When Should Leaders Walk Away?

This is a guest post by Dave Yarin. Dave is a compliance and risk management consultant to directors of large and mid-size companies and the author of the upcoming book Fair Warning – The Information Within. You can follow Dave on Twitter.

The Sunk Cost Theory

The supersonic Concorde jet’s tragic crash in 2000 and retirement in 2003 was the end of a troubled history for the aircraft.  Plagued by design and development cost over-runs, the British and French governments that jointly developed the Concorde also knew that the plane wouldn’t be an economically viable business, yet they pressed on despite these warnings.  The plane’s history gave rise to the metaphor “The Concorde Fallacy” to describe when an individual or company spends more to continue a failed project rather than abandon it or pursue a less-costly alternative.  But why do companies behave this way, and can they overcome this phenomenon and make the critical decisions necessary for long-term success?

 

Leadership Danger: ignoring warnings to justify past decisions.

 

Social psychologists refer to a thought process known as the “sunk cost theory,” which often explains why companies ignore warnings and continue forward with failed projects or plans.  The sunk cost theory refers to the unconscious desire to have our current choices justify prior decisions.  It’s the reason many car owners continue to repair a lemon — because they can’t bear to give up on the money they’ve already spent — and it helps to explain why so many homeowners resist selling and cutting their losses when real estate prices tumble, only to unload their houses for even less just a few months later.  Time Magazine’s October 2011 article What Was I Thinking discussed why we often have trouble acting in our best financial interests.  Part of the article discusses why we “can’t let go” of a financial path that we put ourselves on.  For example, lawyers typically rank low on job-satisfaction surveys, but ask an attorney why he or she doesn’t switch careers, and they’ll probably respond by saying how long they’ve been practicing and how much law school cost.  The article also discusses what behavioral economists call loss aversion – the pain of making a loss final outweighs the rational reasons for making that transaction or decision.  The research of Daniel Kahneman, a 2002 Nobel Prize winner and Israeli psychologist, demonstrated that most people respond to the loss of a given amount of money about twice as strongly as they react to a similar gain.

Have companies been able to overcome the sunk cost fallacy, end a failed project despite significant investment, and succeed in the long run?  In the early 1990s, Blue Cross Blue Shield of Massachusetts embarked on one of the most ambitious information system projects the industry had ever seen. “System 21” was heralded as “the future of Blue Cross,” a claims processing software marvel that would be cheaper and more responsive to customers.  But after six years of delays, cost overruns, and over $120 million invested in “System 21”, Blue Cross Blue Shield management faced the prospect of going to the board of directors to not only explain the delays but request another $120 million to complete the project.  Blue Cross ultimately scrapped the project and turned its computer operation over to an outside contractor.  The company has since moved on to become one of the most successful health plans in the industry, recording net income of $163.9 million in 2012. In the long run, walking away from a $120 million failed IT project was better than pouring far more time and money into it.

 

Ask if your company is investing in a failing project because it can’t let go.

How to Ruin a Business Without Really Trying

 

  • Would you like to ruin a business?
  • Have you been looking for tips that will guarantee you to fail?
  • Want to screw up your next big deal?

I didn’t think so.  That’s why you should read my friend, MJ Gottlieb’s new book How to Ruin a Business Without Really Trying: What Every Entrepreneur Should Not Do When Running a Business.

Because it will save you a lot of time, money, pain and aggravation to learn from someone else’s mistakes rather than your own.

Don’t own a business?  His advice isn’t just for entrepreneurs.  The same advice for an entrepreneur applies in the corporate world.

I recently had the opportunity to ask MJ to share his perspective with you.  He writes with an honesty and humility about his trials and mistakes that will draw you right in.

 

Fact: 90% of start-ups fail and 70-80% of all businesses fail within 10 years.

 

Learn What NOT to Do

MJ, why a book on ruining a business?

When an entrepreneur starts a business, a tremendous amount of time, effort and (often) money is spent and great sacrifices are made at the expense of friends and family.  That is a fact.  It is also a fact that losing (ruining) a business after all that sacrifice can be an extraordinarily painful experience.  What most people don’t realize is that they can significantly mitigate the risk of failure by learning from the mistakes of others before the clock starts and the stakes are for real.  If you truly study brands, you will see a pattern of common-thread mistakes that most businesses both past and present seem to share in common.  The ones who are willing to recognize a mistake and quickly adapt, adjust and modify will survive, the rest disappear.

 

“Only brands willing to recognize a mistake and adapt, adjust and modify will survive.” -MJ Gottlieb

 

It’s not that aspiring entrepreneurs don’t want to learn from failure, I think society is simply focused too much on the end result (the success) and is viewing things through rose-colored glasses.  Most of the information that I come across focuses on the small percent who are succeeding, as opposed to studying and learning from the vast majority who are not.

Statistics show 90% of start-ups fail and 70-80% of all businesses fail within 10 years.  Despite these facts, the market is flooded with how-to books and courses on how to succeed.  Here’s my concern with this.  Every business is different with its own unique blueprint to success, so there is absolutely no way you can tell someone how to run their business.  You can, however, find the key mistakes that most businesses seem to share in common to start to swing the percentages in the other direction and give more hope to the entrepreneur.

 

Learn From Adversity

How has adversity helped make you who you are?

I think it’s all about one’s perspective on the word.  Corny as it may sound, I have come to crave adversity and look at it as yet another great opportunity to grow.  The only reason I can see that perspective is because I operated from the other side for a very long time.  When I was young, I ran away from everything and accomplished nothing.  It wasn’t until I was able to turn around and look adversity in the face that I was able to take the power away from it and use it to my advantage.

I think adversity not only makes you a stronger person but also is the only way to see what you are truly capable of.  I think there should always be adversity to some extent, as it will always challenge us to grow.  Without adversity there is complacency, which I think is a four-letter word.  I always want some goal ahead of me that I have not yet achieved or some stumbling block I have not quite yet moved aside.

 

“It is just as important to know where you are as it is to know where you want to be.” -MJ Gottlieb

 

For example, basketball was my salvation, and I played every day until I couldn’t play anymore and had to get my hip replaced. I still do two hours of physical therapy every night because I not only want to get back on the basketball court but also want to dunk again.  The doctor says that is most likely not going to happen.  I say it most likely will.  While he is showing me the adversity, I choose to take it as a challenge and an opportunity.

How To Ruin 3D 2

Take me to the dark days after your first business failed.  What were you thinking? 

Why Winners Take Risks

 

Recently, I had the opportunity to talk with Tom Panaggio, entrepreneur, strategic advisor, speaker and amateur race car driver about taking risks, winning, and using failure to propel success. Tom is the author of The Risk Advantage: Embracing the Entrepreneur’s Unexpected Edge.

 

The 2 Big Advantages of Risk

 

“A leader who accepts risk is setting the stage for long term success.” –Tom Panaggio

 

Why is risk an advantage?

 

There are two big advantages to risk.

First and foremost risk is directly connected to opportunity.  Every opportunity must have an element of risk or there will be no benefit.  Risk is the cost of opportunity.  All businesses and organizations must be in a constant state of forward progress because of competition and the ever-changing demands of customers.  Therefore, as an entrepreneur or business leader we must continuously seek out opportunities to meet these demands.  A leader who recognizes the vast importance of forward motion for their organization accepts risk as merely a cost of opportunity and then actively endorses this philosophy throughout his business in setting the stage for long term success.

Secondly because most people have a tendency to avoid or minimize risk, those who have the courage to embrace it already have a competitive advantage.  For example my company was a non-stop marketer.  We knew that our competition was not willing to risk the investment in marketing to the degree that we were.  So we took advantage of their unwillingness to risk the marketing dollars and dominated our market space by out-marketing them.  We put ourselves in a position to win by embracing the risk of marketing.

 


“The only way to achieve success is to have the courage to embrace risk every day.” –Tom Panaggio

 

How do you encourage the appropriate amount of risk?

It is important to understand that my position on embracing risk does not advocate blindly engaging in any and all opportunities regardless of the potential outcome.  But the only way to achieve long term success is to have the courage to embrace risk each and every day.  With that said, there is no standard to determine what level of risk is appropriate, and there is only a blanket rule of thumb that can be generally applied.  That’s the great challenge of being a business leader: recognizing worthy opportunities.  Any opportunity that is void of a sufficient benefit or is described as “no-risk” should be avoided.  Each situation that requires one to embrace risk must be evaluated on a unique basis.

If pressed for an answer, I would say that we always start with the end to determine if this is an opportunity worth pursuing.  What is the reward or benefit the company receives from committing to this opportunity?  If an opportunity provides little reward or doesn’t help with the company’s forward motion, then we limit the amount of risk.  If the opportunity can change the competitive landscape for the company or increases the value your product or service has for your customers, then the level of risk increases by the potential return.

Everyone wants a formula or template they can apply to all business situations.  That shifts the responsibility from the business leader to the formula.  But in the end, business leaders need to rely on their gut intuition and have the courage to step outside the comfort zone.

 

Adapting A Winner’s Mindset

 

How do you adapt a winner’s mindset?

This is really a difficult concept to grab hold of because human nature is pushing us to play not to lose rather than to go for the win.  A study was done and it found out that most people get twice as much joy from not losing as they do from winning.  Lose aversion creates risk aversion: “I don’t want to lose what I have.”

My father was a basketball coach so from a very early age the idea of winning was a way of life. I was conditioned to want to win and, therefore, not only to think like a winner, but more importantly ACT like a winner, which means having the internal drive that says, “I want to win” and then focusing on preparing for competition, execution and moving forward.

 

“If you do not have a winner’s mindset, odds are you will not succeed.” –Tom Panaggio

 

The truth is business does not support the theory of, “It’s not whether you win or lose, but how you play the game.”  In business you not only better play the game right, but you have to win, too. Competition in business has no level of compassion, you either want to win and then act like a winner or you get eliminated.  So if you do not possess a winner’s mindset when you launch a business, the odds are you will not succeed.

 

Using Failure to Succeed

Failure Is Not Defeat

This is a guest post by Tom Panaggio,
 Author of The Risk Advantage: Embracing the Entrepreneur’s Unexpected Edge. Tom is an entrepreneur who spends his time advising companies, speaking and spending time on the racetrack.

Vince Lombardi never admitted to failure. He always said that he never lost a game, he just ran out of time. To Lombardi, failure was not fatal; it did not mean that hope was lost. He simply refocused his team and made the necessary game strategy alterations. In his mind, he never lost or failed because he always made the necessary changes going forward.

There is a difference between failure and defeat. Failure is temporary, but defeat is permanent. I’d love to see the statistics for how many entrepreneurs mistook a failure as defeat and gave up. For anyone who accepts defeat, there is no hope, only regret.

 

Failure is temporary, but defeat is permanent. -Tom Panaggio

 

Today, I am an amateur race car driver. That obsession began in 1983 after I attended a sports car race at Daytona International Speedway. My background was in traditional athletics, and I knew nothing about racing or how to even begin to get involved. All I knew was that I wanted to do it. After conducting some research, I found that I needed to go to two accredited racing schools to qualify for a license, with the caveat that school number two must be a Sports Car Club of America (SCCA) sanctioned school. If I didn’t pass this second school, there would be no racing for me.

9781938416446The first school I attended, Skip Barber Racing School, supplied everything needed, including a real race car and all the safety equipment. The second SCCA school supplied only the racetrack and instructors; I needed to provide my own race car. By luck, I knew someone who owned a race car and was retired from driving. He was gracious enough to let me borrow his car if I paid to get it track ready. That turned out to be a mistake on his part.

I failed at the second racing school. Twice. In consecutive weekends, I failed due to mistakes. (Okay, I crashed both times.) The second failure caused the untimely death of the borrowed race car in a spectacular crash at over a hundred miles an hour. I can still see the track workers leaping from their protective bunker moments before I plowed into it.

Everyone told me to quit, to give up. They said that I didn’t have what it takes to be a race car driver. Even I had doubts, but my desire to race had not lessened. In fact, everyone else’s doubts made me want to prove that I could do it. I was determined, and I wouldn’t let failure defeat me.

Fear of Failure: Why It’s Essential to Success

Image Courtesy of istockphoto/AnsonLu

This is a guest post by Bill Blankschaen. Bill is a writer, speaker, ministry consultant and non-profit leader. He blogs at FaithWalkers at Patheos and can be found on Twitter and Facebook.

If you fear failure, you are not alone. A quick Google search reveals countless resources to help you overcome the fear of failure. Certainly, an unhealthy fear of failure can paralyze us and destroy the culture of the teams we lead. But the lack of any fear of failure can be just as deadly.

I recently enjoyed lunch with a friend who excels in sales for a large media company. Quite simply, he’s one of the best at what he does. Always eager to learn, I asked him what trait seemed to be shared by all the failed salespeople he has seen over the years. His reply? Overconfidence.

If you want to be creative all it takes is one step. The extra one. -Dale Dauten

The most common characteristic of those who failed was that they all once thought failure to be impossible.

There’s an important lesson for us as leaders. When no one fears failing at all, our team gets complacent, inefficient, and starts to coast. As I’ve often reminded my teams, coasting kills. It’s when we think our ship is unsinkable that we stop looking for icebergs ahead — in spite of repeated warnings.

We all know how that story ends.

When No One Fears Failure