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Interview With Greg Crabtree: Author, Consultant & Small Business Expert

Greg Crabtree is a speaker, author, entrepreneur and financial expert.  Crabtree has used his entrepreneurial skills to develop Crabtree, Rowe & Berger, PC, a CPA firm focused solely on the needs of entrepreneurs, helping them build the economic engine of their businesses. I invite you to read my interview with Greg as he shares his beliefs on small business ownership and entrepreneurial management.

Mike Goldman: You mention in your book that it’s important for a business owner to take a market-based wage vs. just drawing money out of profits. Why is this important?

Greg Crabtree: We have found that when the owner confuses “you get paid a salary for what you do and a return on what you own”, you lose clarity on how the business is truly performing.  This is the biggest distortion in privately held companies.  No matter if it is being done for tax purposes, ego or ignorance, it is the first thing we have to address in getting to true business performance.

We strongly recommend that owners stop playing games with their compensation going forward so that they do not have to do Mental Olympics to figure out true business performance.  We have many success stories of getting owners to buy in on this idea and the business taking off in profitability because of the clarity created.  The increased performance of the business made the supposed “tax savings” insignificant to the new level of profitability.

It is also essential in multi owner businesses where the owners pay themselves equally instead of by role.  No two people are worth the same amount of pay every year so if you pay the owners the same amount, somebody is getting the short end of the deal.

MG: You provide consulting services to help entrepreneurs manage their finances. What is the biggest roadblock small business owners face when it comes to money matters in the early stages of a company?

GC: An entrepreneur’s lack of truthful data to manage by has been the biggest issue causing money problems.  Except for the 5% or less of entrepreneurs who have a good grasp of finance, the rest are swimming in a pool of data that makes no sense to them.

Our process helps all entrepreneurs attack this problem with 4 steps to get truthful data you can manage by:

  1. Eliminate distortions caused by owner compensation and owner occupied real estate.

  2. Set profit targets using the Simple Numbers profit model

  3. Use Labor productivity concepts to drive profitability with the business you have before you try to grow

  4. Understand the impact of the 4 Forces of Cash Flow (Taxes, Debt, Core Capital and Dividends)  You can only discuss Cash Flow AFTER you are profitable.

MG: In your book, Simple Numbers, Straight Talk, Big Profits!, you say that paying more taxes is a good thing and you encourage business owners to focus on increasing profit rather than lowering taxes. Can you explain a little what you mean by this and why this is beneficial in the long run?

GC: Most entrepreneurs incorrectly task their accountants about taxes.  If you tell me that you do not want to pay taxes, the easiest approach to accomplish this is to have you spend (i.e. waste) your profits.  The problem with that concept is that is leaves you forever under capitalized and you never build any wealth with your business.

The number #1 Key Performance Indicator of true wealth creation is “how big of a check did you write to the IRS last year?”  If you did not write a big check to the IRS, there are only two possibilities, you either made no profit or you cheated.  Both are bad!

Most accountants and tax advisors tell you they “saved” you taxes when all they did was move it to another year at potentially a higher rate of tax.

MG: The idea of using a Labor Efficiency Ratio (LER) to better manage and project staffing levels is fascinating to me. Can determining the ideal labor spend really be that scientific? What challenges have you seen when companies attempt to implement the LER?

GC: The Labor Efficiency Ratio (LER) has been a huge discovery in our analysis of profit models.  The further refinement of LER to distinguish Direct LER from Management LER has given entrepreneurs an ability to put both hands on the wheel of their business.  My original book only looked at a single LER but I contributed a chapter to Verne Harnish’s book Scaling Up (Chapter 13) where I show a case study of how to use LER to management business.

When it comes to Direct LER (Gross Margin per Direct Labor $), each industry and even each business has their own signature rate depending of the game plan of how they use their labor.  As a general rule, Direct LER will be higher when you have to spend considerable active management time for that group ($3.50 and up).  You can also get a high Direct LER when you use proprietary technology to enhance labor output ($5 and up).  As labor rates go up and the employees are more self managed, Direct LER goes down.  Professional service industries are generally close to $2.

For Management LER (Contribution Margin per Management Labor $), we have actually seen a tight correlation to 10% or better profit needing $3.5 to $4.  We think this is because the way our Simple Numbers Profit Model isolates the business engine from the business chassis (i.e. structure) that runs the engine.  The marketplace will only give you so much labor to manage the output (salary cap) and be profitable.

MG: I’ve seen many situations where the CFO is the only member of the leadership team that really understands the financials (and sometimes not even them!). How important is it for all members of the leadership to be literate in reading the financial statements?

GC: We are huge fans of Open Book management.  Our Simple Numbers Model makes it much easier to at least share the business engine section of the P&L (Revenue, Gross Margin, Contribution Margin).  As I often say “a man who aims at nothing hits it with amazing accuracy!”.

With the Simple Numbers Model, your Critical Number becomes Contribution Margin.  It is the highest value number on the P&L since it has no distortion or discretion in determining it.  If you can forecast Contribution Margin dollars, I can predict every other number in the P&L.  As long as you keep Management Labor Efficiency at the right rate, you can almost guarantee profitability.

Direct LER is a great way to discuss compensation with your team.  We are fans of paying market based wages.  But if I give someone a raise, there is a definitive amount of productivity that has to occur to adjust for the wage increase.  It also helps you discuss with your team when you are “paying ahead” for future performance instead of paying them for where they are.

To learn more about Greg, visit SimpleNumbers.com.

Performance Breakthrough Reviewed on The Leadership Blog

By John G. Agno
Having the right people not only impacts the performance of your organization, but your own happiness. If you don’t enjoy coming to work, how do you think your employees feel?

“Performance Breakthrough” by Mike Goldman provides a framework to drive enthusiasm and engagement throughout your organization.

Read the full article on coachingtip.com.

Success In Career

How Trusting Employees Saves Time and Money

Do you have confidence in your hiring process? If you have hired the right people—the ones with the smarts that impressed you enough to choose them—and have provided them with the tools necessary to do the job, then you need to give them the freedom to get the job done. This means trusting them enough to allow them to reach their true potential. If you believe in your hiring process, then trust your people. As Steve Jobs stated, “It doesn’t make sense to hire smart people and then tell them what to do; we hire smart people so they can tell us what to do.”

Realize that not trusting your employees costs you time and money. Additionally, micromanaging and being involved with every decision the team makes creates a bottleneck. Therefore, you need to come to terms with any trust issues.

Why is it so hard to trust employees? Some business leaders believe that their employees need to earn their trust before being trusted—rather than the other way around. Others are afraid to be vulnerable with their teams, while many more are fearful of sharing confidential information—the very information their teams need to be trusted to get the job done.

Allowing your team to have a greater role in the decision-making process means you need to trust them. Stop defining every step they need to take in order to get the job done. As a leader, your role should be one that focuses on defining outcomes and giving the team more responsibility for figuring out the best way to get there. Your team is working on the front lines every day, so they are probably smarter than you are when it comes to the real details of the project.

In order to have a more participatory company and to allow your people to have true ownership and impact on the bottom line, your attitude toward them needs to change. Here are some suggestions to consider.

1. Discover/communicate core ideologies.

Core ideologies are the “almost never changing” foundation of your organization and are made up of your core purpose and core values. A solid core ideology becomes the glue that holds the organization together and the driver of all strategy and people decisions.

  • Core Purpose: This is the “why” of the organization, and it is not just about making a profit. Your core purpose answers the question, “What difference are we making in the world?”

  • Core Values: This is the “how” of the organization. Core values are a non-negotiable handful of rules your organization lives by every day. These values become your organization’s attitude and should drive your organization’s behavior, who you hire, and who you promote.

The right core purpose and core values act as a set of guiding principles for the organization. This allows leaders to stop micromanaging and give more freedom to their team members.

2. Encourage more ideas from your team; be participatory instead of dictatorial.

Dictatorial Management: 

  • Your team’s effectiveness is limited by your vision and knowledge.

  • Your team will become paralyzed if you are not available to make a decision.

  • You feel ownership for all decisions.

Participatory Management:

  • Allows the team to rise higher as all team members’ talents are used to the team‘s advantage.

  • Allows the team to make effective decisions, with or without you.

  • The team feels ownership for all decisions.

How to achieve participatory management:

  • Ask for suggestions, such as: What are the five dumbest things we do? Of what should we do more? What should we stop doing?

  • Focus on ways to reward intelligent failure rather than punish for mistakes made.

  • Conduct open-forum meetings to discuss events, ideas, and issues.

  • Follow up on suggestions consistently.

3. Conduct team-driven goal setting.

Good leaders and managers set goals for their teams and create an accountability structure to manage and measure results. Exceptional leaders take that idea one step further by allowing the team to set its own goals, which will allow them to take more ownership and accountability toward their accomplishment.

A team-driven goal-setting process can work as follows:

Conduct a team planning meeting where you focus on two objectives:

  • Ensure the team understands the organizational vision and strategic goals or initiatives. If your organization does not have a vision and a set of strategic goals or initiatives, create them before moving forward.

  • Ask your team to work together over the next week to identify four to eight key metrics that will drive the team toward the accomplishment of the organizational goals (i.e., number of sales meetings, number of new clients, number of referrals, customer retention rate, etc.). For each metric, they should also work together to set team and/or individual goals.

Conduct a follow-up team planning meeting to review the metrics and goals your team has developed. Push back if you are uncomfortable with either the metrics or the specific goals. Make sure your team is aggressive, but not unrealistic. Just because your team is setting its own goals does not mean you should not provide strong guidance when necessary.

 4. Be vulnerable.

It’s okay for managers to say, “I made a mistake” or “I’m not very good at that.” Being vulnerable with your team members will dramatically increase their level of trust in you. They will also feel more comfortable sharing their vulnerabilities with you. Productive communications within your team will skyrocket.

5. Encourage arguments.

Does your team get along well? Do they always seem to agree with each other? Do you have trouble remembering your last major team conflict? This may seem strange, but if you answered “yes” to these questions, then you have problems. A team needs conflict to evolve. Think of this as Darwin’s theory of evolution for business. If good ideas do not crush bad ideas, and great ideas do not crush good ideas, a business and its employees will grow stagnant and die.

The formula for success is really very simple: Hire a great team; then give them the tools and the trust they need to do a great job.

Performance Breakthrough Book

Performance Breakthrough

I’ve made a career out of unleashing the untapped potential of workforces at organizations of all sizes. An unengaged workforce costs organizations more than just money: it costs opportunity and can halt growth. If you’re a manager at an organization, it’s easy to recognize an unengaged workforce, but it can seem impossible to reengage them! I’ve written down my secrets for keeping a workforce engaged (or reengaging them!) in the newly released 2nd edition to Performance Breakthrough: The Four Secrets of Passionate Organizations.  I’m pleased to share an excerpt from the book with you here. Continue reading “Performance Breakthrough”

Businesspeople Stacking Hands

How to Focus on Your Employees’ Strengths

Would you rather have a well-rounded employee or a world-class employee?

When making hiring decisions, most leaders look for well-rounded individuals and create a list of skills and experiences they would like a job candidate to possess. Unfortunately, very few leaders have knowledge of the talents required for the job. Talents are habits and tendencies wired into our brains from an early age—things like leadership, flexibility, love of learning, or empathy. On the other hand, knowledge and skills are learned and mastered through experience. Continue reading “How to Focus on Your Employees’ Strengths”

Businessman Ready To Chase His Vision

Five Ways to Celebrate Victories and Improve Your Bottom Line

In today’s fast-paced, goals driven business world, many business leaders think that celebrating or rewarding their employees requires too much time and money. In other words, they believe they don’t have time to celebrate employee accomplishments or have fun because they have pending work and deadlines that take priority, or they think celebrating always means spending money.  Other leaders are of the mindset that their employees should just be thankful to have jobs, and there’s no reason to celebrate what they get paid to do. These leaders are missing out on the many advantages that rewarding employees offers.

Celebrating is not just about making people feel good and having fun. It’s also about generating positive energy, which improves both top line and bottom line results. Additionally, celebrating your employees leads to passionate, engaged employees, and that is a requirement to achieve consistent top and bottom line growth in any organization. Grumpy, disengaged employees alienate good customers, kill productivity, and send “A” players running to the competition.

To improve a company’s top and bottom line, it is important for leaders to change their mindset about celebrating their employees and having fun at work. They need to understand that when employees are engaged, they work harder, smarter and longer, are more creative, and refer other “A” players to the company. Also, realize that it is important to celebrate activity, not just results. By the time activity leads to results, people might be burnt out.

Therefore, if you want to have a motivated team that achieves the company’s goals, you need to find ways to measure and reward positive outcomes. Compliment and celebrate your team’s accomplishments, both big and small. Reward activity, not just financial performance. Below are a few specific ideas to help you identify productive ways to celebrate.

1. Quarterly Themes or Contests

The key to helping people remember what is most important in any given time period is to make it memorable and fun. The theme or contest can focus on revenue goals, customer service levels, safety statistics, or any key performance indicator deemed critical for the organization. The theme or contest should include the following:

  • Theme name

  • Theme scoreboard or image (visual)

  • Reward for achieving the theme goal (a reward is typically a tangible item—money, gift, etc.)

  • Theme celebration (a celebration is typically a special experience or event for achieving the theme—like a party).

 2. Above and Beyond the Call of Duty (ABCD) Award

Reward people for doing something outside of the scope of their job in order to help a client, coworker, or supplier. Nominations for this award can be made by anyone (supervisor, coworker, or subordinate). Hold an “all hands” meeting each month where the stories behind each of the nominations are told.

3. Employee Dollars

Give out fake money when an employee is caught doing something great. This money can only be redeemed for work-related privileges or gifts (time off, gift to their favorite charity, etc.).

4. Include the Family

Reward an employee by taking that person and his or her family out to lunch, dinner, or a show. Including the family adds a nice personal touch, which is greatly appreciated.

5. Thank You Notes

Show your appreciation by sending a thank you note immediately following a job well done. We spend half our waking lives at work. Shouldn’t we figure out how to make it fun and rewarding?

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Why Do Leaders Deceive Themselves?

The secret of rulership is to combine a belief in one’s own infallibility with the power to learn from past mistakes. ~ George Orwell

As much as we’d like to believe that we’re rational human beings, we can all too easily mislead ourselves. Self-deception is a process that encourages us to justify our false and invalid beliefs.

Individuals, organizations and communities experience self-deception — the root of most problems, according to the Arbinger Institute, a Utah-based consulting firm. It’s human nature to blame others, externalize causes and deny our role in organizational struggles. This tendency is so pervasive that few of us escape its reach, and self-deception intrudes into every aspect of our lives. Nowhere is it more destructive than at the top of the leadership food chain.

You’ll find that self-deception:

  • Obscures the truth about yourself
  • Corrupts your view of others and your circumstances
  • Destroys your credibility and the trust others have in you
  • Inhibits your ability to persuade others
  • Thwarts wise decision-making

 

Fortunately, recognizing this leadership trap can inoculate you against its consequences. If, however, you believe that guarding yourself against wishful thinking will prevent self-deception, you may be in for a bumpy ride. Ongoing vigilance is required to preserve immunity, note Arbinger’s experts in Leadership and Self-Deception. Awareness will:

  • Sharpen your vision
  • Reduce feelings of conflict
  • Enliven the desire for teamwork
  • Redouble accountability
  • Enhance your ability to achieve results
  • Boost job satisfaction and overall happiness

 

Are You “In” or “Out” of the Box?

Leadership and Self-Deception features an entertaining story about an executive who is facing challenges at work and home. His exploits expose the psychological processes that conceal our true motivations and intentions from us and trap us in a “box” of endless self-justification. Most importantly, the book shows us the way out.

When you’re “in the box,” you are speaking with your interests and goals in mind. Through the lens of self-justification, you’ll find external factors and other people to blame. You’ll deny responsibility for problems and fail to identify your part in perpetuating them. In your interactions, you’ll try to change other people and convince them to do what you would do.

When you’re “out of the box,” there’s room for openness, authenticity, and interest in and empathy for other people. You’ll seek the true basis for problems, including your own participation. You’ll be less interested in assigning blame or judgment, or being locked into unproductive battles.

Confidence Games

One of the most documented findings in psychology is the average person’s ability to believe extremely flattering things about himself. We generally think that we possess a host of socially desirable traits and that we’re free of the most unattractive ones.

Most people deem themselves to be:

  • More intelligent than others
  • More fair-minded
  • Less prejudiced
  • Better drivers

 

While confidence and a fair view of one’s capabilities and strengths are essential, overconfidence and an elevated sense of worth lead to fragile relationships. When we focus on proving ourselves, we spend far too much time on defending and justifying our behavior. We cut ourselves off from opportunities to understand our colleagues. Our ego prevents us from communicating an interest in others. In other words, we lack empathy.

The vast majority of people attribute their successes to themselves and their failures to external circumstances. This self-serving bias is a feeble attempt to positively reinforce our sense of worthiness and self-esteem.

Our preferred perceptions lead us to test hypotheses that are slanted toward our chosen direction. By consulting the “right” people, we increase our chances of hearing what we want to hear.

We’re not consciously distorting information, but we have considerable opportunities to jiggle various criteria and arrive at conclusions that favor our biases.

Managerial Self-Deception

Try telling a colleague or subordinate that he has a problem, and the depth of his self-deception will become clear.

Helping others see what they’re unwilling to recognize is a widespread leadership challenge. It’s especially tricky when we observe it in others, yet are unable to acknowledge it in ourselves.

In business psychology, the prevailing wisdom has assumed that a high degree of self-confidence leads to promotions and leadership success. New studies, however, prove otherwise, writes business psychologist Tomas Chamorro-Premuzic in Less-Confident People Are More Successful (Harvard Business Review blog, July 2012).

A moderately low level of self-confidence is more likely to make you successful, Dr. Chamorro-Premuzic asserts. Don’t confuse this with a very low degree of self-confidence. Excessive fear, anxiety and stress will inhibit performance, impede decision-making and undermine interpersonal relationships.

But low-enough self-confidence can work in your favor because it:

  1. Makes you pay attention to negative feedback and be self-critical. This means you’re open to learning and improving. Most of us tend to listen to feedback and ignore the negative in favor of the positive. If you want to overcome deficits, you must listen to both positive and negative comments.
  2. Motivates you to work harder and prepare more effectively. If you really want to achieve leadership success, you will do whatever it takes to bridge the gap between the status quo and your professional goals. 
  3. Reduces your chances of coming across as arrogant or delusional. People with lower levels of self-confidence are more likely to admit their mistakes instead of blaming others — and they rarely take credit for others’ accomplishments. 

 

If you’re serious about becoming a strong leader, lower self-confidence can serve as a strong ally, inspiring you to work hard, conquer limitations and, put simply, avoid being a jerk.

Inspired Leadership

When you’re courageous enough to question your own behavior and motives, you model the behaviors you wish to see in others.

Help yourself and your staff by:

  1. Reading Arbinger’s Leadership and Self-Deception.
  2. Working with an executive coach to pinpoint areas of self-deception.
  3. Asking yourself, “What’s my part in any given problem?”
  4. Identifying ways to set aside your ego and achieve optimum results.
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A Dashboard For Managing Complexity

Businesses are becoming more complex. It’s harder to predict outcomes because intricate systems interact in unexpected ways.

Staying on track is much easier with a guide or checklist. Michael Useem, a professor at The Wharton School of the University of Pennsylvania and bestselling author of The Leadership Moment, has published The Leader’s Checklist to create a clear roadmap for navigating any situation. It is presented here in condensed form, with sample questions accompanying each principle:

  1. Articulate a Vision: Formulate a clear and persuasive vision, and communicate why it’s important to all members of the enterprise.
    • Do my direct reports see the forest, as well as the trees? 
    • Does everyone in the firm know not only where we are going, but, most importantly, why?
    • Is the destination compelling and appealing? 

  2. Think and Act Strategically: Make a practical plan for achieving this vision, including both short- and long-term strategies. Anticipate reactions and resistance before they happen by considering all stakeholders’ perspectives.  
    • Do we have a realistic plan for creating short-term results, as well as mapping out the future? 
    • Have we considered all stakeholders and anticipated objections? 
    • Has everyone bought into, and does everyone understand, the firm’s competitive strategy and value drivers? Can they explain it to others? 

  3. Express Confidence: Provide frequent feedback to express appreciation for the support of those who work with and for you. 
    • Do the people you work with know you respect and value their talents and efforts? 
    • Have you made it clear that their upward guidance is welcomed and sought? 
    • Is there a sense of engagement on the frontlines, with a minimum of “us” vs. “them” mentality? 

  4. Take Charge and Act Decisively: Embrace a bias for action by taking responsibility, even if it isn’t formally delegated. Make good and timely decisions, and ensure they are executed.  
    • Are you prepared to take charge, even when you are not in charge?
    • If so, do you have the capacity and position to embrace responsibility?
    • For technical decisions, are you ready to delegate, but not abdicate?
    • Are most of your decisions both good and timely?
    • Do you convey your strategic intent and then let others reach their own decisions? 

  5. Communicate Persuasively: Communicate in ways that people will not forget, through use of personal stories and examples that back up ideas. Simplicity and clarity are critical.
    • Are messages about vision, strategy and character crystal-clear and indelible?
    • Have you mobilized all communication channels, from purely personal to social media?
    • Can you deliver a compelling speech before the elevator passes the 10th floor?

  6. Motivate the Troops, and Honor the Front Lines: Appreciate the distinctive intentions that people bring to their work; build on diversity to bring out the best in people. Delegate authority except for strategic decisions. Stay close to those who are most directly engaged with the enterprise’s work.
    • Have you identified each person’s “hot button” and focused on it?
    • Do you work personal pride and shared purpose into most communications?
    • Are you keeping some ammunition dry for those urgent moments when you need it?
    • Have you made your intent clear and empowered those around you to act?
    • Do you regularly meet with those in direct contact with customers?
    • Can your people communicate their ideas and concerns to you?

  7. Build Leadership in Others, and Plan for Succession: Develop leadership throughout the organization, giving people opportunities to make decisions, manage others and obtain coaching.
    • Are all managers expected to build leadership among their subordinates?
    • Does the company culture foster the effective exercise of leadership?
    • Are leadership development opportunities available to most, if not all, managers?

  8. Manage Relations, and Identify Personal Implications: Build enduring personal ties with those who work with you, and engage the feelings and passions of the workplace. Help people appreciate the impact that the vision and strategy are likely to have on their own work and the firm’s future.
    • Is the hierarchy reduced to a minimum, and does bad news travel up?
    • Are managers self-aware and empathetic?
    • Are autocratic, egocentric and irritable behaviors censured?
    • Do employees appreciate how the firm’s vision and strategy affect them individually?
    • What private sacrifices will be necessary for achieving the common cause?
    • How will the plan affect people’s personal livelihood and the quality of their work lives?

  9. Convey Your Character: Through storytelling, gestures and genuine sharing, ensure that others appreciate that you are a person of integrity.
    • Have you communicated your commitment to performance with integrity?
    • Do others know you as a person? Do they know your aspirations and hopes?
       
  10. Dampen Over-Optimism: To balance the hubris of success, focus attention on latent threats and unresolved problems. Protect against managers’ tendency to engage in unwarranted risk.
    • Have you prepared the organization for unlikely, but extremely consequential, events?
    • Do you celebrate success, but also guard against the byproduct of excess confidence?
    • Have you paved the way not only for quarterly results, but for long-term performance?

  11. Build a Diverse Top Team: Although leaders take final responsibility, leadership is most effective when there is a team of capable people who can collectively work together to resolve key challenges. Diversity of thinking ensures better decisions.
    • Have you drawn quality performers into your inner circle?
    • Are they diverse in expertise, but united in purpose?
    • Are they as engaged and energized as you?

  12. Place Common Interest First: In setting strategy, communicating vision and reaching decisions, common purpose comes first and personal self-interest last.
    • In all decisions, have you placed shared purpose ahead of private gain?
    • Do the firm’s vision and strategy embody the organization’s mission?
    • Are you thinking like a president or chief executive, even if you are not one?

Not all of these questions are applicable to every situation, but it is the questioning that counts.

Whether you are facing a typical day at the office or walking into a crisis, ask yourself and others these questions to inspire correct actions. Only then can you make sense of the complexities you encounter.

 

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The Art of Bouncing Back

 “Some of the most important and insightful learning is far more likely to come from failures than from success.” ~ Former Procter & Gamble CEO A.G. Lafley, interviewed in Harvard Business Review (April 2011)

How we respond to failures and bounce back from our mistakes can make or break our careers. The wisdom of learning from failure is undeniable, yet individuals and organizations rarely seize opportunities to embrace these hard-earned lessons.

Harvard business professor Rosabeth Moss Kanter is unequivocal: “One difference between winners and losers is how they handle losing.” Even for the best companies and most accomplished professionals, long track records of success are inevitably marred by slips and fumbles.

Our response to failure is often counterproductive: Behaviors become bad habits that set the stage for continued losses. Just as success creates positive momentum, failure can feed on itself. Add uncertainty and rapidly fluctuating economics to the mix, and one’s ability to find the right course is sorely tested.

Long-term winners and losers face the same ubiquitous problems, but they respond differently. Attitudes help determine whether problem-ridden businesses will ultimately recover.

Luckily, most of us can learn to become more resilient with training and coaching.

The Best of Times, the Worst of Times

Take the example of two typical MBA graduates who were laid off from their positions during the recession. Both were distraught. Being fired provoked feelings of sadness, listlessness, indecisiveness and anxiety about the future.

For one, the mood was transient. Within two weeks he was telling himself, “It’s not my fault; it’s the economy. I’m good at what I do, and there’s a market for my skills.” He updated his resume and, after several failed attempts, finally landed a position.

The other spiraled further into hopelessness. “I got fired because I can’t perform well under pressure,” he lamented. “I’m not cut out for finance; the economy will take years to recover.” Even after the market improved, he was reluctant to apply for positions and feared rejection.

How these individuals handled failure illustrates opposite ends of the spectrum. Some people bounce back after a brief period of malaise and grow from their experiences. Others go from sadness to depression to crippling fear of failure—and in business, inertia and fear of risk invite collapse.

Optimism and Resilience

Research clearly demonstrates that people who are naturally resilient have an optimistic explanatory style—that is, they explain adversity in optimistic terms to avoid falling into helplessness.

Those who refuse to give up routinely interpret setbacks as temporary, local and changeable:

  • “The problem will resolve quickly…”
  • “It’s just this one situation…”
  • “I can do something about it…”

In contrast, individuals who have a pessimistic explanatory style respond to failure differently. They habitually think setbacks are permanent, universal and immutable:

  • “Things are never going to be any different…”
  • “This always happens to me…”
  • “I can’t change things, no matter what…”

University of Pennsylvania psychology professor Martin P. Seligman believes most people can be immunized against the negative thinking habits that may tempt them to give up after failure. In fact, 30 years of research suggests that we can learn to be optimistic and resilient—often by changing our explanatory style.

Seligman is currently testing this premise with the U.S. Army’s Comprehensive Soldier Fitness program, a large-scale effort to make soldiers as psychologically fit as they are physically fit. One key component is the Master Resilience Training course for drill sergeants and other leaders, which emphasizes positive psychology, mental toughness, use of existing strengths and building strong relationships.

This military program will no doubt provide insights for civilians who wish to become more effective within their workplaces and organizations.

Learning from Mistakes

That which does not kill us makes us stronger.” ~ Friedrich Nietzsche

Failure is one of life’s most common traumas, yet people’s responses to it vary widely. Many managers have learned to reframe personal and departmental setbacks by stating: “There are no mistakes, only learning opportunities”—and it’s a great sentiment. In practice, however, their companies often continue to view failures in the most negative light.

Part of the problem lies in our natural tendency to blame. We perceive and react to failure inappropriately. How can we learn anything if our energy is tied up in either assigning or avoiding blame? Still others overreact with self-criticism, which leads to stagnation and fears of taking future risks.

In the 1930s, psychologist Saul Rosenzweig proposed three broad personality categories for how we experience anger and frustration:

  1. Extrapunitive: Prone to unfairly blame others
  2. Impunitive: Denies that failure has occurred or one’s own role in it
  3. Intropunitive: Judges self too harshly and imagines failures where none exist

Extrapunitive responses are common in the business world. Because of socialization and other gender influences, women are more likely to be intropunitive.

Fortunately, managers at all organizational levels can repair their flawed responses to failure. Business consultants Ben Dattner and Robert Hogan suggest three highly effective steps in “Can You Handle Failure?” (Harvard Business Review, April 2011):

  1. 1.      Cultivate Self-Awareness.

    First, identify which of the three blaming styles you use. (Note: They occur automatically and immediately, so they are unconscious emotional responses.) Do you look to blame others? Deny blame? Blame yourself?

    It’s hard for us to see our personalities clearly, let alone our flaws. It’s harder still to learn from our mistakes if we’re caught up in the blame game.

Next, take at least one self-assessment test to help broaden your view of your interaction style. Two popular assessments are the Myers-Briggs Type Indicator and the Big Five Personality Test. (You can take a free version online at personal.psu.edu/j5j/IPIP/ipipneo120.htm.)

Finally, work with a coach or mentor to improve your level of self-awareness. While it takes some time to shine a light on our attitudes with respect to failure and blame, each of us can benefit from such reflection and discussion.

For example, think about challenging events or jobs in your career, and consider how you handled them. What could you have done better? Ask trusted colleagues, mentors or coaches to evaluate your reactions to, and explanations for, failures.

Pay close attention to the subtleties of how people respond to you in common workplace situations. Ask for informal feedback. If you’re in a managerial position, you may underestimate how what you say may be perceived as criticism, due to the hierarchical nature of your job.

  1. 2.      Cultivate Political Awareness.

Whereas self-awareness helps you understand the messages you’re sending, political awareness helps you understand the messages others are receiving. It requires you to know how your organization defines, explains and assigns responsibility for failure, as well as how the system allows for remedial attempts.

Political awareness involves finding the right way to approach mistakes within your specific organization, department and role.

  1. 3.      Develop New Strategies.

 

Once you’ve become more aware of your failure response style (and your bad habits), you can move toward more open and adaptive behaviors.

Practice these strategies the next time mistakes and failures present challenges:

Listen and communicate. Most of us forget to gather enough feedback and information before reacting, especially when it comes to bad news. Never assume you know what others are thinking or that you understand them until you ask good questions.

Reflect on both the situation and the people. We’re good at picking up patterns and making assumptions. Remember, however, that each situation is unique and has context.

Think before you act. You don’t have to respond immediately or impulsively. You can always make things worse by overreacting in a highly charged situation.

Search for a lesson. Look for nuance and context. Sometimes a colleague or a group is at fault, sometimes you are, and sometimes no one is to blame. Create and test hypotheses about why the failure occurred to prevent it from happening again.
Blameworthy or Praiseworthy?

Admittedly, some mistakes are more blameworthy than others. As a manager, how do you make it safe for people to report and admit to mistakes?

Harvard management professor Amy Edmondson delineates a “spectrum of reasons for failure” in “Strategies for Learning from Failure” (Harvard Business Review, April 2011), as summarized here:

  1. Deviance: An individual chooses to violate a prescribed process or practice.
  2. Inattention: An individual inadvertently deviates from specifications.
  3. Lack of Ability: An individual doesn’t have the skills, conditions or training to execute a job.
  4. Process Inadequacy: A competent individual adheres to a prescribed, but faulty or incomplete, process.
  5. Task Challenge: An individual faces a task too difficult to be executed reliably every time.
  6. Process Complexity: A process composed of many elements breaks down when it encounters novel interactions.
  7. Uncertainty: A lack of clarity about future events causes people to take seemingly reasonable actions that produce undesired results.
  8. Hypothesis Testing: An experiment conducted to prove that an idea or a design will succeed actually fails.
  9. Exploratory Testing: An experiment conducted to expand knowledge and investigate a possibility leads to undesired results.

Notice how this spectrum progresses from mistakes that are blameworthy to those that could be considered praiseworthy. 

How many of the failures in your business are truly blameworthy? Compare this to how many are treated as blameworthy, and you’ll have a better understanding of why so many failures go unreported.

You cannot learn from your mistakes when the emphasis is on blaming. You cannot learn to become more resilient when your energy is tied up in assigning or avoiding blame.

Perhaps Procter & Gamble’s Lafley said it best in his Harvard Business Review interview: “I think I learned more from my failures than from my successes in all my years as a CEO. I think of my failures as a gift. Unless you view them that way, you won’t learn from failure, you won’t get better—and the company won’t get better.”