High Resiliency Organizations – What Investment Firms Should Learn from High-Risk Industries
/There’s a small group of organizations that have learned to excel despite operating in extremely complex, dangerous, and unpredictable environments. For example nuclear power plants and aircraft carriers all operate in rapidly changing environments with deadly consequences for failure. They’ve learned to handle the unpredictable surprises that would decimate a typical organization. The fact that many of these organizations operate for years without failures is a testament to the deliberate design of their organization and carefully constructed team training.
Investment organizations should pay attention. Investing occurs in volatile and unpredictable environments. The future is unknowable and full of surprises. The most well-researched plans will be disrupted. For many institutional investors, the consequences for getting it wrong are measured in the billions.
Many investment firms are comforted by their highly educated and credentialed personnel, extensive technology/software resources, and a deep roster of consultants. While these components are certainly essential, they’re missing one major component.
Resiliency.
Resiliency is simply the ability of the organization to respond to change. It’s all about how teams and resources work together, not about the strength of the individual components.
Resiliency is a primary reason why nuclear power plants and aircraft carriers have had such an outstanding rate of success despite the dangerous, high-pressure environments. These organizations have learned, often through deadly disasters, how to best confront the unpredictable nature of their environments. Because the consequences are so high for these organizations, they’ve been incentivized to learn the proper way to build a resilient organization.
Due to their ability to thrive in tough environments, they are known as High Reliability Organizations (HRO).
High Reliability Organizations don’t succeed because they have better people, technology, or more resources. Instead, they’ve redesigned how existing resources work and communicate together.
Investors can implement many ideas uncovered by these HRO’s. Investment firms need to start looking outside the investment industry and begin adapting the best ideas that other industries have figured out.
What is a High Reliability Organization (HRO)?
What exactly constitutes an HRO? How are they different than a typical organization?
…managing complexity and uncertainty in high-risk sociotechnical systems requires people to continuously adapt. Designing resilient systems that support adaptive behavior requires a deepened understanding of the context in which adaptations take place, of conditions and enablers to implement these adaptations, and of their effects on the overall system. Also, it requires a focus on how people actually perform, not how they are presumed to perform according to textbook situations.1
All investment firms will face crises that will stress the organization. It’s not if, but when, it will happen:
Recent studies of large, formal organizations that perform complex, inherently hazardous, and highly technical tasks under conditions of tight coupling and severe time pressure have generally concluded that most will fail spectacularly at some point, with attendant human and social costs of great severity.2
Adaptation is a critical element. Because a crisis is unpredictable, leaders can’t implement procedures to negate every possible threat. Instead, it’s more important for teams to adapt to a new threat, not to try to predict them in advance. Flexibility, not rigidity, is key.
The adaptability of an investment organization isn’t something that can be decreed from leaders and expected to happen instantly. It’s a learning process that’s built over time. It’s a multi-year commitment, not a one-time lecture from the CEO. You don’t pile on additional rules and processes and expect adaptability and resiliency to emerge. In most organizations, teams don’t know how to be adaptable. There tends to be more scrambling and panic then controlled adaptation.
Organizational resiliency isn’t assessed by just looking at its component parts. The educational background and expertise of your team doesn’t matter. Neither does the size of your team. Sophisticated technology isn’t the answer.
Reliability is an emergent property. It’s the culmination of the interaction of the components, not the strength of any one component. The interaction determines how responsive an organization will be to the unexpected:
Safety is an emergent or system property, not a component property. Determining whether a plant is acceptably safe is not possible by examining a single valve in the plant (although conclusions can be reached about the valve’s reliability). Safety can be determined only by the relationship between the valve behavior and the other plant components and often the external environment of the plant—that is, in the context of the whole. A component and its specified behavior may be perfectly safe in one system but not when used in another.4
All organizations need to learn, especially those operating in volatile and unpredictable environments. Real learning is hard. Real learning takes more than scheduling random half-day workshops on the latest management fad. It’s continuous process over many years.
While it is difficult to argue against learning from mistakes, the costs of implementing effective organizational learning are high and the problems of competition for resources arises again. In addition, the difficulty of implementing effective organizational learning should not be underestimated.5
HRO Principles
Principle #1: The Continuous Cycle of Learning, Mentoring, & Retraining
Of all activities studied by our research group, flight operations at sea is the closest to the "edge of the envelope", operating under the most extreme conditions in the least stable environment, and with the greatest tension between preserving safety and reliability and attaining maximum operational efficiency.6
The U.S. Navy has developed an exceptional ability to train young and inexperienced teams. Given the high turnover and lack of experience, it’s remarkable more accidents don’t occur. How many other organizations could survive a complete turnover of their staff within 18 months?
…the Navy demonstrably performs very well with a young and largely inexperienced crew, with a "management" staff of officers that turns over half its complement each year, and in a working environment that must rebuild itself from scratch approximately every eighteen months.7
The Navy proves that HROs can be built, even with high turnover and inexperienced teams. The key is the consistent and unrelenting cycle of training:
At any given moment, all but the most junior of the officers and crew are acting as teacher as well as trainee. A typical lieutenant commander, for instance, simultaneously tries to master his present job, train his juniors, and learn about the next job he is likely to hold. If he has just come aboard, he is also engaged in trying to master or transfer all the cumulated knowledge about the specifics of task, ship, and personnel in a time rarely exceeding a few weeks. In addition to these informal officer-officer and officer-crew interactions, officers and crew alike are also likely to be engaged in one or more courses of formal study to master new skills in the interest of career advancement or rating.8
The Navy emphasizes three levels of training. Training those beneath you, mastering your current role, and learning your future role. Many investment firms solely focus on mastering your current role, with some emphasis on training junior employees, and very little priority to training for future roles. But all three are essential to building capable employees. When the market shifts or an employee leaves, organizations need people ready to step up. You need to start training before the need has arrived, not after.
Many investment firms stop formal training and end up with siloed teams, focusing on their own niches, but unable to bridge the opportunities and risks to other parts of the organization. Personnel can specialize but can’t have complete ignorance of other markets. They have to understand how other asset markets are connected. Equity managers can learn from fixed income managers. Alternative markets can educate traditional markets. And so on. Create global knowledge among the team and better relative value decisions will be made across the strategies. CIO’s can’t do this on their own. All individuals should be able to uncover ideas and threats in different markets. Those closest to the front lines often have the best insight.
Team debates are much more informative when team members have foundational knowledge across multiple asset classes. However, when people are confined to their own silo, it’s difficult to have a deep discussion and challenge other’s ideas when you don’t have the necessary background.
There’s an organizational imperative to build a resilient team. Yes, that may reduce the hours spent on someone’s core responsibility, but there’s a longer term, and arguably, a much more important benefit to the organization that results from training and mentoring across asset classes.
Principle #2: Empowering Junior Employees With Abort Authority
The U.S. Navy has a unique feature on its aircraft carriers that is unlikely to be found in a typical organization:
Events on the flight deck, for example, can happen too quickly to allow for appeals through a chain of command. Even the lowest rating [sailor] on the deck has not only the authority but the obligation to suspend flight operations immediately, under the proper circumstances, without first clearing it with superiors. Although his judgment may later be reviewed or even criticized, he will not be penalized for being wrong and will often be publicly congratulated if he is right.9
Have you ever seen a junior employee stop a decision of a senior executive? Or pushback against the CEO? I’ve never seen it and I doubt others have either. It just doesn’t happen in a typical company. Senior leaders make decisions. Everyone else falls in line.
For both HRO’s and investors, big decisions can’t flow in one direction from leaders to employees. The markets are too complex for the CIO to dictate all the investment decisions in a top-down manner. Instead, all employees need to have the authority and support to push back when their knowledge indicates a potential problem with the CIO’s decisions.
High reliability organizations defer to expertise. Leaders at high reliability organizations listen to people who have the most developed knowledge of the task at hand. Sometimes, those individuals might not have the most seniority, but they are still encouraged to voice their concerns, ideas and input — regardless of hierarchy.10
No person, no matter how experienced, can understand and decide with 100% accuracy. That’s why junior sailors on aircraft carriers are empowered to abort operations if they sense a potential issue. Investment organizations need to operate with the same empowerment. If there’s a decision that exposes an underappreciated threat, even the most junior employee should be encouraged and rewarded to speak up. It doesn’t matter if they end up being right in the end. As long as there is a reasonable basis for their concern, their input deserves attention.
Given the nature of both aircraft carriers and investment markets, many decisions will be made with less than perfect information. Feedback needs to happen before there is 100% certainty. Encourage people to follow their hunch and not wait until they have all the evidence:
A culture that values accuracy may influence people to withhold judgments and communication until they have “precisely the same information” and can demonstrate “the validity of their analysis.” Since accuracy is difficult to demonstrate in a dynamic partially understood environment, norms that favor accuracy may silence the reporting of imprecise hunches about anomalies that could cumulate into crises.11
Principle #3: Decision Redundancy
The U.S. Navy also embraces decision redundancy, allowing decisions to be quickly and efficiently reviewed:
Most interesting to our research is…decision/management redundancy, which encompasses a number of organizational strategies to ensure that critical decisions are timely and correct. This has two primary aspects: (a) internal cross-checks on decisions, even at the micro level; and, (b) fail-safe redundancy in case one management unit should fail or be put out of operation. It is in this area that the rather unique Navy way of doing things is the most interesting, theoretically as well as practically.12
No one likes to be second-guessed, but feedback is essential for big decisions. There’s always the need to balance independent authority vs. additional review. The extremes are the danger. Some firms give individuals complete autonomy with zero oversight. That’s easier for everyone in the short run but won’t lead to good decisions. Other firms create endless loops of meetings and reviews, guaranteeing nothing gets decided. Both models destroy resiliency.
Markets are too complex for one person to have all the answers. Teams exists for a reason – people with different backgrounds and perspectives will catch mistakes otherwise missed. The key is making the review process a streamlined, efficient process. Reviews need to be timely and immediate, otherwise individuals become frustrated waiting for others to make decisions. This slows down decision making and drives resentment among the teams. It can’t be a burdensome, bureaucratic approach. It’s imperative to have team members see themselves as part of a team, rather than as individual decision makers.
Principle #4: Elevate and Normalize Mistakes
Any forward-thinking innovative organization will make mistakes. It’s an unavoidable part of the process. Most organizations treat mistakes as failures, leading to complacency and hesitation to take risk. Mistakes drive learning but many leaders treat mistakes as an invitation to punish.
Once again, the U.S. Navy has a unique approach to recognizing and even rewarding mistakes:
Landau and Chisholm describe a seaman on the nuclear carrier Carl Vinson who loses a tool on the deck, reports it, all aircraft aloft are redirected to land bases until the tool is found, and the seaman is commended for his actions the next day at a formal deck ceremony.13
Not only was the mistake not punished, the sailor was rewarded for admitting the mistake. How many organizations operate like that? How many employees feel comfortable admitting a mistake that leads to disruption. Most don’t, so they suppress the reporting of mistakes. Leaders who don’t hear about mistakes often assume mistakes aren’t happening. In reality, mistakes are happening all around, but they get buried quickly. When mistakes are punished, that doesn’t stop future mistakes, it just suppresses the reporting of the mistake, ensuring that the organization never learns.
The same effect has been found in hospitals. The top performing teams had the highest levels of mistakes because they were comfortable reporting mistakes. It was the bottom performers who were hiding mistakes. They appeared to be the best performers, but in reality, were the worst.
Edmondson (1996) found, contrary to her hypotheses, that the highest performing nursing units led by skilled and supportive managers, had higher detected error rates for adverse drug events than did units that were lower on these dimensions. She interprets these results to mean, not that more errors were made in the high performing units, but that a climate of openness had been created that made people more willing to report and discuss errors and to work toward correcting them.14
As a leader, don’t mistake the lack of mistakes with the conclusion that things are going fine. Do you really make it comfortable for your team to report mistakes? Or have you created an environment where people fear the swift retribution of admitting mistakes?
HRO’s prioritize a deep understanding of mistakes. It’s not a process that’s comfortable or quick but does provide the best chance of an organization achieving their objectives.
High reliability organizations are reluctant to accept "simple" explanations for problems. Broad, rational excuses can be attractive when processes don't work well. But high reliability organizations resist simplifications. While it is beneficial to simplify some work processes, high reliability organizations recognize the risks of painting with broad strokes and failing to dig deeply enough to find the real source of a particular problem.15
It takes a cultural shift to move from mistake avoidance to mistake acceptance. It’s not something that can be decreed from the top down. It needs to flow through all levels of the organization. It’s a long-term investment to change the approach to failure. And it’s certainly not easy.
High reliability organizations have a preoccupation with failure. Every employee at every level in a high reliability organization is encouraged to think of ways their work processes might break down. This sense of shared attentiveness is constant. It is applicable to small inefficiencies and major failures, including medical errors. Employees are encouraged to share their concerns for potential failures, which can help create best practices across departments.16
Principle #5 Constant Communication and Feedback
Leadership doesn’t occur in isolation. Leaders need to be intimately involved with the organization, not relying on the chain of command to relay critical knowledge. Leaders need to actually walk around and talk to the people on the front line. The best insights are real-time observations, not rehearsed answers during a once a year formal review process.
As mentioned below, hospitals using rounding to get first-hand knowledge of what’s really happening:
There is no substitute for observing operations firsthand. Rounding can help leaders develop a more textured understanding of hospital processes. Essentially, hospital leaders take an hour or so to attentively watch processes and talk with employees and supervisors. Rounding promotes open, purposeful communication. If done correctly, it also unveils which processes are working and which ones are burdening employees or interfering with patient care, says Mr. Studer. Leaders should make rounds with a sense of purpose and an eagerness to identify operational problems.17
HRO’s also value the feedback of new employees. New employees aren’t handicapped by corporate tradition. They often have different perspectives on how to solve problems. It’s an easy way to get fresh insight. Life-long employees are too entrenched to defeat the tunnel vision that biases their views.
The best place to get a fresh pair of eyes is from new staff…in healthcare, organizations hire consultants and pay them thousands of dollars to tell them what staff could tell them for free.18
Conclusion
Investment firms can learn a lot from HRO’s. Long-term performance is a constant, never-ending effort to succeed in complex and volatile environments. While perfection will never be achieved, the best firms recognize the learning process doesn’t happen on its own. There’s never a finish line. But by implementing the lessons from HRO’s, investment firms can be better prepared to navigate the unknown.
HROs “seek an ideal of perfection but never expect to achieve it. They demand complete safety but never expect it. They dread surprise but always anticipate it. They deliver reliability but never take it for granted. They live by the book but are unwilling to die by it.19
Sources:
1. Resilience in Everyday Operations: A Framework for Analyzing Adaptations in High-Risk Work
2. The Self Designing High Reliability Organization Aircraft Carrier
3. Organizing for High Reliability.pdf
4. http://sunnyday.mit.edu/papers/hro.pdf
5. http://sunnyday.mit.edu/papers/hro.pdf
6. The Self Designing High Reliability Organization Aircraft Carrier
7. The Self Designing High Reliability Organization Aircraft Carrier
8. The Self Designing High Reliability Organization Aircraft Carrier
9. The Self Designing High Reliability Organization Aircraft Carrier
10. 5 Traits of High Reliability Organizations: How to Hardwire Each in Your Organization
11. Organizing for High Reliability.pdf
12. The Self Designing High Reliability Organization Aircraft Carrier
13. Organizing for High Reliability.pdf
14. Organizing for High Reliability.pdf
15. 5 Traits of High Reliability Organizations: How to Hardwire Each in Your Organization
16. 5 Traits of High Reliability Organizations: How to Hardwire Each in Your Organization
17. 5 Traits of High Reliability Organizations: How to Hardwire Each in Your Organization
18. 5 Traits of High Reliability Organizations: How to Hardwire Each in Your Organization
19. Organizing for High Reliability.pdf