If you want your business to be around for the long haul, it's essential that you include failure in your forecast for the future. It's critical for companies to become adaptive organizations that use trial and error to innovate, said Tim Harford, the Financial Times' "Undercover Economist." And failure is a key ingredient in the messy business of trial and error.
Companies need to experiment first and then be clear-eyed about the failures that follow so that changes can be made. It's a matter of survival. We know that failure works on a large scale. Look what it's done for Google. Can failure be made to work for small businesses as well?
Harford believes it can.
Weed out failures
Biologists have a word for the way in which solutions emerge from failure, Harford told BusinessNewsDaily. That word is "evolution." In equal parts, it's about the survival of the fittest as well as the failure of the less fit. [Read related article: Overcoming the 5 Biggest Obstacles to Innovation]
He describes that process in his new book, "Adapt: Why Success Always Starts with Failure" (Farrar, Straus and Giroux 2011). You try out a few variants of the methods you're already trying, weed out the failures, copy the successes—and repeat forever.
It works in the natural world and translates with equal smoothness into the do-or-die scrum of the business world.
They're both incredibly complex environments. An ordinary product such as a toaster has over 400 components and subcomponents, Harford said. A major city economy such as New York, London or Tokyo has around 10 billion distinct products and services. It's a petri dish for failure.
"If you want to succeed in a system like this — or as a government, if you want to produce some policy to improve the way things work — you're dealing with a very tricky problem," he said. "The upshot of this is that if we're trying something genuinely new, we're unlikely to get it right first time. It's just too hard. That's where the idea of 'Adapt' comes in: The principle is that success is all about experimenting, figuring out what's working and fixing errors quickly. It's not that failure is a good thing — it's just that it's almost inevitable and so success almost always starts when you fix failures."
Failure doesn't have to be catastrophic
Just as success comes in all gradations, failure doesn't have to be on a catastrophic scale to be beneficial.
"I'd say that small and partial failures are the best kind of failures," Harford said. "Ideally we're looking for experiments with potentially large upside and a small downside."
The path to become an adaptive organization and failing profitably is a three-step process to establish a failure-tolerant culture, he said. You need to try new things, expecting that some will fail. You must make failure survivable and make sure you know when you're failed. The essential step is being willing to fail.
"Step one is to be trying as big a variety of things as you can sensibly manage: variety is a good way to throw up unexpected new ideas. Step two is to keep downside risks as small as possible. Step three seems obvious but it's tough: figure out what is working and what isn't. Otherwise there's no point in doing all these experiments, because they're telling you nothing."
What's working, and what isn't?
For many organizations and many individuals deciphering what's working and what isn't is a major stumbling block. Why is that?
When it comes to high-impact innovations, it's often not clear for a long time what is working and what isn't, Harford said. Allowing the necessary time for a radical idea or concept to mature and flourish is anathema to management with an eye on quarter-to-quarter results.
"I think we need a high tolerance for these long-shot experiments for a long time," he said.
And then there's the human factor. Owning up to failure consistently fails to move the needle on Maslow's hierarchy of needs.
"Psychologically, we resist acknowledging our own goofs," Harford said. "An incredibly common reaction to a mistake is simple denial."
Don’t shoot the messenger
Finally, bad news doesn't travel well when it involves decisions made by large organizations.
"Smart people don't pass bad news up the hierarchy," he said. "I look at really pathological examples of this in 'Adapt' — for instance, in the Soviet Union under Stalin, which began to crumble because even the most grotesque failures couldn't be reported — as well as examples closer to home such as the suppression of whistleblowers during the financial crisis."
Trial and error as an operating principle may have a better shot at survival from a cultural perspective in a small business than in a large organization with layers upon layer of management, but experimental initiatives may be hamstrung by a lack of resources.
"A large business will struggle with feedback through a hierarchy, but can afford lots of experiments and may even systematically experiment — companies such as Google, Proctor and Gamble, and Walmart all do this in different ways," Harford said. "A small business probably knows much more quickly what's working or what's not, but will find it harder to do a full range of experiments."
The biggest challenge to the adoption of trial and error comes when the experiment or innovation has the potential to destroy the existing business. Think of the arrival of digital photography. New technologies demand new experiments, but the experiments are terribly threatening to existing hierarchies.
"One of the most poignant examples comes from the Vietnam War," Harford said. "One senior officer famously opposed any tactical innovations, remarking, 'I'll be damned if I permit the United States Army, its institutions, its doctrines, and its traditions to be destroyed just to win this lousy war.' We've all seen that attitude in business too."
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Follow BusinessNewsDaily senior writer Ned Smith on Twitter @nedbsmith.