The value of a little failure here and there

“Economists have predicted ten of the last three recessions.”

Political pundits haul out this tiresome bit of ridicule every time an economist warns that colossal trade or federal deficits might not be such a good idea.

Ridicule is fun, persuasive, and best of all demonizes the group of people called them. It’s the more emotionally satisfying alternative to understanding what’s really going on. It combines scapegoating and ad hominem argument — two of the most trod upon paving stones in the road to becoming an idiot.

Your turn: Imagine your data center’s wiring has frayed insulation, overloaded outlets, and circuit breakers that haven’t been tested since Edison and Westinghouse battled it out.

The company ignores your concerns. You continue to warn of serious problems until at some point a fire breaks out.

You and your staff extinguish it. You again recommend rewiring the data center. And some mouthy executive points out that you have, “… predicted ten out of the last one fires.”

That’s the problem with risk.

Businesses can invest in three value creators: Revenue enhancement, cost reduction, and risk mitigation. One almost always dominates, not because it is the most important, but because it’s how the company and CEO are wired. They’re usually wired so that risk comes last. Here’s why:

Entrepreneurs usually focus on revenue. When you’re first building a business you need cash coming in the door more than anything else — not only to finance the company but to create confidence and credibility.

Entrepreneurs often get cost wrong — they either ignore it, at which point it can quickly get out of control, or they obsess, running the company so lean they choke off growth.

Those running large enterprises have a different perspective. They are accountable to the board of directors, shareholders (in theory) and various Wall Street analysts (in practice). That means having to justify all spending decisions.

Other than sales and advertising, the connection between expenditures and revenue can be very hard to demonstrate. The investments required to build sustainable revenue –in product quality and customer relationships in particular — can’t be linked to business success in a provable way. Among other challenges, the payoff for these investments can take years to arrive. Until they do, all you have is cost.

Few entrepreneurs spend time on risk, beyond buying insurance and some other basics. They figure they need luck to succeed. What’s a little more?

Those running large enterprises are more likely to acknowledge its importance — in theory. In practice, expenditures for risk mitigation don’t build shareholder value — the only true goal among the business Illuminati. And so risk mitigation generally takes a back seat to cost reduction.

You, in contrast, live in the world of risk. When your job is to keep the joint running, it’s your neck if the bad wiring ignites.

Persuading those who run your company to let you mitigate risks is always going to be a challenge. When significant expenditures of capital or effort are part of the request it’s tough. When changing how employees are supposed to behave — usually part of the plan — it’s even tougher.

Risk mitigation might be your top concern. To those responsible for business results it’s probably a distant third.

Worse, they might be right. Too often, those responsible for risk mitigation misunderstand their goal, trying for risk elimination instead. The result: They design ultra-low-risk environments that strangle innovation, ingenuity, and the free flow of information — all risk-creating activities.

Often, they write policies and procedures that make doing useful work, let alone innovating new and better ways of working, aggravating enough that many employees won’t see a reason to bother. So your first step is to keep your own perspective in balance.

Your second: Don’t be too successful.

To illustrate with an example: The business refuses to upgrade a seven-year-old server farm. You have a talented staff, adept at keeping them running through a combination of duct tape, memory juggling, and day-to-day ingenuity. You’re proud the business experiences no disruption. Right up until the day the whole farm fails catastrophically.

Better to have had a succession of small, visible outages. When each happens, explain that as the servers age they’re more likely to fail. The business impact this time was x dollars in unnecessary costs and y dollars in lost revenue. Next time could be worse.

You’re converting risk, which they don’t care about, into revenue and cost, which they do.

Risk turns you into a meteorologist. At the beginning of the day you figure the odds: There’s a 60% chance of rain. At the end of the day, either raindrops kept falling on everyone’s head or they didn’t. Meteorologists receive frequent ridicule for this reason.

Welcome to their world.