Small, inert events

About a year ago the Wowowee stampede at the Ultra killed 74 people. It is easy to second-guess, but what if there had been a wider, flatter, entryway, not the narrow-down-slope ramp where people were crushed? What if the locks on the fence at the bottom of the ramp had given under pressure? What if it had been cooler, rather than the warm February 2006 evening at the Ultra, so fewer people might have stayed all night, and thus wait in exhaustion? What if…? And so on.

If not for a curious alignment of seemingly inert events, there might have been fewer deaths—or none at all.

Flashback to 1977, to the Los Rodeos airport in Tenerife, the Canary Islands. (While this was a recent documentary in the Discovery Channel, there is a beautiful, in-depth analysis of Karl Weick in 1990.) Pan Am 1736 was crossing the single runway, while KLM 4805 was positioned at the other end.

KLM captain: “We are now at takeoff.”

KLM engineer: “Is he not clear yet, that Pan Am?”

KLM captain: “Yes.”

The recordings show that the KLM captain did not wait. Instead he pushed his throttles up, and 13 seconds later, KLM 4805 slammed into Pan Am 1736: 583 died.

What wereTenerife’s aligned, inert circumstances? Weick enumerates: Los Rodeos airport was ill-fit for jumbos; the KLM and Pan Am jumbos had been diverted there from the major international airport due to a bomb scare.

When hit, Pan Am 1736 was trying to execute an awkward turn on an all-too narrow runway. The KLM captain, though a seasoned veteran, was most recently a training pilot in simulators. As such, he was used to giving his trainees clearances to “take off.”

At any rate, the air-traffic controllers were working in English, an unfamiliar language. So much cloud covered Los Rodeos that fire trucks rushing to the crash did not know that another plane was burning in the fog.

Finally and tragically, all this might not have happened had the flight deck not been so ambiguous: “We are now at takeoff” (Were they positioned for takeoff, or were they taking off?) and “Is he not clear yet, that Pan Am?” If only one inert event was out of line, Tenerife might have never happened.

What has this got to do with business? The insight is that it is not the major calamities, but the confluence of small events that “get” us in our normal course of operation. Another insight is that when managing operations risk, one ought to assess the “small inert events,” and how to mitigate them. But such “small inert events” have always been around. Why does it seem like they now align in more disastrous fashion? Put another way, why are operations risks more acute than ever? There are three separate but interrelated reasons: tight coupling, globalization and systems integration.

Tight coupling is the result of technological advances like supply chain management, just-in-time manufacturing and mass customization. More and more we operate our businesses like a chain of links, pulled taut over time. Tautness assures efficiency and profits. However, the same tautness exposes rigidity. If one link in the chain snaps, then the whole affair comes flying apart.

In short, the more technologically adept one is, the more susceptible one is to risk. Technology allows us to operate at a much faster, efficient pace, to trade off for the occasional, disastrous snaps. One might actually argue that because Filipino systems are far less tightly coupled than their US counterparts, we actually have more slack, and, therefore, more resilience to risk.

Related to tight coupling is globalization. Whereas coupling is internal, globalization is external. We are more connected to outside, to diverse suppliers and myriad markets. E-commerce dissolves time zones: when the Japanese and Asian exchanges close, the European exchanges open; when they close, the US exchanges open; and so on, 24/7.

To execute contracts my sugar-trader friend sets his clock to Chicago and Amsterdam’s commodity exchanges. Technology has ended respite altogether—if there is any surefire investment, it might be in coffee stocks like Starbucks or Red Bull!

Systems integration is still another “greaser” of operations risk. Integration happens two ways: through IT, or through mergers and acquisitions. Many companies have installed ERP (Enterprise Resource Planning) systems. Such systems, if done well, yield major savings. Yet ERPs expose the company to more operating risks: a brownout here, a mis-entered transaction there. Through sheer, tight coupling, ERPs are more vulnerable to random events.

One also integrates systems through mergers. There has been a surge in mergers in the banking and fast-food industries in the Philippines, for example. At best such mergers promise grand synergies and economies of scale. Yet these new integrated companies become so much more vulnerable during their initial transition period.

Last and ironically, the risk mitigation techniques we use may very well cause more risk. For example, we may employ derivatives to hedge against market risk. Such practices have a dark side: they led Nick Leeson to buy derivatives upon derivatives on the Nikkei index, eventually wiping out billions in capital of the once proud Barings Bank.

Let us come back to our theme: that small, inert events in alignment get you. How then can we identify such seemingly inert chains of events?

Our problem is not that we do not know all the individual events. With patience we can enumerate them all. Our problem is more, how do we connect the dots? How do we see the whole system in play, all its complex interactions? The key to connecting the dots might be in using new frames to see. There are a multitude of prescribed methods for reframing, to name a few: Right-to-left planning; scenario planning; Delphi-FGD expert group opinions; and systems thinking.

Right-to-left planning intends to pop people out of their normal linear frames. To do right-to-left, one must first think of the disasters, the consequences, at the right end. One proceeds to the left, determining different events that lead to the disasters. From these events, we determine causes.

A similar process lies in the “5 Whys” popular in TQM. People died in Wowowee. Why? Because they were crushed against the chain-link fence. Why? Because the master lock did not “give.” Why? Because we built the fences and used locks to keep people out, not let them in.

In essence, right-to-left or five whys retraces a path backwards to the root cause. Business schools constantly extol students to separate intervening effects from root causes.

Another frame-breaking method is scenario analysis, as popularized by Shell. Here we enumerate a universe of environmental events that drive end consequences. From such a universe we isolate the two most key sets of events.

For example, we may want to investigate a strategy for selling donuts. We might surmise that of the many factors that drive donut consumption, two key stand out: health concerns and price tolerance. We then construct a 2 x 2 matrix that depict the extremes of these two factors: high/low health concerns, high/low price.

In the scenario where people display high concern for their health, and are at the same time averse to high prices, we might suggest healthy, wheat-based, low-cal “munchkin”-like snacks, small and affordable.

On the other hand, a high-health and high-price tolerance scenario drives us to make exotic, vitamin-rich donuts that sell at premium prices. And on. Scenario building pushes planners to think in extremes, in order to generate robust plans.

Another way to paint future scenarios is through Delphi techniques. These take the form of FGDs, and expert opinion polls. According to James Surowiecki, author of The Wisdom of Crowds, the aggregate knowledge of the herd outperforms lone geniuses under specific conditions: that there be enough variety within the group; that individuals in the group not influence each other; that people have special sources of knowledge; and that there be a mechanism for aggregating information for display to the decision makers. In short, a carefully chosen group can connect dots better than individuals.

Lastly, there is systems thinking. Where systems thinking is superior is in explaining nonlinear, complex and continuous events.

For example, color-coding in Manila might initially alleviate traffic. But many Filipinos will buy extra vehicles with new license plates in order to beat the scheme. We now have more cars, and all things held equal, more traffic. The problem may be worse: my colleague, Prof. Tony Perez of AIM, teaches an excellent course in systems thinking, and he would call this “fixes that fail.”

Now that we have connected the dots, the next step is to articulate action. In risk management there are essentially two: avoidance and mitigation.

We can avoid the problem altogether. In essence, we avoid battle. We withdraw from a market because the competition may be too tough; we do not to expand into a new territory because of potential losses. But avoidance does not mean complete capitulation. Avoidance also means sensible, low cost solutions. Had there been more megaphones at Wowowee, we might have had fewer deaths.

My late mother-in-law, an expert house builder, always advised us: install square, standard sockets for 110 volt outlets, and round ones for 220 outlets. This seems counter-intuitive, but makes perfect sense: unless I willfully mean to do it, in her scheme I can never burn out my 110 volt appliance from the US. (Of course I can avoid this altogether by buying only multi-volt or 220 volt machines.)

We can mitigate operating risk, such as buying insurance, or making a making up portfolios of actions, or eliminating risk altogether. The choice of mitigation usually depends on worst-case consequences, the so-called value at risk, or VAR calculation.

For example, we pay fleet insurance premiums in case our trucks hit others. At the same time we pray that we never have to collect. Conversely we can deploy two different teams to solve the same problem. If one fails, we have another to back up. If we want, we can completely negate risk altogether, which tends to be expensive. If our risk is a threat from a competitor, why not buy him out? In all cases we pay “premiums,” to either transfer risk to others, hedge our bets, or cartelize a market.

Managing risk has become a buzzword these last few years, especially after the shocks from 9/11 and Enron. But more than disasters, good risk management can save money. Under the Basel II accords, demonstrated risk management processes will allow banks to maintain lower levels of capital. In due time similar risk standards may be applied to non-banking corporations, especially those with wide ownership bases, or risk-averse owners. It would pay to start a risk management program early in anticipation of these changes.

New technologies will only couple our links tighter; new markets will open up; and our businesses will recombine and merge. Only by careful, repetitive, honest, and exhaustive connections and reconnections of small, inert events, can we truly declare temporary victory. That is, until the next change comes around. 

Lim is an associate dean of the Washington SyCip Graduate School of Business of the Asian Institute of Management and associate professor for MBA EMBA and Excell. E-mail at ralim@aim.edu.

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