Risk: Why the Modern Enterprise Must Change the Way that Decisions are Made
Why are we in this mess, now facing the prospect of economic armageddon? It’s because the prevailing characteristic has been greed.
Jeremy Paxman
Know your enemy and know yourself and you can fight a hundred battles without disaster.
Sun Tzu
The trailer has come out for the new movie Deepwater Horizon (2016). Unlike the fiction in the movie Armageddon (1998) which glorified oil rig workers as saving the planet earth from destruction by an asteroid the size of Texas(!). The events surrounding the largest oilfield environmental disaster of all times will be more down to earth. But, the truth is that oil rig workers likely could have prevented this disaster had they been listened to more closely, worked together more cooperatively, and had their collective reporting information compiled and shared better. This fact holds true for workers within all complex enterprises. This is the greatest problem with the modern complex workplace where copious amounts of data are collected and stored, but improperly shared and processed to become knowledge. The most significant modern day risk for man-caused disaster is a management problem wrapped around a paradigm which adheres to the false-truth that concentrated decision making by an isolated (and often highly paid) few will be able to address complex problems correctly and in a timely manner without the contextually correct input from afield. Just like a modern day fire-safety system that shuts down some processes while simultaneously starting others automatically based on environmental data, more emphasis needs to be on understanding processes and their impact on the entire enterprise. The real role of management is to improve processes based on the outcomes and not make decisions literally from the seat of their pants, or change outcomes – data – to cover the seat of their pants, as too often happens. The Deepwater Horizon disaster was not a single impact event like an unexpected asteroid from the heavens, but was the aggregate outcome of many shortcuts, uninformed, and even intentionally bad decisions that combined like straw filling a bag until the last piece of straw finally breaks the camel’s back. Most man-caused catastrophes of magnitude happen because of corrupted processes and controls that render the intended designed outcome unattainable. Not only unattainable, but unstable and unpredictable. Some unintended negative outcome was all but inevitable.
Deepwater Horizon was a disaster of cinematic magnitude and therefore has become a case study for risk management. Unlike other high-visibility disasters, such as the Space Shuttle Challenger, there are several deepwater platforms operating globally. This means that the potential of more, and maybe even worse, environmental disasters is still present. Unless there is a fundamental shift in how complex projects are managed, the risk will continue to exist. Risk is always a management issue. Management creates the workplace culture through defining the processes and resources required to deliver products and services. Work is performed within these constraints where workers are within the system, whether it be safety, environment, or quality as stated objectives – usually all. Management establishes the infrastructure for communication-flow and knowledge-sharing necessary to make the best decisions. The technical feat of deepwater drilling operations should not be understated. In terms of technology, it certainly rivals space programs. Drilling operations through thousands of meters of water and earth while maintaining just the right balance of heat and pressure throughout the endeavor is complex and technologically challenging. For this reason, a number of technological advancements in equipment and processes have been developed to safeguard operations from catastrophe. At the focus of the Deepwater Horizon disaster was the failure of the blowout preventer (BOP). Oilfield blowouts occur when the underground pressure overwhelms the weight of the column of drilling fluid above the drill bit. It is very difficult to control the pressures encountered during drilling and specially formulated mud is used. An uncontrolled release of pressure can cause fire and explosion. The first BOP valve was designed in 1922. Prior to this invention terrestrial blowouts were allowed until pressure reduced to a level that would allow capping the well. At depth and underwater similar principles apply, but are more challenging to control. Thus, the BOP valve alone is not the only defense against a blowout. A variety of environmental and equipment measurements are made through the course of operations to evaluate the integrity and overall safety of the operations. Reports about the disaster indicated that alarms and warning systems had been disabled prior to the blowout as well.
Deepwater Horizon was actually a manifestation – albeit a catastrophic one – of how close many operations are to disaster when protocols are ignored or changed without proper evaluation and analysis. Central to this is a management paradigm which is practiced in many enterprises that cannot address complex risk operations effectively. While the vast majority of enterprises are not executing operations where error in decision making can result in a disaster of the proportion of Deepwater Horizon, operational failures which can negatively impact operations and enterprise performance happen with relative frequency. Perhaps, it is the redundancy in processes designed to detect and offset catastrophes that allows this complacency. The problem of adjusting procedures and protocols is wide-spread. We call them “short-cuts” which need to be taken because those writing the processes and protocols do not really understand what happens “on-sight.” This is a localized and simple view of risk. Movies about the everyday of the modern workplace would be mundane. When they do reach the screen it is often in the genre of comedy. Unfortunately, many do not pay attention to how in-sync the comedic view of the prevalent management paradigm is with eventual disaster. Every decision is a risk. Decisions define enterprise culture. Leadership establishes culture through its management and process of decision making. A safety culture, environmental culture, and quality culture are realized by how processes and protocols are managed, reported, and analyzed. The paradigm depicted on video is “fear-based” management which categorically reduces the opportunity to make the most appropriate safety, environmental, and quality based decisions. It is a management paradigm that puts into place uncontrolled and unstable processes that produce unpredictable outcomes. Like the planet Mars, many modern workplaces are surrounded by dread and fear (moons Phobos and Deimos).
Whenever there is fear, you will get wrong figures.
W. Edward Deming
Danger will come upon us when it will. We can’t stop it. We can only try to be prepared. There’s no point in looking ahead to that danger and suffering its effects even before it comes to us.
Chitra Banerjee Divakaruni, The Conch Bearer
Enterprises must be considered and evaluated as a system. Most enterprises are in fact systems of interdependent and interrelated elements that are constructed for the purpose of achieving some desired outcome. The elements continually influence one another. The use of resources are often defined within processes which operate concurrently within the system. The inter-dependency of processes and resources throughout the system means that they are never truly isolated. One may be able to operate a motor vehicle with one flat tire, but the vehicle will not perform optimally. However, if the flat tire is completely removed it is likely that the vehicle will not operate at all. Elements of a system will also not function independently because of this interdependence. Systems must be designed with purpose and managed to achieve optimal outcome. Certain aspects of the system are temporal. A project, by Project Management Institute (PMI) definition, is a temporary endeavor with a defined beginning and end (in time of completion) undertaken to create a unique product, service or result. Deepwater Horizon was a platform designed to be able to complete any number of desired outcomes. However, its use was defined by the scope and objectives of the particular outcomes which the operator customer wished to achieve. Simply, the license operator had a job to complete and the contractor committed to endeavor to complete that job using Deepwater Horizon with attached appropriate processes and resources. While many of the capabilities and constraints were pre-determined by the appropriate processes and resources, the actual project scope of the endeavor was unique and defined by the license operator. A linear or Cartesian paradigm tends to separate process outcomes. A system thinking perspective should analyze holistically. Said another way, the Cartesian paradigm removes the tire because the tire is damaged and its functional interdependency within the system is not understood. The system thinking perspective understands that the tire cannot be repaired without impacting the overall performance of the system. The job of management is to optimize the entire system.
Knowledge is required to optimize a system. The prevalent management paradigm reinforces that authoritative position in the hierarchy equates to knowledge. Those at the top-levels may have access to more information to inform their decisions. However, the rapidity of changing events cannot cope with a linear-downward decision making processes. Decision making processes must be defined, but also dynamic. Decisions must be based on the aggregate of correct knowledge from throughout the system. Knowledge should also be viewed from the context of the system and interdependencies and not isolated. Experience obviously should be used to develop processes. However, top-down decision making processes cannot adequately address unique project circumstances. Individuals accessing the same knowledge base and well thought out processes should arrive to the same decisions as managers at different location. The difference will be on-site decisions will be more efficient. Data and processes should drive the decision making, not hierarchy. Management must monitor the processes and outcomes and through the use of data and understanding interdependencies improve performance and not accept shortcuts. Decision making in absence of knowledge is high-stakes guessing. Most everybody will now agree that disabling an alarm system is a bad idea. On the other hand, false alarms wake-up workers depriving them of sleep which can also impact safety, quality, and environment integrated systems performance. The alarm system should have been improved and not disabled without a contingency in place.
Fire drills are practiced repeatedly so that decisions are automatic. When multiple processes fail to provide valid outputs, decision making cannot be simple nor automatic. In crisis, practiced conditions may often not be what is realized anyhow. But, when multiple processes fail throughout operations no degree of preparedness determined through safety drills is valid. Even though safety drills are a common practice, they are practiced with assumptions. What the Deepwater Horizon events demonstrated was that much of what was practiced did not matter. The movie likely highlights the disaster which occurs when expected conditions of preparedness contradict the reality of multiple and simultaneous process and subsequent equipment failures. The objective of often redundant processes is to avoid a complete system breakdown. The reason Deepwater Horizon was such a disaster is that the system cannot anticipate that so many of the “alarms” were ignored. System breakdowns point to poor system control. System control comes from knowledge and understanding not only how well processes are performing, but also the ramifications of processes not performing. On an offshore oil rig, a system breakdown leads to environmental disaster and loss of life. But, any uncontrolled system reacts unpredictably. Too many hedged unstable financial instruments embedded throughout a banking sector that ignores traditional “alarms” can collapse global financial institutions and create an economic crisis. Failing to consider all the environmental data and performance constraints of important system components can result in catastrophic failure and explosion of an otherwise well engineered space vehicle. Management focus should be in data collection and analysis that informs decisions, not the other way around. Too many enterprise decisions are being made without full understanding of the processes that define performance. Also, there often are peripheral and unaccounted influences that dominate the decision making prior to a disaster. These influences build-up due to non-optimal performance anchored in poor process control and analysis. In the bottom-line world of business, this influence almost always is connected to money.
Rational behavior requires theory. Reactive behavior requires only reflex action.
W. Edward Deming
Because if you’re prepared and you know what it takes, it’s not a risk. You just have to figure out how to get there. There is always a way to get there.
Mark Cuban
Money often becomes a principal, albeit undocumented, influence in decision making, especially within poorly controlled systems. This reality is seldom acknowledged, which often makes its impact even more nefarious. Decisions are supposed to be aligned to processes and constraints, such as being legal and adhering to enterprise policies and values. In the world of contract, products and services are agreed to be delivered within threshold requirements. In my experience, there are often different tenders submitted for a project. One tender is requested to address the operational and technical expertise to carry out the work by the contractor. Another tender is requested to address the financial and commercial commitment for services. These combine to put a value on solving a certain problem for the customer. The customer may tell the contractor what weight they place on certain operational capabilities or commercial terms which will combine to form their final decision for award. The expectation is that the product and/or service can be delivered according to what the tender related. Quality is tantamount to variation. One could say that the ability to deliver exactly what the customer requested at the cost that was designated would be very high quality indeed – zero variation. But, complex projects have pressures from many directions which make actual delivery and cost differ from the planned delivery and cost. If processes and the system are well understood and aligned to contract terms and conditions, these differences may not always be neutral, but benefit one party over the other. For example, waiting for the delivery of a crucial machine part may cost the operator or cost the contractor, or cost may be split evenly. It depends on the commercial terms. On the other hand, the requirements for functioning alarm systems and other defined processes should not be impacted. If processes are developed, monitored, analyzed, and improved they are also usually well understood and stable. This means that the estimated performance will not vary too much from the actual performance. However, when processes are not understood or adhered to variation is exacerbated. In these all too common scenarios estimated performance will be way off from actual performance causing cost pressures. The optimized system is always the highest quality, most safe, and environmentally conscientious system which meets the project requirements and delivers the most benefit.
The problem arises when processes are compromised for cost based reasons. Such decisions actually degrade the system performance because processes are interdependent. How decisions are made speaks directly to enterprise culture and values and how decisions are prioritized. Ironically, the best way to offset cost overruns and poor performance is through managing and improving processes and the system. The best way to improve the processes and change the constraints is through better understanding of the system. The number one reason provided for project failure is poor communication. What this is saying is that knowledge does not get where it is needed to improve performance and outcome. It also likely points to a poor understanding of the system, which points to non-optimal outcome. It was common knowledge aboard offshore oil rigs that employees who invoked their right to stop work when unsafe conditions occurred resulting in discontinued operations would be targeted to be let go – lose their jobs – eventually. After heated discussion, the Deepwater Horizon rig manager succumbed to the decision of the customer representative which elevated risk of a blowout. The central consideration was to expedite the completion of a project which was 5-6 weeks over schedule and allow the platform to be moved to another project. Time is money for offshore projects especially. Of course it is. But, should it be? There are multiple agreements that are violated when processes and procedures are not adhered to and safety equipment not functioning. Contracts are predicated on the safety, quality, and environmental equipment and processes operating in accordance to design and procedures. Personnel and their specific function and responsibility are often also included within the contract. Why then can management circumvent specified contractual provisions? They really shouldn’t be able to. Managing the system and processes optimally based on knowledge should form decisions, because if the system is truly managed well and optimized the course of action should be clear and also honor the contract.
Many organizations believe that their principal responsibility is to make profit for shareholders. They forget the part about staying within the rules of the game. Too many decisions are made which do not adhere to those rules. The rules are skewed to allow hierarchal authoritative power to make decisions without knowledge to form the best decisions. And bad decisions are the result. When knowledge is shared and accessible throughout the system and not held within silos of company divisions or subcontractors, operations are safer, environmentally astute, and produce lower variation outcomes – better quality. When systems are gamed, outcomes are less predictable and higher variation. Knowledge shared and guided toward improvements mitigate risks. Risk is uncertainty. The more knowledge available to form the best decisions will reduce risks. Decisions must adhere to values which consistently prioritize them. This provides system stability and reduces outcome variation. Management should not be deciding when a tire needs to be inflated or changed. Management’s key role is optimizing the processes and resources so that any driver who has the knowledge and follows the defined processes can make the same decision independently. Such decision making is more efficient. Do not impede safety, environment, and quality performance by fear. It will be counter-productive in the long-run. Provide a conduit for improvement and engage. Complex systems require optimal knowledge sharing and decision making at each connection. The offshore sector is emphasizing the need to reduce costs. This can only be accomplished through system optimization and not circumventing well thought-out processes and protocols.
Everyone has the right to call time out for safety. But, you do it, your’e gonna get let off. You know … you’re gonna get fired. They are not gonna fire you for that, but they are gonna find a way to eventually get rid of you.
Daniel Barron III, Deepwater Horizon disaster survivor
There is one and only one social responsibility of business–to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.
Milton Friedmand