

Result Subsystem

The desired result of most projects is a product, a service or some other deliverable. Results have many components, all of which must work well together to deliver success. Problems in one area can spill over into other areas, causing a cascade of problems. For example, the HealthCare.gov project at the heart of the Affordable Care Act of 2010 was more than just an e-commerce site selling insurance; it was a system with complex interfaces to other government systems across a wide range of departments. In October 2013, when there were serious issues with the launch, it was evident that the project had run into messy integration problems with its key product.

Process Subsystem

The work required to execute and manage a project is another type of system, one made up of activities, tasks and decisions related by the flow of information, work products and deliverables.2Efficient and effective processes depend not only on the activity content but also on the relationships among those activities. For example, a lean, value-adding activity could fail to add value if it receives bad inputs (which in turn could impact other activities and cause problems later). Because the network of activity relationships and its implications can be hard to see and manage, the process subsystem is often rife with latent unk-unks.

In March 2008, for example, British Airways and the British Airport Authority suffered a huge embarrassment at London’s Heathrow Airport Terminal 5. After the project’s use of the latest thinking in lean project management had been touted, the opening of BA Terminal 5 turned out to be a debacle, with hundreds of canceled flights and thousands of lost bags. BA lost $32 million, and two senior managers lost their jobs. While the BA project team had focused on the technical side of the project (such as getting the building equipped and testing the building’s services), it neglected operational logistics and staff training. On the opening day, many staff were late for work (they couldn’t find parking) and weren’t able to log into the computer system. BA’s experience underscores the fact that many unk-unks lurk within the complex network of tasks and relationships composing a project.

Organization Subsystem

The people, teams, groups, departments and functions collaborating on a project represent another type of system. In many cases, this system breaks down due to what is often referred to as “poor communication.” However, the solution isn’t for everyone to communicate with everyone else. Rather, it’s necessary to strike a balance between effective information transfer and information overload. When the organization subsystem is suboptimized by miscommunication, a lack of communication or information overload, the risk of unk-unks grows.

Tools Subsystem

To manage activities and transfer information, people in organizations need tools, facilities and equipment. Today, most tools needed for activities such as information exchange, compatibility and service support are software-based. Unfortunately, many software tools are unable to transfer data due to various incompatibilities and organizational decisions. For example, computer-aided design tools can work well in some settings but not in others. When an aerospace design project wanted a certain CAD tool so it could collaborate easily with its partners, the project’s parent organization said it had already standardized around a different brand. Adversities in the tools subsystem can be a significant source of unk-unks for a project.

Goals Subsystem

Most projects have goals for time, cost and performance (functionality, capability provided, quality, scope, etc.). These three areas compete with each other: Improving on functionality, for example, often means increases in cost and/or time. The same often goes for performance: Increasing one capability usually requires a trade-off with another. The goals subsystem influences what is and is not possible, permissible, desirable and effective. As these trade-offs become more pronounced, the possibilities for unwelcome surprises increase.

All five of these project subsystems are related to each other. To accomplish the project’s goals, the organization uses the tools to do the work (execute the process) and produce the desired results. All of these relationships imply no small amount of complexity — which, as we will see, provides a fertile breeding ground for unk-unks.

Context

Every project exists within a larger context. A project may be part of a larger portfolio of projects, or it might have multiple stakeholders who have competing visions and requirements for success. A project’s ideal software tools might be consistent with its parent organization’s standards for multiproject commonality, or they may be completely incompatible. The project context contains a mix of known and unknown unknowns, and it interacts with elements in each of the five subsystems. As managers look to convert unk-unks to known unknowns, they need to consider all six of these domains and their relationships.

Six Factors Driving Uncertainty

Several characteristics of a project’s subsystems and context make surprises more likely. Although unk-unks are by definition specific things we don’t realize we’re missing, it’s possible to look at a project and its context and come to the realization that unk-unks are likely to exist — and why. For example, a large, complex project is more likely to encounter unk-unks than a small, simple project. An organization that is actively looking to uncover unk-unks is more likely to convert them into known unknowns. We have identified six factors — characteristics of a project and its context — that tend to increase the likelihood of unk-unks.3 (See “Factors Contributing to Unknown Unknowns.”) By evaluating a project in terms of these factors, managers can learn why their project might encounter unk-unks — and thereby justify why they should invest in taking a closer look for them.

Factors Contributing to Unknown Unknowns

The six factors shown here tend to increase the likelihood of unk-unks (surprises) in projects.

Complexity

A complex system contains many interacting elements that increase the variety of its possible behaviors and results. The five project subsystems described above each have many elements (components, activities, people, tools and goals) that interact in various ways to generate many kinds of outcomes. All else being equal, the complexity of a project (or a subsystem) increases with the number, variety, internal complexity and lack of robustness of its elements. A project with more tasks, more people and/or more requirements is usually more complex than a project with fewer. When a project’s elements have greater variety (for example, they do three different tasks rather than doing the same task three times, or have a team with representatives from four different functional organizations versus a team with four people from the same function), complexity also increases. The internal complexity of an element (for example, a project composed of five huge tasks versus a project composed of five small ones) also matters. Furthermore, if a project’s elements are robust in the face of change (such as engineering design changes, requirements changes, etc.), then they can act as change absorbers, preventing the propagation of change throughout the system, whereas elements lacking this robustness will amplify complexity.

Other aspects of project complexity depend on the relationships among the project’s elements. As the number, variety, criticality and internal complexity of these relationships increase, so will complexity. For example, a project to develop a product with many interconnected parts (for instance, some requiring close proximity, some needing to transfer energy) is extremely complex — and that is just the product subsystem. Collectively, the subfactors of element and relationship complexity can increase the level of complexity significantly, thereby adding to a project’s likelihood of encountering unk-unks. (See “Situations That Increase the Likelihood of Unknown Unknowns.”)

Complicatedness

Regardless of its complexity, a system may appear more or less complicated depending on one’s point of view. In contrast to complexity, complicatedness is more subjective and observer-dependent. For example, an automobile with automatic transmission is more complex than one with manual transmission; it has more parts and intricate linkages. To drivers, it is less complicated (even though it can be more difficult to fix).4 Similarly, a software application may seem more or less complicated depending on the simplicity and elegance of its user interface, regardless of the complexity of its underlying code. A project’s complicatedness depends on the participants’ abilities to understand and anticipate the project. That depends on subfactors such as the intuitiveness of the project’s structure, organization and behavior; its newness or novelty; how easy it is to find necessary elements and identify cause-and-effect relationships; and the participants’ aptitudes and experiences. The more complicated a project seems to the project manager and other participants, the greater the likelihood that something important will be missed, thus increasing the likelihood of unk-unks.

Dynamism

A project’s dynamism — its volatility or the propensity of its subsystems’ elements and relationships to change — adds to its complexity. A project’s external dynamics are especially likely to affect its goals. Regulatory agencies may impose new rules, customer preferences may change or competitors may alter their strategies. Changes in goals may lead to changes in a project’s results (the product or deliverable) and its means of achieving them. Portions of a project might be outsourced, customers or suppliers might become formal partners and so on. Such changes realign the components and relationships considered to be “part” of the project. And increasing complexity and complicatedness increases the likelihood that a project will encounter unk-unks.

Equivocality

Project work requires a lot of sharing of information. If the information is not crisp and specific, then the people who receive it will be equivocal and won’t be able to make firm decisions. Although imprecise information itself can be a known unknown, equivocality increases both complexity and complicatedness. For example, some projects require a number of participants to attend meetings “just in case” an issue comes up that might affect them. The inability to pin down exactly who needs to be at any particular meeting increases scheduling complexity and the length of meetings and makes for “too many cooks in the kitchen.” In such cases, an attempt to avoid one area of unk-unks ironically increases the likelihood of other types of unk-unks.

Offering incentives for candor can show people that there are advantages to owning up to errors or mistakes in time for management to take action. At the same time, it is imperative to eliminate any perverse incentives that induce people to ignore emerging risks.

Mindlessness

We refer to the perceptive barriers that interfere with the recognition of unk-unks as mindlessness (as opposed to mindfulness). Examples include an overreliance on past experiences and traditions, the inability to detect weak signals and ignoring input that is inconvenient or unappealing. By mindlessly relying on past data, book inventories and existing documentation or components instead of requiring physical verification, managers may be inviting unk-unks. Individual biases and inappropriate filters can keep periphery-dwelling knowledge in the shadows. A project manager’s limited “bandwidth” requires filtering out the “noise” while letting important information through. Unfortunately, filtering is prone to errors, and the information that gets screened out, willfully or not, can be critical. Although it can be tempting to suppress or dismiss negative information while accentuating the positive when promoting a project, that can be a slippery slope. Mindlessness increases a project’s susceptibility to surprising unk-unks.

Project Pathologies

Whereas mindlessness pertains largely to the individuals associated with a project, project pathologies represent structural or behavioral conditions in and around projects as a whole that allow unk-unks to remain hidden. Project pathologies include mismatches among the project subsystems and context (for example, goals for which no organizational unit is responsible), unclear expectations among stakeholders and dysfunctional cultures. A dysfunctional culture can manifest itself in numerous ways: information asymmetries (for instance, some stakeholders have key information about a risk that others lack), shooting messengers, covering up failures, discouraging new ideas and making some topics taboo for discussion. A manager might interpret a lack of active opposition as positive support, but in many organizations people who harbor doubts keep quiet, knowing that opposing views (either negative or positive) simply aren’t welcome. Each of these project pathologies can make unk-unks more likely by decreasing the likelihood of uncovering them before they become unwelcome surprises.

How to Reduce Unk-Unks

Each of the six factors that increase the likelihood of a project encountering unk-unks can affect each of a project’s six domains, yielding 36 places to look more specifically for knowable unk-unks. How should a manager go about looking? What techniques can a manager use to shine a light on these areas? We have identified 11 tools that can help managers with directed recognition: seven are project design approaches and four are behavioral approaches. (See “From Unknown to Known Unknowns.”)

From Unknown to Known Unknowns

Directed recognition, which can entail both project design and behavioral approaches, can convert knowable unk-unks to known unknowns.

1. Decompose the project.

Modeling a project’s subsystems — to understand their structures, how their elements relate to one another and the subfactors of complexity — builds knowledge that helps expose unk-unks. Decomposition should begin with the natural structure of the overall purpose of the project (the “problem”), identifying the subproblems relating to key areas (such as customer need, product functionality and the venture team) and complementing it with experience and experimentation. For example, one company was able to decompose a project5 by:

a) Identifying the problem’s goals, context, activities and cause-effect relationships

b) Breaking the domains into smaller elements — such as product modules, process activities and stakeholders

c) Examining the complexity and uncertainty of each element to identify the major risks (known unknowns) that needed managing and the knowledge gaps that pointed to areas of potential unk-unks

d) Managing the selected pieces of the project in parallel with different project management methods — for example, treating various project threads as “options” and determining further actions contingent on the outcomes.

2. Analyze scenarios.

Scenario planning involves constructing several different future outlooks.6 Unlike many approaches to forecasting, it accepts uncertainty, tries to understand it and builds it into the reasoning. Rather than being predictions, scenarios are coherent and credible alternative futures built on dynamic events and conditions that are subject to change. Scenario analysis looks at how indirect threats or situations affect stakeholders, competitors, suppliers and customers,7 and it is particularly suited to uncovering unk-unks in projects.

3. Use checklists.

Codified learning from past projects can enlighten future planning. This often shows up in the form of checklists or prompt lists. Of course, providing such tools won’t help if they are viewed as obstacles rather than facilitators of success. Checklists and categories need to be viewed as helpful prompts, not substitutes for thinking. Although some professionals such as doctors have sometimes resisted using checklists, airplane pilots have long known that a good checklist helps smart people free up thinking for higher-level problems.8

4. Scrutinize plans.

Project plans are merely a hypothesis for how success will occur. At a minimum, plans should contain information about the expected work (for example, when it should start and finish, projected costs, anticipated results, responsibilities and resource requirements). These expectations need to be scrutinized closely by project participants and other stakeholders. The scrutiny can come in the form of reviews, audits and even formal verifications of how the content was generated.9 Just as reliable products may require some redundancy, project plans may need predefined contingencies. An independent board of overseers composed of experienced experts, empowered to obtain all kinds of project information, can help reduce potential unk-unks lingering from planners’ entrapped mindsets. In a well-known case in 1992, NASA’s Mars Observer was lost due in part to a lack of independent verification and validation.10

Although it can be tempting to suppress or dismiss negative information while accentuating the positive when promoting a project, that can be a slippery slope.

5. Use long interviews.

Long interviews with project stakeholders, subject matter experts and other participants can be effective tools for uncovering lurking problems and issues.11 However, interviewers need to be careful not to be too enthusiastic about the projects they’re examining and not asking “yes or no” questions. The best interviews probe deep and wide and ask “out of the box” questions, which can help managers identify latent needs that project stakeholders are unable or unlikely to articulate readily. Consider Silverglide Surgical Technologies, a Boulder, Colorado-based company specializing in nonstick electrosurgical instruments.12 It came up with what it thought was a novel product — a nonstick surgical probe. Although surgeons were intrigued by what the new product could do, they weren’t accustomed to using a probe to operate, so the product bombed. Subsequent studies revealed that had the surgeons been asked, they would have preferred nonstick forceps to a probe. That was a knowable unk-unk.

6. Pick up weak signals.

Weak signals often come in subtle forms, such as unexplained behaviors, confusing outcomes or a realization that no one in the organization has a complete understanding of a project. Recognizing and interpreting weak signals requires scanning local and extended networks, mobilizing search parties, testing multiple hypotheses and probing for further clarity.13 It’s also helpful to include tools we have previously discussed, such as long interviews and diverse scenarios.

7. Mine data.

When vast amounts of data are available from a plethora of databases, electronic data mining can be a particularly powerful tool for extracting implicit, previously unknown and potentially useful information. By simultaneously reviewing data from multiple projects, data mining could enable project managers to identify the precursors of potential problems. The NASA Engineering and Safety Center (NESC) was established to improve safety by proactively identifying precursors to potential problems hidden in NASA’s diverse databases. The NESC found electronic data mining to be a particularly promising tool for the nontrivial extraction of implicit, previously unknown and potentially useful information toward accomplishment of this goal.14

8. Communicate frequently and effectively.

Regularly and systematically reviewing decision-making and communication processes, including the assumptions that are factored into the processes, and seeking to remove information asymmetries, can help to anticipate and uncover unk-unks. The 1998-2004 Ladera Ranch earth-moving project in California, for example, needed to find a way to deal with any unk-unks related to discovery of prehistoric Indian ruins or rare animal or plant species the dig might uncover.15The project manager and the team met weekly to discuss whether the project or its current plan needed to be revised and how. Effective and frequent communication is essential for project adaptability and agility. However, this doesn’t necessarily mean communicating large volumes of information, which can cause information overload. Rather, the key is knowing how to reach the right people at the right times.

Managers can stress the limits to what can be known about a project, especially at its early stages. They can cultivate a culture of healthy skepticism about projects purporting an absence of risk.

9. Balance local autonomy and central control.

Many unk-unks are obscured by the relationship complexity and dynamism of a project — dictated by diverse technologies, geographic sites, interests and external influences. Such confusion makes the project management team vulnerable to unwelcome surprises. Using decentralization of control to grant autonomy to the local nodes of a multinodal project facilitates adaptation and innovation as well as recognition of unk-unks (such as the effect of regulatory changes and customer preferences). Although decentralization helps project managers compensate for their knowledge gaps, it creates challenges for governance. Local nodes are less willing to report problems. To achieve adequate control, project managers may adopt an approach that combines bottom-up empowerment to correct errors with top-down efforts to embed learning across the project.16

10. Incentivize discovery.

Some of the most promising ways to identify unk-unks include timely and honest communication of missteps, anomalies and missing competencies. Offering incentives for candor can show people that there are advantages to owning up to errors or mistakes in time for management to take action. At the same time, it is imperative to eliminate any perverse incentives that induce people to ignore emerging risks.17 Among the most common perverse incentives are organizational tendencies to stress short-term over long-term results — a key contributor to the financial crisis of 2008.

11. Cultivate an alert culture.

An alert culture is made up of people who understand how unk-unks can derail projects and who strive to illuminate rather than hide potential problems. Managers can cultivate a culture of alertness in several ways. First, they can emphasize systems thinking, which recognizes that deciding what to do in a complex system is not simply a matter of repeating what was successful before. Systems thinking also emphasizes the use of multiple perspectives to reach a decision, does not expect to be completely right and changes course in the face of contrary evidence. Second, managers can stress the limits to what can be known about a project, especially at its early stages. They can cultivate a culture of healthy skepticism about projects purporting an absence of risk. Third, managers can seek to include and build a wide range of experiential expertise — intuitions, subtle understandings and finely honed reflexes gained through years of intimate interaction with a particular natural, social or technological system. Fourth, they can seek to develop the characteristics of a high-reliability organization: preoccupation with failure, reluctance to simplify, sensitivity to operations, commitment to resilience and deference to expertise.18 And fifth, managers can attempt to learn from surprising outcomes. In their eagerness for resolution and clear explanations in reviews, managers should eschew the rhetoric of justification and hold out for the possibility of a deeper understanding of the causes of failure.

PROJECTS ARE COMPLEX and complicated. A project’s desired results, planned process, performing organization, tool suite, goals and context all lend themselves to complexity and complication. What’s more, any of these areas can harbor unk-unks, the undetected problems that are buried in the morass of elements and interactions in and around a project. Some unk-unks are actually knowable, but individuals and organizations acting in mindless or pathological ways will allow the unk-unks to remain hidden, where they can fester into even bigger problems before becoming evident. Fortunately, there are tools and strategies to help managers. The 11 approaches described above give managers a tool kit for directing recognition toward uncovering the knowable unk-unks lurking in projects and converting them to known unknowns. By providing guidance on where and why unk-unks exist in projects and how to recognize their clues, managers can reduce the number and magnitude of unwelcome surprises.

REFERENCES (19)

1. These five project subsystems have been noted in several prior works, including T.R. Browning, E. Fricke and H. Negele, “Key Concepts in Modeling Product Development Processes,” Systems Engineering 9, no. 2 (summer 2006): 104-128; S.D. Eppinger and T.R. Browning, “Design Structure Matrix Methods and Applications” (Cambridge, Massachusetts: MIT Press, 2012); and R.V. Ramasesh and T.R. Browning, “A Conceptual Framework for Tackling Knowable Unknown Unknowns in Project Management,” Journal of Operations Management 32, no. 4 (May 2014): 190-204.

2. S.D. Eppinger, “Innovation at the Speed of Information,” Harvard Business Review 79, no. 1 (January 2001): 149-158.

Tyson R. Browning and Ranga V. Ramasesh

Why Your Sales Reps Can’t Close

Think your team has a “closing” problem? Think again.

How often have you heard leaders say, “My salespeople can’t close”? If you’re a sales manager, you’ve probably even said it. But failing to close is never the real problem. Never. That’s just the symptom. The problem is that sales reps neglect important activities during early stages of the sales process.

Unless you address the broken links in your prospecting system, your sales reps will continue to struggle. It’s like back pain. You can stretch and put heat on an aching back, but unless you treat the source of the pain—a pulled muscle or degenerating disc—your back will continue to hurt.

Put Your Finger on the Real Problem

When you start analyzing what really went wrong with missed sales opportunities, you’ll typically discover that your sales reps didn’t make time to prepare for their meetings. They didn’t plan agendas, do their research, tailor their pitches, or even check the clients’ LinkedIn profiles to identify shared interests, connections, and similarities.

Other common prospecting problems:

• The initial prospects were unqualified. They had no idea why they were meeting with the salesperson or why they should be interested.
• The salesperson didn’t ask enough discovery questions.
• The salesperson left without getting agreement on next steps or scheduling the next call.
• Follow-up consisted of a series of emails that promoted products, didn’t address the client’s unique concerns, and had no calls to action.
• The salesperson was clueless as to why his emails were greeted with radio silence.

This is not how you wow prospects, build relationships with them, and convert them into clients.

One of my clients was on the way to a high-profile meeting. If his team wowed the client, they had an opportunity to close a million-dollar deal. I asked my client how the sales reps prepared. His answer: “Oh, we talk about it in the car on the way to the meeting.” Was their sales manager clueless, or what?

Start at the Source

If your team has trouble closing, go back to the beginning—qualifying prospects—and examine your entire sales process for missing links and broken tactics.

Ask these pointed questions:

• How are sales reps getting leads?
• How are these leads qualified?
• Are salespeople asking the right questions to identify prospects’ problems and propose thoughtful solutions?
• Do sales reps demonstrate product features, or do they talk ROI?
• What is the marketing plan for following up?

Don’t even think about training your sales team on closing techniques. Save your money. Instead, give them a sales process that works.

The ROI of Referrals

More often than not, the problem is with a team’s prospecting methods. If your reps are chasing cold leads, they’re pretty much set up to fail. There’s only one kind of lead that should be in your pipeline. Only one kind of lead with a 50-percent conversion rate. Only one kind of lead that sales managers should care about.

That’s hot leads—the kind you source through referrals from trusted allies.

Every sales professional agrees that referral selling is, hands down, their most effective prospecting strategy. When you prospect through referrals:

• You bypass the gatekeeper and score meetings with decision-makers every time.
• Your prospects are pre-sold on your ability to deliver results.
• You’ve already earned trust and credibility with your prospects.
• You convert prospects into clients at least 50 percent of the time (usually more than 70 percent).
• You land clients who become ideal referral sources for new business.
• You score more new clients from fewer leads (because all of your leads are qualified).
• You get the inside track on your prospects and ace out your competition.

Ditch the Canned Pitch—Ask the Right Questions

If your team is getting in front of the right prospects and still can’t seal the deal, they’re not engaging in insightful discussion or asking compelling questions.

Thoughtful and provocative questioning has a huge impact on close rates and sales revenues. When sales reps ask smart, probing questions to understand what their clients really need—not just what the clients think they need—the scale of projects increases, creating win/wins for everyone. Your company gets bigger deals. Clients get solutions that actually solve their problems and create measurable business results. And they are happy to offer referrals to their networks.

Bravo! You’ve addressed the problem, not the symptom. Your client looks good, your team is prepared, and deals are yours to win. You are now a true sales manager.

http://www.nomorecoldcalling.com/note-to-the-sales-manager-why-your-sales-reps-cant-close/