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07/27/2011

Better safe than sorry!

Credit crash, Lehman failure, explosion of BP offshore oil platform, the Fukushima nuclear power plant accidents in Japan – companies are facing bad surprises ever faster. Small wonder that there is a growing need for stability and security. Both promises the HRO approach (high reliability organization). It is to make companies as crisis-safe as a hospital emergency room.

 
By Axel Gloger

Logitech has a problem because the iPad is currently a top seller. Apple's tablet computer has a finger-sensitive touchscreen with a virtual onscreen keyboard – so bare fingers type directly onscreen. Mouse clicks have thus become superfluous – and Logitech's mice are often shelf warmers. As a result, the company suffered a sharp drop in profits; stocks of the computer mouse manufacturer lost one quarter of its value since the beginning of the year.

Could Logitech have anticipated the business slump in computer mice and taken measures against it? 'Yes', say followers of a new approach in corporate consulting. Their 'high reliability organization' concept – HRO for short – could have protected the computer mouse provider from Lake Geneva. HRO users are promised to be safe from surprises and sudden crises.

Basic idea of the concept thought out at the University of Michigan: Any quake has a minor, preliminary quake. Yet, most companies tend to overlook those small, sometimes hardly perceptible signals. Companies using the HRO rules can learn to perceive any relevant minute signs – and thus detect small crises so early that the large crisis does not happen at all or can at least be better handled. 'Watch closely, listen closely and ask the right questions. Observations must not be guided by interpretation', that's how the new method's principle is described by Dr. Annette Gebauer, HRO practitioner and owner of the Berlin-based consultancy Interventions for Corporate Learning (ICL).

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"Many risks just can't be handled with conventional planning means", say HRO expert Gebauer. Kion provides an example: The manufacturer of forklift trucks was caught unawares by a black swan — the type of event which is rare but devastating. The manufacturer obtains the electronic controls for its forklifts from Japan (brands: "Linde", "Still"). But in March of this year, their reliable supplier relationship dropped down to unreliability status within hours. When news of the nuclear power plant accident raced through the headlines, Gordon Riske, head of Kion, became nervous. "Supplies of controls from Japan might soon fail to come", was the rather disturbing message. Results would have been fatal for manufacturing: Production standstill.

Routine is no longer sufficient

The above described major breakdowns show the limits of any reasoning so far: Sequences of reactions specified by a plan can help to handle only those incidents that had already happened before. "Our vision is focused on what we expect anyway", says Gebauer. That's no problem for routine crises. If faultily produced cheese packages end up on supermarket shelves, the preplanned response is: Initiate product recall. In this event, complete checklists and instructions are available which precisely indicate how the cheese can be removed within hours from the shelves of 2,500 supermarket chain stores. That's known territory; made for a checklist because such incidents happen every few years. When the 'if-then' system fits, the company will react routinely — even a bank when one of its branch banks is being robbed.

But that's just not enough in case of disturbances outside of the routines: Kion was entirely unprepared when its supply chain failed. At England's Barings Bank, nobody had anticipated the case of all cases so that the internal meltdown could not be averted: The derivatives dealer Nick Leesin had speculated behind the backs of his superiors with ever increasing amounts until Barings Bank finally buckled under. England's oldest bank most steeped in traditions was wiped out within a few weeks in 1995.

These incidents fit a new category. Nobody had enough imagination to anticipate them. What's more: Geographic distance no longer presents any protection. It's irrelevant that Kion's forklift trucks are produced in Aschaffenburg, 9,400 kilometers away from Japan. Economic distance is all that counts – and that's practically nil in many cases. "Today, globalization and networking make sure that any fault and failure will rapidly propagate worldwide", explains Gerd Kerkhoff. The managing director of Kerkhoff Consulting knows that subject inside out: On behalf of his clients, he analyzes procurement markets, supply chains and risk potentials all around the world. His conclusion: "On the map of globally linked supplier relationships, Fukushima is like a suburb of Aschaffenburg."

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