Pretend you’re about to embark on an important project. You believe it will be a success, but can’t be sure. So you imagine that, a year down the track, your project has failed. Then you seek answers: What killed it off? How could you have avoided the failure? What could you have done differently? What other kinds of low-risk events could have totally shut the project down?
Executives, spooked by devastating “black swan events” during the financial crisis, are increasingly examining these kinds of what-if scenarios to stress test risks in a potential strategy or to refine contingency planning.
One such exercise, the premortem, aims to do just what the name implies: identify potentially devastating problems to improve a product, project or strategy before deployment, or just to be better prepared to face the unknown – rather than getting caught unaware in the face of a real-life implosion.
“The idea of the premortem tells everyone that it’s OK to think about worst-case scenarios,” says Mark Beasley, Deloitte professor of enterprise risk management at North Carolina State University’s Poole College of Management. “It’s a way of presenting the negative in the context of a strategy.”
The exercise goes beyond “think before you act”. For decades, researchers have studied the benefits of “prospective hindsight.” In a 1989 Journal of Behavioral Decision Making article, US researchers Deborah J. Mitchell, J. Edward Russo and Nancy Pennington theorised that, “Traveling forward in time to look backward on a future event might improve decision making, by helping people see the more necessary ingredients.”
That kind of examination, they wrote, can help decision-makers come up with alternative solutions – and “increase realistic awareness of uncertainty present in a future situation, including the range of potential outcomes.”
Premortem in action
John Huston, manager of Ohio TechAngel Funds (OTAF), one of the largest angel investors in the United States in terms of investors, says that kind of thinking has breathed fresh life into the due diligence his teams conduct on new investment opportunities. Premortems get his team thinking about risks they wouldn’t normally have considered during the more conventional due diligence work, he says.
“It has added an extra level of certainty when we [make] decisions,” says Huston, who has used the technique on at least five major investment evaluations.
The process goes like this: Huston introduces the premortem in the investment appraisal process about three-quarters of the way through the formal due diligence process. By that time, his team will have already had some serious discussions with senior management of the investee company.
He asks his team members to imagine that it’s a year later and their investment in the company has failed completely. What, he asks them, could have caused the catastrophe?
Huston’s team then writes down all the reasons they can think of. Then they share their ideas and decide which ones they feel need to be explored in more detail.
The team is careful to manage sensitivities surrounding the process. “The management of the companies could find it pretty insulting that we’re prepared even to consider the possibility that their company could fail,” he says. “That’s why we don’t introduce the premortem idea until we’re comfortable that management isn’t going to be insulted.
“We need to couch the premortem in such a way that we’re not saying their company is going to fail, but that we’re merely trying to identify factors that could cause failure so that we can have a robust discussion.”
So far, certain potential causes of failure have cropped up time and again. A popular one: What would happen to the investee company if the chief executive died unexpectedly?
“We always insist that our investee companies take out $1 million of key man insurance on their chief executives, but the premortem forces us to think about whether that is enough, or whether a chief executive could even be successfully replaced,” Huston says.
Another potential catastrophe that has surfaced regularly: Whether the investee company can ramp up its sales sufficiently before it runs out of seed investment cash.
Because OTAF is investing in high-tech – and, therefore, high-risk – start-ups, the premortem also gets the investment team wondering whether there is a better piece of science somewhere out in the market that could undermine the investee company’s business plan.
“It’s very effective in getting people focused on issues that could cause disaster,” Huston says.
Managing the premortem
Premortems can take a counterproductive turn if mismanaged. For instance, premortem teams can become overly cautious.
“We sometimes forget the concept that risk and return go together,” says Beasley, the North Carolina professor. “Some could argue that the premortem approach could make organisations too risk averse and forget the truth that if you don’t take risks, you won’t grow.”
Susan Lesser, co-founder of Connecticut-based nPlusOne Consulting, has acted as facilitator at many premortems. She says “analysis paralysis” and other pitfalls of premortems can be solved with good management. She offered some tips on managing an effective premortem process:
The premortem’s facilitator must understand that if the strategy or project is of value, it has to go forward, Lesser says. The premortem’s purpose is to make it happen in the most risk-aware way possible.
“Whoever is facilitating the premortem needs to be seen as objective,” Lesser says. “If the facilitator has any bias … [about the firm’s strategy or the particular investment being evaluated], it will inhibit people’s responses,” she says.
One of the premortem’s big benefits is that it clears away confusion in people’s minds about how they’re thinking through a particular strategy or project, she says. It gives them the opportunity to think the unthinkable without being accused of being overly negative by fellow team members. People who have developed the firm’s strategy or planned a project, for instance, may be “over-invested” in its outcome, simply because they’ve already put so much work into it, Lesser says. So a premortem becomes an antidote to over-confidence.
A premortem team should include people who have worked on a strategy or project as well as those who haven’t. And it should include people from all levels of an organisation. “I particularly love contrarians who are often marginalised in an organisation,” Lesser says. “A premortem gives them an opportunity to speak with authority and confidence in a way they couldn’t otherwise do – and it brings them into the mainstream.”