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(originally published by Booz & Company)


How to Prevent Self-Inflicted Disasters

1. Clarify who is responsible for which decisions, taking into account the influence that informal leaders already have (decision rights and norms). The decision rights for large, unrealized risks are probably unclear, because by their nature, these risks involve long-term concerns with an uncertain payoff. Risk prevention and mitigation measures may also involve a complex group of actors, especially when work is outsourced or offshored. Some companies, including many financial-services firms, assign risk exposure to specialized departments. But these risk departments — which are typically disconnected from mainstream operations and led by managers with little authority — may lead to a false sense of security. People feel little need to concern themselves, because the department is there to take care of it. Yet if the risk department does not have the authority or influence to affect company decisions, then who will step in to ensure that self-inflicted black swans don’t appear?

To establish a more appropriate group of decision rights, you may need to set up a cross-organizational team to manage information on significant risks. Make sure that some members of this team have the requisite decision rights to ensure that practices are put in place and that people comply. Other members may be influential people who have no formal role in preventing risk, but who are personally committed to the idea and well connected informally.

Formal decision rights should be backed up by informal discussions to establish general agreements. For example, what if a contractor sees a practice that seems dangerous? Whom should he or she inform? What if that person doesn’t act on it? Who should then step in? Once these informal general agreements have been reached, design the formal decision rights to complement those agreements.

2. Align incentives and other motivators to promote awareness of potential risks and their prevention (motivators and commitment). Because incentives are rarely designed with self-inflicted black swans in mind, they may produce conflicting priorities. The CEO of a financial institution may be charged by the board with looking out for long-term health, but individual traders are compensated on the short-term revenues they generate. Or a manufacturing company may have a safety-conscious culture alongside a high-pressure production schedule; managers who can’t keep up are seen as letting everyone else down.

It’s not easy to resolve these tensions, and people often rely on both formal and informal support. If the company has established rules about the priorities and rewards involved in anticipating risk, and if most people are regularly exposed to informal conversations about the dangers of cutting corners, they are more likely to avoid peril. It also helps when people involved in a complex situation can meet openly to hash out the issues and think together about ways to resolve the tension between being fast and being safe.

You can often find evidence of poorly aligned incentives by talking to managers in the field. Have they “normalized” their view of problems, discounting the idea that catastrophes could happen and letting excessive risk become business as usual? Their mindset can be similar to that of one oil company engineer who wrote in an internal e-mail, just before a disaster, “Who cares? It’s done, end of story, we’ll probably be fine and we’ll get a good [follow-up] job.”

To redesign motivators and commitments may require an explicit review of your organization’s gaps and inconsistencies. How closely aligned are the promotion and bonus structures with the behaviors you want to promote? Do employees care about short-term gain only, or do they have long-term growth and the preservation of their jobs in mind? Once you have established some answers to these questions — through surveys and analysis of your existing incentives — you can then begin moving those incentives closer to the motivators and commitments you need.

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Editor’s note: This article is part of a body of management theory and practice called organizational DNA. Take our new online survey to see your own organizational DNA profile — and gauge, among other things, how well equipped your company is to prevent and mitigate self-inflicted crises. Click here for the survey and more information.
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