Organizational Learning from Failures: The Return on Failure Ratio

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Chloe Xu
Director, Australia

Organizational Learning from Failures: The Return on Failure Ratio

Over the last decades, innovation and creativity have become critical skills for achieving success. A 2015 Boston Consulting Group survey indicated that a key obstacle to business innovation and growth is fear of failure.

On one hand, senior executives are aware that mistakes are an inevitable consequence of trying something new and should be seen as valuable. On the other hand, the obligation of managers forces them to keep everything in control. As a result, if people feel they might fail, they do everything possible to avoid it.

A solution to this problem might be to extract as much as possible value from failures, improving your 'Return On Failure', boosting benefits while at the same time controlling costs. The equation to calculate your Return on Failure (ROF) ratio is shown as below:

Obviously, one way to raise the ROF is by keeping the denominator, which is your investment low. The other way is to increase the numerator - the "assets" that you gain from mistakes, such as information gathered about customers and markets and insights on yourself, your team and your operation.

In fact, quite analogical to organizational learning as described by Argyris and SchŲn (1978), Birkinshwa and Haas (2016) describe 3 steps that help to extract value from failure to raise an organizationís ROF:

  • STUDY EVERY FAILURE AND GATHER AS MANY INSIGHTS AS POSSIBLE FROM THEM. Begin by getting people to reflect on projects that disappointed, spelling out what the project has taught in regards to things like customers and markets; your organizationís strategy, people, culture, and processes; and future trends. Then compile a list of the associated costs Ė direct and indirect, internal and external.

  • CRYSTALIZE THOSE INSIGHTS AND SPREAD THEM ACROSS THE ORGANIZATION: While itís valuable to reflect on individual failures, the real payoff comes when the knowledge are spread across the organization. Build a review cycle with either formal structures or informal approaches to feed the insights into a broader conversation.

  • CONDUCT A CORPORATE LEVEL SURVEY TO MAKE SURE YOUR OVERALL APPROACH TO FAILURE WORKS: Take a bird-eye view of the organization and check whether the overall approach to failure yields all the benefits. This also encourages your employees toward greater openness to failure.

  • Failure is less painful when even if it fails it can bring maximum value.

    ⇒ Are there any other further measures that can increase an organizationís return on failure?

    Sources: Birkinshwa, J. and Haas, M., May 2016, Increase Your Return on Failure, Harvard Business Review USA.

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