Tag Archives: failure

Strategy, the Accounting Equation and the failure of Arrium

If I remember rightly, the very first thing you learn in Accounting in first Year Uni is the Accounting Equation.  The fundamental framework that underlies the recording of a business’s activities.

Assets = Liabilities + Shareholder Funds

It means that for everything a company has, there is a claim on it by either the owners of the company, or by those that the company has a liability to (i.e. its suppliers of labour, inventory, cash etc).

But its actually more than this.  Bear with me, its actually the basis of strategy!

Everyone’s heard the lie line “the purpose of the company is to increase the wealth of the shareholders”.  So the Board of Directors can believe they are acting correctly and ethically when they pay out dividends, even if this slowly compromises the company’s ability to survive.   Almost certainly this will also shaft the suppliers to the company.  So when a Board ignores warnings and continues to give cash to shareholders, Administrators need to step in to start looking after suppliers.  i.e.  Looking back to our Accounting Equation, the shift in strategy becomes obvious – the emphasis moves from looking after shareholders, to looking after those with the Liability  (the Shareholders).

This isn’t abstract, it translates directly into the real world.  Have a look at Arrium.  Since One Steel became Arrium in 2012, it paid out a large percentage (41%+) of its profits as Dividends.   Despite plenty of warnings that trading conditions were deteriorating, despite profitability diminishing, and having to maintain crushing debt levels.  It still looked after the shareholders.  Only in 2015 did it have to call a halt to the Dividends.  There was no building a war chest to make the company more resilient.   Consequently, the Administrators have taken over and will now look after the Creditors, to the detriment of the Shareholders.

So the fundamental strategy of a company isn’t the value proposition of a company that it takes to a market segment,  it’s how it balances the competing needs of owners and suppliers so that it can survive!

success, failure and the space in-between

I had a coffee with a friend yesterday that got shafted at work. She had been working on an exciting new agenda for some months, got signoff at every level and was ready to transition into the new leadership role that came with her plan. Unfortunately they (the evil bosses) took her plan, but replaced her in the leadership role with a political appointment that won’t be able to deliver. To add insult to injury, she will be seconded to support the new “leader” in delivering her plan. Unsurprisingly she is a bit miffed (understatement!) and sees herself as having failed.

Plan BSo we had a chat and I tried to be supportive, outlining my thoughts on success and failure.

Most people are very good at defining success, we teach it at school from the very beginning. There is a right answer pre-defined by the teacher, and if you’re not right, you’re wrong. i.e. failure is simply the state of “not success”. But real life is much more complex, more shades of grey. There are normally a couple of right answers, and many more “almost right” answers that we can work with. But still we we are trained to only define success not failure, and if we don’t achieve it in our careers, we tend to get emotional and flail about as we see ourselves as having failed.

Having worked in innovative and entrepreneurial environments almost my entire career, failure and I are good friends. In fact I now pretty much expect to not succeed in anything until I have had a couple of go’s at it. However I don’t support the Seth Godin concept of that “worthwhile things are hard, and you should keep on whacking away at it until you succeed” I prefer the Scott Kilmartin concept of “The wisdom of years helps you decide when you should quit a project, no matter how personally painful it is”.

All this can seem a bit confusing, but I have a fairly simple approach to most things I get involved with.

Define Success
This is normally easy (as we spend our lives doing it) and there are plenty of resources to help guide you if you are confused or unsure about your personal goals. Obviously SMART Goals are good (Specific, Measurable Attainable, Realistic, Timely). An example of defining success could be offering a new product to five existing customers and getting 2 sales within a month.

Define Failure
This is a a lot more difficult, but I lean towards parts of the SMART Goals framework (but just the Specific, Measurable, Timely parts) to define this. I also normally define failure after I have defined success as it gives you a nice contrast, but I don’t simply define failure as the opposite of success though. An example of failure could be offering a new product to five existing customers and not getting any appointments to explain the product within a month. Defining failure clearly also offers much better learning opportunities for you when things don’t work out right.

Recognise there is space in between.
You don’t need to define the difference between success and failure, just recognise that a result that falls in that space means you will have to come up with a plan B, and kick it into action. Remember, that this is probably the most likely outcome, so embrace it when it comes.

Defining both success and failure upfront means that you can be a hell of a lot more effective and less emotional when things don’t pan out the way you want. It also means that you stop investing your time in dud ideas quickly, and stick with the ones that might just pan out.

My friend didn’t get to be the recognised leader of the new agenda, however she did get to be the architect of it and the implementer. Turns out she can live with that once she realised she hadn’t failed and they are using her plan, its just that she didn’t comprehensively succeed.

4 tips for avoiding invisible failures

Have you ever noticed how successful businesses tend to have nice biscuits in the kitchen, normally something special, wrapped in chocolate, perhaps with a little dash of marshmallow or jam. Meanwhile businesses on their last legs, normally have a couple of broken Anzacs in the biscuit barrel. Not to say I don’t like Anzac’s, its just that broken ones seem to accompany businesses about to fail.

I’ve talked about the importance of recognising failure before, and I wanted to talk it about again this week as I have visited a firm with some “broken Anzac’s in the kitchen”. Failure has lots of attributes; it can be catastrophic or minor, likely or unlikely, frequent or rare even desirable or undesirable, and of course a whole lot of other things.

But the attribute I want to talk about today is the most insidious attribute of all, its visibility. Sometimes failure is obvious, its a “thanks but no thanks” response to a pitch. Hopefully, you learn, adapt and move on. But sometimes failure isn’t recognised because its simply invisible, meaning you don’t know you have failed and can’t learn, adapt and move on. Call me judgemental if you like, but consider:

  • The owner of an IT services partnership I have known for many years. He told me “We are doing really well, because we have managed to cover out costs for the last decade”. The two man firm was really just them being contractors, pretending they were in business and never noticed that their client list hadn’t changed over the last 5 years either. They never considered that with effort they could have more than this, they just felt “no work, no pay” was their lot in life. Their failure was invisible to them.
  • The owner of a small marketing firm, who told me “we must be doing everything right, because we are making about $500K profit a year”. He never got invited to pitch to new businesses, was never considered to be a trusted advisor and every day was hard work. In fact his business didn’t grow because he was leaking customers as fast as he could get them on board, and every ex-customer hated his guts.. He saw himself as a “winner” with vast success just around the corner. Because he wouldn’t recognise his failures, he changed his goals so that the $500K profit defined success. He altered his goals to suit the outcomes, so that he never failed and never changed his ways.
  • An executive in a large Australian Telecommunications business who was a friend of mine, and had held a series of strategy based roles. He moved through a series of business units that all failed after he left. In each case he felt that the reason for failure was poor execution, and it was never his strategy, despite the fact he was the common denominator. He refused to recognise that he contributed to the failure, so never learnt from it and was eventually squeezed out as he couldn’t impact profitability.

So failure can be invisible because it wasn’t in your aspirations, or you just won’t recognise it, or you trick yourself into thinking you are always a winner. But if you wanted to recognise this invisible failure and wanted to do something about it, there is a couple of things I think you can do.

1. Define success and define failure

You may be pitching a new product to 6 customers – getting two sales is outright success, getting no interest is failure. A result somewhere in between means you need to tweak your product, and failure means you should drop the product. Defining success is generally easy but rarely done, especially when its qualitative. Defining failure – or when you give up and try another tack is generally much, much harder to do. Not because its technically difficult, but because it makes people uncomfortable. However doing both gives you much more clarity on approaching any task.

2. Ask yourself what would getting lucky look like?

Some people just get lucky, they happen to sit next to famous people or potential customers on a plane and get on like a house on fire. People who never fly, normally complain about this phenomena. Exploring the question “What would getting lucky look like” helps you visualise outcomes that you may not be targeting, but capable of achieving. Therefore you can act, fail, learn and then alter your behaviour to achieve heights you never considered before.

3. Enjoy your competitors product

Have a good look at what competitors are doing and focus on what you like and their success. All too often we tend to feverishly focus on our own stuff the only comments we make about competitors is criticism. By looking at what competitors do well, you can see what your potential customers see and it open up new ideas of what your success could look like.

4. Notice the little signals

Sometimes success isn’t black and white, especially if its qualitative like being “valued”. And qualitative successes tend to have lots of little indicators along the way, such as; a client that wants to catch up for lunch, being asked to sit on a discussion panel, being cc’d on communications that don’t directly affect you. If you understand what the signals of success are, and they are missing, then you are seeing signals of invisible failure.

So why does all this have mind share with me at the moment? I got offered some broken Anzac biscuits last week by a company I was pitching to, and on leaving the premises I asked myself “Why would actually want to win their business? – It will be less lucrative, and they are sure to argue over every point in my invoices plus pay late”. By recognising the situation as a failure, I can create time on my schedule for much better opportunities. Perhaps with Tim Tams rather than Anzacs.

Own Goals

Last week I was honoured to sit in a meeting of a team that was assured of success. I say this with disgust though as the group refused to clearly define what they they were trying to achieve, specifically so they couldn’t fail. Sadly its too easy to get away with this in a NFP environment.

And because I have the shits up, I thought I would write about the 3 most common areas of failure that I see amongst leaders.

1. Lack of goals

Don’t define desired outcomes, don’t define what success looks like, and especially don’t define what failure looks like. This means that you are absolutely assured of not failing. You can carry on about culture and process if you like, but culture and process without one eye on outcomes means you can end up with some really nasty results. After things go really bad, you tend to hear “I was only following orders”. Employees of AWB, Securency and OneTel all thought they were doing a fabulous job.

2. Create small goals

If you create really small goals, its really easy to be successful. Unfortunately you tend to get stuck in this cycle and tend to believe your own success so much, you don’t even notice the big opportunities that wave to you as they pass you by. Certainly Real Networks thought it was doing pretty well when it rejected Tony Fadell‘s idea for a content delivery system for MP3 player. Apple liked it and launched iTunes with its music player into a crowded market. And speaking of music, the record industry did really well for artists when protected their revenue streams by suing Napster. They now have a tiny share in the digital music market.

3. Change your goals to suit your outcomes

The number one area of failure I see in start-ups is that they change their goals to match their outcomes. If you don’t get sales, you were just trying to validate a market. If you don’t get profits, you were just exercising your production systems. Blogger was a side project of Pyra Labs inc. who were building an online project management and CRM tool. After it was bought by Google, Google let the founder Evan Williams, of Twitter fame, go.

If you set smart goals, you risk failure. You also learn and get better.

Going to go home and wash now.

Failing Smarter

Last month we ran a fascinating session on failure at the Churchill Club. It was prompted by a comment of a friend of mine who had been the commander of the Australian forces in the Solomon islands a couple of years ago. He said “Of course failure is going to happen, so we give people room to fail in training”

The conversation on the evening covered a number of different views of failure that were food for thought, including:

Science needs failure. Its basic process, the scientific method, is to make a hypothesis then test it repeatedly. Each failure makes the hypothesis more robust. Scientific hypothesis are never proven, but each failure in trying to “prove it wrong” adds to its weight. Interestingly, Science also recognises that failures can also have enormous value in an unexpected way. Known as serendipitous outcomes, there are too many examples to mention where something was invented by mistake. Consequently its accepted in research funding that interesting failures could likely occur through a new research direction.

The art world values failure, they call it creative accidents.  In fact some Artists set out to deliberately fail hundreds of times, just to see what happens.

For the military failure is expected and the impacts are serious – failure causing death is all to likely an outcome. Therefore, individuals are given room to fail as much as they need in training so, that they can get things right when it matters. This focus by the Military on failure led to the formation of the first military staff college in Prussia in 1801 – Its basic thrust was “lets learn from our mistakes”.

But sadly – Australian business has a problem with failure.  In a small market like Australia its impact is great, as compared to a large market like the USA where the impact is generally small. Consequently it is rarely planned for, learnt from or even acknowledged.

But the kicker for the evening for me was this:

In Science – Research funding applicants are generally only successful around 20% of the time, but almost never on their first go. Clever researchers expect this, and consequently design their first round proposals to derive the maximum amount of feedback on what is wanted by the funding body when the expected failure occurs.  They see the first failed application as the part of the process that determines exactly what’s wanted, but isn’t stated in the brief.

I think there is an awful lot to learn for us in business, from just that little idea.

What happens after failure….

This is a video of a speech I did in June this year on corporate failure at AIMIA.  Rather than talk about climbing back up, or just hanging on the cliff, I decided to talk about what happens when you actually fall off and your business fails. It was probably a bit too candid.  Its not about the legals or the accounting side.  It about that thing that never gets talked about.  What do you, the entrepreneur, do before, during and after.

Failure has bad PR

Why Most Things FailIn mid February the Churchill Club ran a programme called Innovation DNA which was about making innovation a sustainable programme in Australian SME’s.  One of the panellists, Wes Sonnenreich from Deloitte, mentioned that a good failure was one that was quick and cheap.

Which got me thinking about failure again.  My assertion has been for a long time that Australian’s in business are generally terrified of failure  as it creates a stain on your reputation.  Which is fascinating as you can’t have reward without risk, and risk means there will be failure.

Science and FailureAn interesting contrast then to the business approach, is how Australian science treats failure.  Failure is absolutely a  necessary part of any experiment and just as important as success.  For example a test for a link between cancer and smoking, needs to also prove that there is no link between sucking on a tube and cancer (a failure).

The scientists understand the importance of failure and also understand how to give it good PR.  Most grant applications are to test whether there is a link between two areas, instead of trying to prove there is.  The science approach to grants means that you always have a successful outcome (either you proved there was a link, or you proved there wasn’t a link).

So back to We’s comment about good failure being “quick and cheap”.  It seems to me that at a qualitative level a good failure is one that you can learn from (which is why we do exit interviews when employees leave).  But it still leaves a problem on how do you quantitatively measure the value of failure.

Well Wes working for Deloitte gave me the clue.  It made me think how would an accountant treat the problem?  Although it was dusty and unused, I pulled the accountant hat out of the cupboard had had a go at it.  My thoughts went like this.

1.  The value of an activity is normally measured by an Accountant with a Profit and Loss statement.

2. Failure generates costs.

3. An Innovation programme will have a budget that’s used to generate lots of failures.

Cutting to the chase, here’s the idea.

Why not create a profit and loss statement to measure whether its a good failure or a bad failure.

Profit and Loss

The first thing you would do is apportion the budget of an innovation programme across a number of projects.  This would give you a notional revenue figure for each project.

You then apportion the costs of each project to its project P&L.

If the project fails quickly and with low costs, you will get a notional profit, which could be interpreted as good failure.  If you take forever to fail and commit lots of resources and get a notional loss, it means its a bad failure.

Obviously this idea needs to be tweaked for the situation, but I feel it would provide a great platform for starting to measure the value of failure, and give it better PR in commercial environments.

Failing or Flailing?

In the late 80’s when I was training to be an Army Reserve Officer, one of the major training (and leadership development) techniques that had a major impact on me was ownership of failure.  If you taught a lesson and more than a handful of people failed the quick test at the end, then you the instructor failed.  If your team was depressed, your fault, if they got hurt or “killed” it was your fault.  From the smallest mishap to the greatest catastrophe, you owned the problem.

All this failure from a training point of view was massively useful.  It let you gain an intimate understanding of why successful strategies or tactics worked, and how to execute on them seamlessly.

From my point of view, this focus on failure worked because of two major reasons.
1.    The objective you were trying to achieve was tightly defined, and therefore the failures had enormous learning value.
2.    There was a culture that accepted, and valued, failure in training as the pathway to sustainable success.

Interestingly, I have recently discovered a connection between the military and creativity.

Preparing for the upcoming Churchill Club Panel on Creativity , I have been reading a book by Nadja Schnetzler called the Idea Machine : How to Produce Ideas Industrially . Nadia runs a Swiss business called The Brain Store which was founded in 1989.  Nadja’s business focuses on the industrial production of ideas, and has a premium client list in Europe and the USA.

Anyway, an area that Nadja discusses early on is failure.  The Brain store has a culture that accepts failure on the path to success, and in fact sees it as necessary and highly valuable.  The key for them is to tightly describe the question before they start generating ideas to solve it.  This ensures that that every single failure has value when reviewed.  The result of the study of what went wrong leads to the development of the world beating idea (rather than mediocrity).

The process of tightly describing the question is so important that they have set up a business offering just to train staff!  They have a shop front service that allows people on the street to come in and get great ideas for a token fee.  Eg. A guy comes in and asks “What shall I buy my girlfriend for her Birthday?”.  This then gets improved into something that includes pricing information, her interests, what she hates, what you have purchased in the past and what would really excite her.  All this and more before the ideas flow.

Nadja describes the process as the difference between failing and flailing.  Failure is good, but when you regularly fail, don’t learn from it and are not sure where you are going, you are just flailing about.  I’m sure the Army would agree.

Just too bad that 95% of people I meet in business would rather eat worms than accept they may be responsible for a failure and get value from it.