£80 Billion Saved Over 4 Years - What About The £800 Billion Wasted?

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Thu, 2011-02-03 16:42

Every year, around one in ten Small & Medium Enterprises closes down. With start-ups in their first year, the rate can be as high as one in four. The question is why, in the 21st century, despite massive progress in information and communications technology over recent decades, are such high failure rates still considered acceptable?

If one in ten aeroplanes crashed every year, most of us would revert to trains and ships. The SME sector in the UK generates over £1,700 billion per year. Eliminate this attrition and it increases by at least £200 billion. Behind the bare statistics is a terrifying number of lost livelihoods, repossessed properties and mind-boggling legal costs. If we also include the millions who are discouraged from even starting a business, the true cost is even more horrendous. Yet unlike the spending cuts, this is this rarely, if ever, discussed. Are we all in a state of denial?

Why should we expect Governments to know how to solve this problem? How many successful entrepreneurs do you know that stand for Parliament? Don’t a significant proportion of MPs come from the legal and accounting professions – the ones that benefit from these high failure rates? In any case, why on earth should Governments be expected to provide a solution? Isn’t it about time that business owners started taking responsibility for solving this problem themselves?

Before the Wright brothers, the failure rate in powered flight was 100%. Just over a century later, it’s less than 0.00001%. By definition, at some stage it was 10% but it kept on improving. To achieve this in business doesn’t require new miracle cure – it just needs sufficient insight to copy an existing one.

While each business is unique, the hundreds of thousands that close every year are not continuously inventing new ways to fail. A relatively small number of errors is being repeated tens of thousands of times. By the time the consequences of the mistakes are recognised, it’s often too late. Sam Levenson, the American humorist expressed it well: “You must learn from the mistakes of others. You can't possibly live long enough to make them all yourself.”

The aviation industry has weaned itself off repeated mistakes with systems which investigate incidents before they become accidents. An example is the Confidential Human-factor Incident Reporting Programme where crews anonymously report potential hazards. Shouldn’t we be learning from those whose decisions simply must be right - first time, on time, every time? Can’t their methods be adapted and adopted by business owners and managers?

As Darwin discovered, it’s not always the strongest who survive, nor the most intelligent, but those who adapt and change the most. He also found that the environment determined the direction and pace of evolution. The faster the change in the environment, the lower the survival rate. This is how “survival of the fittest” actually works. The slow and apathetic perish while the quick and eager survive. Those who are consistently quick and eager succeed. This fundamental truth has been known and accepted for over 150 years. No species or organisation is exempt.

Though businesses evolve over much shorter timescales, a market downturn and a credit crunch can create a similar environmental threat, providing opportunities to perish, or to survive and to succeed. The key is learning and understanding what, where, who, when and how to adapt and change.

What lessons can be learned from other professionals where a 10% failure rate would be unthinkable? How do pilots experiment with different strategies, gain experience and develop confidence without putting real people and aircraft at risk? The two examples, one from a DC-10 which crash-landed in Sioux City, the other being the Airbus which ditched in Hudson River, provide classic examples of the contribution made by simulations.

In flight simulators, learning is uninhibited by the consequences of failure. Pilots learn how to recognise and handle every conceivable situation, continuously developing the skills and confidence required to deal with challenges in a calm, methodical and professional manner.

What if the experiential learning used in aviation was available for decision-makers in business? What if they could run a virtual business in a realistic, competitive, simulated environment? What if we could all learn from the mistakes of others? Why can’t unexpected events like a market downturn or credit crunch be handled with the same degree of proficiency that has been achieved on a flight deck?

Simulations can provide the same opportunity for anyone with responsibility, authority and accountability for business policy decisions. They can be used with all types and sizes of organisation, from the micro-entrepreneur to major multi-national corporations.

With simulation-based business games, the challenge might be to turn round an underperforming company, in competition with others. Each “virtual board” determines its own strategy and sets its own policies. The difference is that instead of waiting years for the consequences to emerge, it’s immediate. Sam Levenson’s observation is no longer valid! With accelerated experiential learning, we can make as many mistakes in the virtual world that we need to avoid failing in the real one. We can even overcome risk aversion, the greatest mistake of all. Competition provides realism and stimulates the will to win, which motivates adaptability, until success evolves into a habit.

Change is said to be the only constant but the rate of change is accelerating. With the amount of published information doubling every two years, only those who become more adaptable will survive, let alone succeed!