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May 07 2006 - What our failures can teach us

We'd rather talk about success than failure. The human race gets great succour
from tales of greatness. We like to idolise, and we habitually build up our ancestors,
our leaders, our managers into mythical figures whose successes become
legendary.

We would do better to discuss failure, says Paul Ormerod, for failure is a more
widespread condition than success. "Failure is all around us. Failure is pervasive.
Failure is everywhere, across time, across place and across different aspects of life;
99.99% of all biological species that have ever existed are now extinct. More than
10% of all the companies in America disappear each year."

The author is that most rare of species himself: an economist who engages in
original thinking. Those words are from his new book, Why Most Things Fail. A
professor of the dismal science himself, he has spent the last decade or so
admonishing his fellow economists for their preoccupations with equilibrium
solutions and with artificial thought-models that assume away so much that they
lose all connection with reality. Economists live in unnatural worlds, yet they always
offer simple prescriptions for all maladies in our world: "free the markets", they tell
policy makers; "equate marginal revenue to marginal cost", they recommend
confidently to businesspeople.

The offering of simple solutions to complex problems has become an international

disease. Management gurus write bestsellers based on the most trivial advice.
Politicians of all shades claim to have the answers to very complicated national
issues, egged on by their advisors to make the most absurd campaign promises.
CEOs appear on TV chat shows to say how their remarkable (but always
short-lived) successes are based on simple wisdom.

But failure, says Prof. Ormerod, is actually the state of the world. Economies fail;
businesses fail; projects fail. Yet all the time we are asked to believe in success and
the simple formulae that led to it.

Over the past few decades, governments across the world have embarked on very
ambitious programmes to tackle social issues such as inequality, social mobility and
racial integration. Almost without exception, Ormerod argues, these programmes
have resulted in failure. The countries in question have more inequality, more
segregation and less mobility than when they started - many years and many
billions of dollars later.
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Lest we try to attribute this to mendacious politicians and incompetent bureaucrats,

Ormerod reminds us of something else: business failure is also all-pervasive. Of the
top 100 global companies in 1912, only 19 were still in the list by 1995; nearly half
had been absorbed into other businesses or had simply gone bankrupt. Today,
10,000 companies in America close down every week.

We can see this from our own experience in Kenya: forty years of extravagant
promises by successive politicians have taken us precisely...nowhere. Is there
more to this than just the lamentable quality of our leaders? We have seen
business success, yes: but how many of our top firms were around decades ago,
and will be up there decades hence?

But what about the world's top firms, you might reasonably ask. Has a company like
Microsoft not straddled the corporate world for more than two decades, based on
the worldwide usage of its Windows operating system? Is this not the result of a
rational, calculated strategy? Ormerod has some interesting history for us.
Windows 1.0 appeared in 1985, and the product was awful. Microsoft retreated in
the face of scathing reviews, and cut the Windows support team to just three
people.

The company's strategy was actually focused elsewhere. It was convinced that its
future lay in a relationship and joint product being developed with IBM: the OS/2
operating system. "This will be the environment for office computing in the 1990s",
said Bill Gates. "This is it, after this we're not going to have any more Windows. It's
all OS/2?, said Steve Ballmer (who is now the global CEO of Microsoft).

We know the rest. Windows 3.0 appeared in 1990 to little fanfare. But within 6
months it had sold 2 million copies. Today it is on my PC and yours, and on nine
out of ten of the world's 600 million computers.

Why is it so difficult to get things right? Ormerod tells us that there is an Iron Law of
Failure, and it appears to apply to government policies, businesses and biological
species. The real world is characterised by great complexity and massive
uncertainty. And our capacity as humans to overcome this complexity and
uncertainty is, if only we would admit it, extremely limited.

Running a government or a business is an extremely difficult undertaking, once you

cut through the hype and spin of leaders. No holds are barred. The rules will
change without warning. Opponents will not stand still, nor will they stay the same.
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Technology will often make many once-successful propositions obsolete. The goals
and measures of success will alter over time. The many outcomes of any one
decision are very difficult to predict, and are often only truly apparent when sufficient
time has passed.

So should we all lie down and despair? What is the point of all this activity if failure
keeps happening? Do we even need to bother with which leaders to elect next
year, if all they will (and can) do is repeat the failures of their predecessors?

Fear not. The point about failure is that once understood, it points the way to the
true drivers of success. Failure is necessary, for it breeds success. Failure is what
Joseph Schumpeter, another economist, called "creative destruction". Failure at the
level of the individual component, says Ormerod, is what strengthens the system as
a whole.

And so Microsoft succeeded not because it devised an optimal strategy from the
beginning; it did so because it blundered and then recovered quickly. Both China
and India bounced back from previously disastrous experiments with centrally
planned economies. Adaptability and flexibility, then, are the watchwords of
success in our complex and uncertain world. Rigid centralisation, ossification of
thought, an irrational belief in rational planning - these are the ingredients of assured
failure. We simply cannot predict how complex systems like economies and
companies will evolve. What we can do is install structures and incentives that
encourage exploration and innovation.

Our leaders - corporate and national - need to be individuals who understand this
essential truth. Rather than believe in the absurdity of their own myth, they must be
humble enough to recognise that they do not know it all. Their job is to understand
failure, accept it when it happens, and learn and recover from the experience.
Strategies that work are discovered rather than devised.

We've had the failure, Kenyans. It's time we tasted the success. For that, we need
to understand our failures and their myriad causes very clearly. We need to have
the guts to admit it when we don't get it. We need to see failure as a necessary and
regular event on the path of economic evolution. And we need to invest in the men
and women who will discern the seedlings of future success as they examine the
mud of our present failure.