Wednesday, June 21, 2006

Make some mistakes--and profit from it

In this month's Harvard Business Review, Paul Schoemaker and Robert Gunther write about ways companies get bound up in their own assumptions, and thereby miss important opportunities for growth or improvement.

Their proposal? Deliberately make a "mistake" by doing something that violates an assumption you hold, to test whether the assumption needs to be altered. (Their article can be found here. Note: you need to be a subscriber to access it online. A brief newspaper article by Schoemaker and Gunther on this topic can be found here.)

Schoemaker and Gunther cite an example where the Bell System decided to forgo security deposits from some customers their systems had identified as credit risks. This was done in a controlled way, with a small but significant sample size, in order to test their approach to dealing with credit-risky customers. They found that their rules for requiring deposits were too strict, and that many of the customers who otherwise would have not opened an account (because they couldn't afford the up-front deposit) turned out to be reliable payers. Adjusting the processes based on the test added, according to the article, $137 million per year to the Bell System's profits.

Here are some highlights from the article:

Although organizations need to make mistakes in order to improve, they go to great lengths to avoid anything resembling an error. That’s because most companies are designed for optimum performance rather than learning, and mistakes are seen as defects that need to be minimized. Executives, moreover, perceive that flawless execution is what makes them valuable to the organization. In business (with the possible exception of venture capital firms and entrepreneurial start-ups), an executive’s reputation and rewards are typically based on the height of his or her successes, not on the depth of learning from failures.


Many managers recognize the value of experimentation, but they usually design experiments to confirm their initial assumptions. An advertising company typically may try different approaches to see which tactics work best but won’t run an ad that it presumes will fail. Experiments of this type aren’t deliberate mistakes. True deliberate mistakes are expected, on the basis of current assumptions, to fail and not be worth the cost of the experiment. According to conventional wisdom, they have a negative expected value. But if such a mistake unexpectedly succeeds, then it has undermined at least one current assumption (and, often, more). That is what creates opportunities for profitable learning.

Have you upended any of your assumptions recently? Perhaps it's time you made a few more mistakes.

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