Managing the Cost — and Value — of Failure

Individuals and organizations experience failure on a continual basis. Most failures are small, a few large, and a certain few catastrophic. Financial managers are quick to perceive the cost of failure, typically in the form of wasted money or lost opportunity. But many financial managers “fail” to recognize the significant value that is also present in nearly every failure.

This article is about managing both the cost and value of failure in business today. As risk and uncertainty increase in our business environment, failures of all kinds are bound to increase. But this is not the threat it seems to be; we can learn a great deal from financial management techniques practiced in industries that have always been immersed in risk and uncertainty.

The Stigma of Failure
To many folks — especially financial professionals — failure of any sort is psychologically unacceptable. People avoid failure for many reasons: personal embarrassment, fear of punishment, and the shame of letting others down. Many of us want to always have the right answers, never make a mistake, never attempt anything where the outcome is less than certain.

Decades ago, most people's jobs involved working on unambiguous tasks using tried and true methods. Failure to succeed at one's work was attributed at best to a lack of aptitude and at worst to character flaws. From a managerial standpoint, where the emphasis is on decision making, a decision with an unfavorable outcome used to imply that:

  • we made foolish choices;
  • our decision-making process was flawed;
  • we put insufficient effort into the decision-making process; and/or
  • we ignored an obvious, right decision.

But in today's complex, unpredictable world, the outcome of a decision is an inadequate measure of the decision-maker. Failure isn't necessarily about foolishness, negligence, or irresponsibility, and therefore it need not carry the stigma of a less risky and more certain era. In contrast, as you'll see next, today's successful managers view failure as a valuable stepping stone on the path to success.

The Value of Failure
In the complex, unpredictable world of business today, whoever learns the most, the fastest — wins. The fundamental value of failure is that we can learn much more, much faster from failure than from success. Of course, the challenge is making sure our failures aren't so costly that they take us out of the game.

It is no mean feat to balance the value of failure with its costs as the incidence of failure increases. Before examining how successful financial managers do this, we'll look at how they don't try to do it.

The Folly of Trying to Avoid Failure
In competitive endeavors such as business, the risk of failure cannot be avoided and is regularly realized. Championship teams rarely have undefeated seasons. Conquering armies rarely win every skirmish. Chess masters never win games having retained all their pieces. What separates winners from losers in competition is not that winners avoid failure, but that they exploit it by accepting low-cost failures in the pursuit of high-value successes.

Ironically, the more afraid you are of losing, the less likely you are to win. In general, you can afford to lose a skirmish if it helps you win the battle, and you can afford to lose the battle if it helps you win the war. But if you insist on winning every skirmish, you're unlikely to ever win the war.

Additionally, attempting to reduce the cost of failure by avoiding situations in which failure is possible is self-defeating. By avoiding situations in which failure can occur, you're avoiding situations in which learning can occur. Successful financial managers focus on identifying endeavors where value can come from both success and failure — albeit in different forms.

Finally, a little humility goes a long way in dealing with failure — you're not God and neither is anyone else you work with. You can't control the outcomes of your decisions. You can't control other people.

High-Risk Industries
In industries such as oil exploration and securities trading, failure has always been unavoidable. And as enterprises in all industries face increasing uncertainty and risk, failure becomes unavoidable for them as well.


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