Tag Archives: devil’s advocate

How to Avoid Falling for Groupthink

“In our world, parallel lines do not meet, and you can’t turn an orange wrong side out.” –Joseph Krutch

Yet, I see carrier management and agency owners regularly default to wishful thinking in their decision making. In other words, while parallel lines do not meet, these specific people believe the lines should meet. They make decisions on that assumption. Reality, though, does not change. Parallel lines can never meet no matter how much a person wishes the lines did meet. To pretend otherwise and make decisions in this alternative reality can only lead to problems if not disaster. And just because disaster does not happen immediately should not be taken as a sign that it won’t.

A famous company once had an executive promoting how he had made parallel lines meet. Because most people did not look too closely and the accounting was opaque, what people did not notice was that a shell con game was being played (not literally a con game). While the line-bending benchmarks were being touted, the results being reported were mostly due to an entirely new part of the business that did not have a true financial reckoning until the credit crisis. Even after that, it took about 10 more years for people to admit they’d been seeing a mirage — when financial promises were finally and completely broken.

Always remember: Parallel lines never meet. And you can work to see the lines as they are rather than as you wish them to be.

An example or two might help. Take two carriers of equal size. One has an issue causing expenses to be $200 million more than the competitor’s. All else being equal, the first carrier’s loss ratio needs to be the equivalent of $200 million better. Yet the management of that carrier has proclaimed that its loss ratio only needs to be the same because there is no way its expense ratio is higher than average. So, the carrier loses money the next year, and the next, and the next, and the next. Parallel lines are straight, not warped. The carrier’s thinking is warped (true story).

Or, there are agency owners who think that unmotivated producers will become motivated on their own initiative. That is warped. If the producers had initiative, they would already be motivated (true story, multiplied by thousands).

Yet humans are pre-programmed to believe what they want to believe, reality be damned. St. Augustine wrote something to the effect of, “Do not plan long journeys [pilgrimages], (to help you believe more in something like an aspect of religion in this realm) because whatever you believe in you have already seen.” I have read one theory that the strong desire of humans to believe in whatever they want to believe is for survival. If they did not believe in the unreal, they might give up hope. That makes some sense to me, so the challenge is to know when to believe in reality and to be disciplined enough to recognize the “when” to believe in reality regardless of how sour that reality may be.

See also: Another Reason for Insurers to Embrace AI

The solution, one of the few solutions actually, is to have someone close to you who will always be brutally straight with you.

Another solution is to be away from your kingdom, your organization, when you seek advice. A human’s ability to accept reality often increases the farther one is from home.

Another solution for larger organizations is to always have outsiders on the board and give them extra influence or voice. An entity will begin believing in alternate realities even more rigidly than individuals. This is what happens with groupthink. An example of carrier groupthink is everyone at a carrier thinking it has great claims service even though the agents, based on their customers’ experience, almost universally say differently (again, true story).

Reality really can suck. No bones about that. But reality usually wins, so if you want to be a winner, take steps to understand and accept reality on a vigorous basis.

COVID and the Need for Devil’s Advocates

Over the weekend, two articles made a compelling case that we need to better vet academic studies before they become set in the public consciousness on controversial topics like possible systemic racism and the coronavirus. Both recommended a solution that has been a focus of my career — devil’s advocates — and that we all should use as we formulate personal and corporate strategies in these turbulent times.

Let’s spend a minute on why they’re so important and how you can use them — rather easily, in fact.

The article related to the coronavirus argues that a serious attempt at research wasn’t vetted quickly enough and, when published in April, had obvious shortcomings that allowed many to believe that the virus wasn’t as dangerous as it has turned out to be. The one concerning a paper on possible systemic racism by police went through peer review, but the authors say the process isn’t designed to catch fraud and is vulnerable to rigging. In the case of the paper they discuss, a reader caught a major error shortly after publication, and the paper was withdrawn — but not before many used it to dismiss the notion of racism in policing.

Both articles obviously touch on hot buttons, and the specifics of the arguments about the research they discuss could distract from the point I want to make, so I won’t go into more detail. You can read the articles and reach your own conclusions. I’ll just note that both say problems would have been avoided if the virus and racism research had been put in front of devil’s advocates — people whose task is solely to identify potentially bad assumptions, in time to do something about them.

That need for devil’s advocates is a theme I’ve been sounding with corporate America for a dozen years and is especially important now. The New York Times and the Wall Street Journal ran articles recently saying that corporations are starting to believe both that the economic crisis caused by the pandemic will last longer than they had hoped and that the new normal will look quite different. So, a strategic rethink is happening all at once in a whole lot of C-suites, which creates opportunities both for progress and for mischief caused by bad assumptions — that devil’s advocates could head off.

My belief in the power of devil’s advocates dates back to a book, “Billion Dollar Lessons,” that Chunka Mui and I published in 2008, on the lessons to be learned from corporate failures. Out of the 750 major writeoffs that we spent two years investigating in detail, with the help of 20 researchers, we found that 46% stemmed from strategies that should have been identified ahead of time as brain-dead. Think Avon deciding that its main asset wasn’t its door-to-door sales force but was its “culture of caring,” which led the company to buy a medical equipment manufacturer and operator of retirement homes — then quickly selling them at a loss because the cosmetics company had no idea what to do with them. Or, think Blue Circle Cement, one of the world’s biggest cement companies, deciding that it was really a home products company and should make and sell lawn mowers, among many other things — then filing for bankruptcy protection and being acquired.

We posited in the book that loads of people internally must have seen the problems coming but couldn’t stop the strategies because of internal dynamics — for instance, the CEO is often the one championing a new strategy, so the tendency is to want to confirm the idea, not to challenge it. Our subsequent research and consulting, as devil’s advocates, has confirmed our thesis. (We’re not alone, either. Much has been written in recent years about the value of a devil’s advocate, sometimes referred to as a red team/blue team exercise.)

The key issue is: How do you identify problems in a way that’s acceptable within the complex culture of a C-suite? How do you help the company win without making some powerful individual lose — or see the devil’s advocate process quashed if it looks like the CEO will be the loser?

The main answer is to turn the devil’s advocate process into a bloodless exercise. You don’t give the devil’s advocate the power to rule on whether a strategy is right or even to hazard an opinion. The decision needs to stay with the CEO. You simply have the devil’s advocate interview senior executives to probe for vulnerabilities, then use the concerns to identify the assumptions that have to be true for a strategy to succeed. Because the CEO has authorized the process, he or she can face the evidence and kill the strategy without losing face. If the decision is to proceed, the CEO will have a better idea about the pitfalls that may lie ahead.

Choosing a devil’s advocate can be tricky. You can hire an outsider, who will bring objectivity but may take time to get up to speed. You can ask for a volunteer among senior insiders, but few want to be known as the naysayer, at least on more than a one-time basis. It seems to work best to designate an insider, so the whole team knows that the person is simply playing a role. (Irving Janis, in his pioneering 1982 book “Groupthink,” described how President Kennedy designated his brother Bobby to be the devil’s advocate after the administration had botched the Bay of Pigs invasion; Bobby then routinely challenged claims by military leaders during the Cuban missile crisis and may well have saved the world from nuclear war. Quite the endorsement for a designated devil’s advocate….)

As insurers reformulate strategies to prepare for what could be an extended economic crisis and for a rather different world on the other side of it, they should build a devil’s advocate into the process. Companies are making a lot of assumptions, many of which they don’t even know they’re making or made long enough ago that the assumptions have been forgotten. Some of those assumptions are wrong — and many senior executives either know or suspect which ones should be challenged and rethought. (If I had to bet, the biggest mistake that companies in general will make in this go-’round is to underestimate what competitors are doing. The tendency is to see competitors as static, but they’re working just as hard and perhaps as creatively in their strategy rooms as you are in yours.)

By the way, a devil’s advocate approach can help you get better feedback on personal issues, just by having you rephrase questions. Don’t ask a friend or family member if some plan of yours is a good idea. They’ll know you want affirmation and give it to you. Instead, present a plan neutrally, say you’re looking for holes in the idea and ask your friend or relative to help you identify the potential problems. Then, on your own, you can weigh those concerns against the benefits that you’ve already seen.

Knowing about pitfalls won’t always matter. I consistently underestimate how long it will take me to write something, even though I allow for the fact that I always underestimate. But at least a devil’s advocate process will open your eyes to many of the problems that lie in wait out there.

So, challenge those assumptions.

And stay safe.

Paul

P.S. Here are the six articles I’d like to highlight from the past week:

Why Traditional Insurance Won’t Work

With the sudden shift to remote-only interactions, insurers can no longer dictate the speed of their transformations.

Tipping Point for Claims Automation

While virtual estimating for auto claims—using photos in place of a physical inspection—is not new, the pandemic has made it the preferred method.

Time to Focus on Cyber Resilience

Here are five ways that businesses should be shoring up potential weak spots in their cyber security program’s incident response plan.

Increased Threats for Manufacturers

Manufacturers must understand that the digital push to run more efficiently creates a security gap that must be addressed.

Blockchain: Golden Opportunity in LatAm

Blockchain provides a golden opportunity for real, tangible operating efficiencies in Latin America and for transforming the region’s image.

How to Recruit Claims Adjusters

One of the most promising solutions to recruiting and retaining workers lies with artificial intelligence—and not in the way that you might think.

8 Make-or-Break Rules for Innovation

In my last posting, I laid out three reasons for why large companies should out-innovate start-ups to capture the disruptive opportunities that are being enabled by a perfect storm of technological innovations. In this post, I offer eight rules for how they can do so.

Based on research on thousands of innovation efforts—both successes and failures—that went into The New Killer Apps: How Large Companies Can Out-Innovate Start-Ups, corporate innovators should apply these rules to help their companies get out of their own way and leverage their assets. By doing so, they can take better advantage of innovation opportunities than start-ups can. The eight rules fall under three general categories that distinguish winners from losers: Thinking Big, Starting Small and Learning Fast.

Successful innovators “think big” by considering the full range of possible futures. They facilitate innovation by daring to pursue “killer apps”—new products and services that might rewrite the rules of a category.

By contrast, failed innovators tend to “think small.” They assume that change will be a slight variant of the present and just look for incrementally faster, better or cheaper innovations.

Here are three rules designed to help you think big:

Rule 1. Context is worth 80 IQ points. As you start to “think big,” you must understand the information-technology environment in which you are operating. Six technological innovations—combining mobile devices, social media, cameras, sensors, the cloud and what we call emergent knowledge—are reshaping both what is possible and the competitive landscape in every information-intensive industry.

Mary Meeker, the noted business analyst, argues that these technologies are putting more than $36 trillion in market value up for “reimagination.” ($36 trillion is the total market value of the 10 industries most vulnerable to change over the next few years.) You must understand all the traditional forces inside your industry and come to grips with these six technological megatrends, both individually and in combination.

Rule 2Embrace your doomsday scenario. Thinking big is not just about bold aspirations; it also requires understanding the starkest threats facing your organization.

One reason to look for doomsday scenarios is that it helps spot vulnerabilities and spark improvements even if doomsday never comes. Another reason is that it helps to build alignment. Getting beyond vague views and developing detailed, shared views of existential threats and how quickly they might arrive can help management teams develop consensus on timing and move forward in unison. But people tend to avoid thinking about truly worst-case scenarios, so this rule is designed to make sure that they do so.

Rule 3. Start with a clean sheet of paper. A markets change, large companies’ strategic assets too often become liabilities. Success brings with it priorities to juggle, budgets to protect, bonuses to maximize, resources to defend, loyalties to reward, egos to stroke. People have all sorts of incentives in big organizations to slow or halt innovation, and many manage to do so.

That’s why it is important to periodically start with a clean sheet of paper and think about key trends and looming inventions, then envision how everything could come together to transform the business—without worrying about what people, capabilities and other assets have to be added or subtracted to become that perfect version of the business.

Start Small

Successful companies “start small”after thinking big. Rather than jumping on the bandwagon for one potentially big idea, they break the idea down into smaller pieces for testing and take the time to make sure that key stakeholders are working in unison.

By contrast, companies that fail in the face of a disruptive technology tend to swing from complacency to panic. Initially, they not only don’t see the opportunities; they can’t accept that they’re in danger. When they finally see the disruption, they panic. They make a last-chance, massive bet on a single idea—only to have it not pan out. Here are three rules that ensure you are starting small:

Rule 4. First, let’s kill all the finance guys. To start small, make sure you don’t settle on financial projections too soon; they can’t be accurate, and they hamstring innovation. By definition, disruptive innovations deal with future scenarios that are hard to read and where the right strategy is not clear; the right strategy has to emerge over time.

This rule, then, is a reminder to take a more iterative approach to understanding the finances of new businesses. A culture has to be established, beginning at the very top of the organization, that says newborns get to crawl and walk and maybe even start preschool before their talents are evaluated.

Rule 5. Get everyone on the same page. While the tendency is to leap into action as soon as a possible killer app is identified, it is crucial to take the time to step back, assess where the organization is and identify possible impediments to change. One challenge is to understand who wins and who loses if the envisioned innovations succeed. If an innovation has to kill the core business to succeed, it won’t be possible to get everyone to embrace it. Those in the existing business will always try to kill rather than be killed. In some cases, you can delay an uprising by being discreet. In other cases, where those not on the same page can’t cripple you, you can be overt and simply pit a new business against the existing one (while protecting the new efforts sufficiently).

Another challenge is to understand the cultural implications of the desired innovation. Many executives believe they can change a culture to suit a strategy, rather than try to make the strategy fit the culture. That route is possible but usually takes longer than most are willing to admit. Sometimes it is better to work with what you’ve got. The key is to understand that there is no silver bullet to managing change. Instead, you must form a cleared-eye view of the particular circumstances that must be addressed and manage accordingly. Remember Nelson Mandela’s admonition, “Lead from the front but don’t leave your base behind.”

Rule 6Build a basket of killer options. Once you are ready to start building killer apps, make sure to invest only small amounts and test a number of possibilities. At the early stages, any fledgling killer app is more likely to fizzle than sizzle. Do not waste a lot of money plunging toward The Answer. What you really want is a finely nuanced understanding of The Question. Do this by employing the discipline associated with financial options. Rather than investing tens or hundreds of millions of dollars to build out a full-fledged business, invest in iterative experiments that can be expanded as they prove out, or be set aside if they don’t.

It is important to limit the number of options to a handful. Innovations of transformative potential require CEO attention—which is limited—to make sure the efforts are protected from the organizational antibodies; to make sure they do not take on a life of their own; and, to shepherd them to scale if their potential proves viable. (In most organizations, only the CEO can play this role.) Our experience is that the right number is around three “killer options” and no more than five.

Learn Fast

In addition to thinking big and starting small, successful innovators “learn fast.”They take a scientific approach to innovation. They figure out how to gather comprehensive data and quickly analyze both what’s working and what isn’t. They have the institutional discipline to set aside or alter projects based on that analysis. By contrast, companies that fail have neither the time nor the inclination to learn. They fall into the “it’s all about implementation” trap and end up expertly implementing a failed strategy. Here are two rules to make sure you are learning fast.

Rule 7. A demo is worth a thousand pages of a business plan. Too often, early success or optimism about a big idea quickly transforms it into a conventional business development program: a long march where the only acceptable outcome is to get a product to market. As a result, people do all the analysis they can, however imprecise, and the result becomes The Plan. Some of this is due to habit—planning is what big companies do, and business initiatives can’t typically proceed without detailed business plans and reams of confirming spreadsheets.

Our research revealed the need for less planning and more testing. Rather than prematurely building out the new business, keep prototyping to explore key questions, such as whether the technology will work, whether the product concept will meet customer needs and whether customers will prefer it over the competitive alternatives.

Rule 8. Remember the Devil’s Advocate. Setting up the right process for demos, prototypes and scaling is crucial but only half the battle. The other half is making sure you ask the tough questions during the process and remain open to hearing uncomfortable answers. Devil’s advocates are individuals or groups whose role is to stress test critical assumptions, key forecastsand other make-or-break aspects of a potential killer app. The goal is not to interject an abject naysayer into the decision-making process but rather to drive at the answer that best serves the long-term success of the organization. Nor is the goal to relegate the task of critical thinking to the devil’s advocate. Instead, the devil’s advocate process serves as a safety net, and, because everyone knows that tough questions are forthcoming, they’ll be more likely to confront them.

Done right, a devil’s advocate frames the most important questions that need to be answered before moving to the next stage of commitment. The advocate also guides the process along, making sure that the right amount of uncertainty is reduced at each step and that the possibility of a graceful exit is always preserved.

* * *

Following these eight rules won’t guarantee killer-app-level innovation. Business is a contact sport. Some companies win. Some companies lose. That won’t change.

What following these rules will do, however, is help you overcome the biggest barriers to innovation and turn size into an advantage. You’ll do a far better job of sensing what’s really going on in your market and of putting yourself at the forefront of the powerful trends that are transforming our economy.