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IBA Update 21 July 03 – Optimistic Realists

In 1990, Pacesetter, a leading medical devices company, was developing a new pacemaker.  The CEO of the company was faced with a choice between two project leaders:  an optimist, who projected an 18 month development time, and a realist, who felt that the project could only be completed in 36 months.  The optimist was given the resources and the job.  Two years and many million dollars later, the project was cancelled and the project manager fired, but only after setting the company back several years in the development of its new technology. 

Put yourself in the position of Pacesetter’s CEO in 1990: you have to make a choice between two project managers.  One tells you she can do the work in six months, while the other tells you it will take twelve.   Both common sense and a great deal of research indicate that you’ll make the same choice the Pacesetter CEO did, and hire the project manager who believes she can deliver in a shorter time. 

Large companies, faced with complex product development challenges, will naturally select for optimists.  In many cases, this is an appropriate bias.  The optimists will make stronger commitments than the pessimists.   To get innovation to market quickly, you want to hire and reward those people who can deliver results faster and cheaper than others. 

Business problems arise when there is a large gap between optimism and reality.  In some cases, as with Pacesetter, this focus on optimism at the expense of reality can lead to catastrophic failures. 

In an article in July’s Harvard Business Review called “Delusions of Success: How Optimism Undermines Executives’ Decisions,”  Daniel Kahneman, the 2002 winner of the Nobel Prize in economics, and Dan Lovallo highlight three kinds of biases that can make organizations irrationally optimistic.

1. Anchoring.  Anchoring is a subconscious process in which previous (sometimes unrelated) information affects current estimates.     This begins in the first phase of any new project idea.  The starting point for a new product is typically a preliminary plan drawn up by the person or team proposing the initiative.  By definition, this initial plan will tend to accentuate the positive since it’s designed to make the case for the project.  This will anchor subsequent analysis and skew information towards over-optimism.

2. Competitor Neglect.   When examining new markets and new products, companies rarely account for the fact that many other competitors will target the same market.  Investors in TiVo, the company that makes Digital Video Recorders, weren’t anticipating the emergence of a direct competitor, ReplayTV.  TiVo’s challenge has become much harder because it must compete head-on in an emerging market.

3. Organizational Pressure.   This comes in two forms.  The first is the competition for attention and resources within the organization.  Bigger and more profitable projects will get resources more quickly, leading to an upward bias in estimates.  Second, pessimism is interpreted as disloyalty in many corporations, and is actively discouraged.

A key capability in project managers is that of being both optimistic and realistic at the same time.  The optimism generates enthusiasm and team spirit, and helps managers overcome difficult situations.  The realism encourages examination of potential failure modes, and develops the flexibility to reduce their impact.

Optimism and realism are often difficult to balance, and optimism tends to prevail, for the reasons noted above.   If you are overseeing a project, here are several approaches you might want to take with your project managers to test the realism of their outlook.

1. Test for contingencies – ask the project managers how they would respond to different sets of events.  What kinds of contingencies have they thought about?

2. Look at project plans, both to get a feel for the estimates of time, and for the amount of buffer built in to the estimates.  A realist will build time buffers into a project plan, keeping in mind the complexity of the project and the large number of unknowns that may go wrong. 

3. Ask about failure modes.  Find out what managers think may go wrong on the project, and encourage them to keep updating their list of potential failure modes, and responses to them, as the project evolves. 

Business people prefer to think about success than failure.  A very successful engineering firm, Exponent, was once called Failure Analysis Associates.  It changed its name to Exponent in 1998 to provide a better marketing message.  After all, wouldn’t you rather be working with Exponent than with Failure Analysis? 

What drives Exponent’s success, however, is the study of failure.  This is because the earlier you can predict or detect failure, the less painful it is.    

For more information:

1. The article by Dan Lovallo and Daniel Kahneman is in the July 2003 edition of the Harvard Business Review.  Click here to go there: http://harvardbusinessonline.hbsp.harvard.edu/b01/en/hbr/hbrsa/current/0307/article/R0307D.jhtml
2. Failure Analysis, oops, I mean Exponent, is here:  http://www.exponent.com/home.html.  While you’ll have to search a long time for the previous name, it does still exist in a few old press releases.
3. I did a piece on Failure Modes last week.  Here’s a link to that: http://mysite.verizon.net/vze4dvjj/id19.html

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