Monday, May 26, 2003

Root Cause Analysis

My Devereux friends may see in this column something that we quote from the late Weaver Falberg each year at the annual leadership award dinner, about avoiding the comfortable seat of success. (It's not available on the website, so I guess I'll have to wait until next May to put it into my Palm Pilot for future use.)

Anyway, my right-wing analog on the Tribune op-ed page of course blamed the Jayson Blair episode on affirmative action and liberal muddle-headedness, without recognizing that the issue is really organizational and structural, not political and ideological. Of course, she's the business school professor and I'm the ex-politician, so go figure.

East Valley Tribune, May 25, 2003

The Jayson Blair debacle at The New York Times isn’t really about affirmative action or political bias. The best analysis has come from Prof. Sydney Finkelstein of the Tuck School of Business at Dartmouth, writing in The Wall Street Journal. While a local business professor crams all facts into her pre-existing ideology, some Ivy Leaguer explains the actual organizations lessons.

Finkelstein contends that the Blair scandal matches what happened at Barings Bank and Motorola. Key executives at both companies were both very smart and were aware of what was happening -- but didn’t recognize the significance of facts that called their widely-acknowledged expertise into question. What they were hearing was so contrary to their internal assumptions that they proved incapable of understanding and acting. It’s less hubris than cognitive dissonance.

Nicholas Leeson, Finkelstein wrote, wasn’t some “rogue” trader covering up huge losses on speculative trades with a dummy account. His superiors in London approved his trading, so long as he kept winning (or didn’t report his losses). Even low-level clerks knew of Leeson’s large and risky bets. But the losses grew too big to ignore, and the loss of reputation, not the monetary loss, brought down the bank.

Motorola dominated the analog cell phone market, but did little about Nokia’s increasing success with digital phones. Motorola knew what was happening, because it licensed some key patents to Nokia, which reported back its sales results. Motorola resisted shifting resources away from its (then) highly profitable analog lines into the (then) unproven digital market, which proved disastrous.

We’ve seen additional examples of “reputational blindness” recently. Being a rocket scientist offers no protection, either. Congressional hearings last week into the Columbia disaster revealed NASA managers rejected pleas from lower-level engineers to request satellite photographs to check for damage to the shuttle’s wing. Maybe no useful photographs existed, but nobody with authority ever bothered to ask. Senior NASA managers apparently believed they and their top contractors knew more than anybody else about the shuttle program’s risks -- and thus saw no need to ask lesser mortals for help.

Ernst & Young was tipped to accounting fraud at HealthSouth, specifying accounts where expenses were classified as capital expenditures to reduce costs and boost profits -- but senior accountants didn’t believe their huge client would engage in a billion-dollar scam.

With hindsight, senior Times managers had evidence of Blair’s plagiarism and deceit. But according to Prof. Finkelstein, top editors didn’t act because of their institutional prestige and self-image.

Not only did outsiders consider Barings, Motorola, NASA, E&Y, and the Times tops in their industries, filled with really, really smart people -- but so did people inside each organization. Nobody questioned a young reporter who “scooped” everyone else on national stories; that’s what Times reporters are supposed to do.

Nobody questioned CEOs who had led Motorola back from near-bankruptcy to great success when they chose not to make and market digital phones; gutsy strategic decisions is what Motorola CEOs are supposed to do. And nobody who mattered questioned not seeking some outside help about the shuttle; staying focused on core mission tasks is what NASA managers are supposed to do.

As Finkelstein notes, it’s easy for people to fail to understand “evidence that challenges their deepest self-image.” Success is very comfortable. It’s extraordinarily hard for a successful manager to keep running scared. Smarts aren’t enough; too often, successful smart people stop challenging their beliefs and start thinking they’re smarter than they really are.

Successful business run perpetually scared, and their managers keep challenging their assumptions -- especially assuming that success today means success tomorrow. In other words, thinking that Jayson Blair proves you were right all along could be your big mistake.

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