HOW do, and how should, businesses handle failure? Employers often talk about empowering people to take risks and learn from mistakes. Yet few organisations know how to talk about failure when it happens, still less how to learn from it — as the fallout from the banking crisis, overspent information technology projects and numerous botched product launches well illustrate.

Some companies may lack the skills to investigate what went wrong; others do not try. “If one side of the business is making a lot of money and another is making smaller losses that can be easily absorbed, often the attitude is, ‘why worry too much? ‘ says Jan Hagen, an associate professor and failure management expert at the European School of Management and Technology.

Pointing out what is not working can make individuals unpopular, as can warning of approaching upsets others prefer to ignore. Yet among organisations that take error management seriously — such as airlines and healthcare — a body of evidence is building that when people talk openly about their mistakes, morale and performance improve.

Amy Edmondson, a Harvard Business School professor, has identified three sorts of failures: preventable slip-ups and oversights; mishaps arising from unpredictable, complex situations; and exploratory failures that merit encouragement as part of the creative process. All require different handling but often produce an inappropriate response.

When people talk openly about their mistakes at work, performance and morale can improve

An example sometimes cited is 3M. Under the leadership of James McNerney, the company applied Six Sigma — a technique designed to weed out defects and production costs — to its entire operations, including its research laboratories. Short-term profits improved. But its scientists were widely held to have lost their willingness to engage in creative speculative experiments, reducing the chances of a significant discovery.

It is not only by failing creatively that individuals and teams move closer to their goals. Keeping a log of everyday slip-ups and discussing what went wrong, and why, can reveal opportunities to tighten up processes and improve training, reducing the likelihood of mistakes recurring.

Yet if employees are expected to talk about their mistakes, they need to know it is safe to do so. Nothing is learnt “if the guys that talk about failures get shot”, says Andreas Hummel, head of quality management for BMW’s product development operations. But if there are no reprisals, what is to stop employees from slacking?

The aviation industry has wrangled with the dilemma of how to end the blame game, without condoning laxity, for more than a decade. After experimenting with various forms of blame-free reporting, many airlines now follow a system called ‘Just Culture’. This puts the onus on emp­loyees to report any errors they inadvertently make — exceeding a speed-limit, for example.

The quid pro quo is that employees who self-report will not be disciplined, though they may receive extra training. But there are some actions — such as deliberately breaking rules — for which no allowances are made. As Helmut Kunz, director of corporate training at Air Berlin, puts it: “The objective . . . is to foster an environment in which it’s clearly understood that employees who make honest mistakes or misjudgments [and report them] won’t incur punitive action.” The point is to learn from error, not to let those who flout rules escape the consequences.

For some organisations, learning from failure involves changing the language used to analyse what went wrong. In 1999 Julie Morath, a healthcare specialist whose work has been studied by academics, joined Children’s Hospitals and Clinics of Minnesota with a mandate to improve patient safety. She confronted a classic blame culture in which individuals rarely admitted error, for fear of becoming a scapegoat. She trained people in how to investigate without pointing the finger. Now CEO of the Hospital Quality Institute in Cali­fornia, she recommends asking neutral questions, such as ‘what happened’, rather than judgmental ones, such as ‘who did it?’

Serious failures are often the last step in a chain of smaller ones — putting the wrong person on a job, failing to supervise, etc — that pile up catastrophically. They may seem inevitable; but at any point someone could have intervened. It simply requires people to act when they spot others, including bosses, making mistakes. And therein lies a problem. As Prof Hagen observes: the higher people rise, the more they tend to trust their own judgment and the less others tend to question them.

There are no quick fixes, but organisations can take steps to encourage people to speak truth to power. For a start, says Prof Hagen, senior leaders can drop the pretense of infallibility and talk about ‘when they didn’t succeed’ instead of only talking about successes. Publicly applauding employees who raise the alarm sends a message that the responsibility for preventing errors is shared by all. At Children’s Hospitals, Ms Morath introduced ‘a good catch award’, rewarding employees who averted mishaps by questioning situations.

Similarly, for a learning culture to bed in requires the right leadership. Rather than promote the biggest egos, advises Mr Hummel, promote those who are ‘open to feedback and open about their failures’. Organisations also need to think carefully about how they measure success. For example, prototypes and pilots should be designed to push boundaries, not to work perfectly.

Is it time to embrace failure with as much enthusiasm as success? Here some urge caution.

Eli Lilly used to hold ‘failure parties’ to honour the originators of promising potential treatments that failed in trials. The drugmaker subsequently realised this was poor motivational psychology. Used to learning from experimentation, its scientists did not take kindly to seeing their best efforts paraded as flops.

Nowadays, says Andrew Dahlem, chief operating officer at Eli Lilly’s research laboratories, the company no longer celebrates failure per se. Instead, it applauds experimenters who add to the stock of knowledge, whether by confirming a theory, or killing it off. “As an employer in an industry where most good ideas won’t result in commercialised innovations, we don’t want to label our experts as failures . . . we want them [to stay positive] so they can come up with the next set of ideas.”

Published in Dawn, Economic & Business, September 22nd, 2014