risk – Geoffrey Graham

“We should never have 100% client satisfaction”

A friend forwarded me this great article from Jesse Lipson at Forbes, applying Taleb’s concept of antifragility to business. The author encourages entrepreneurs to cultivate a work environment where people will “embrace volatility,” “fail frequently in small ways,” and “build back even stronger.”

“So in Antifragile,” writes Lipson,

Taleb suggests we stop trying to predict the future and focus on protecting against something that we can more easily measure: fragility. Something is fragile if it breaks with small changes in the environment: a wine glass shatters if you drop it; it’s fragile. If an object or system can withstand large changes, it’s resilient. A system is antifragile if it actually thrives on chaos, growing stronger when the unexpected occurs.

It’s like weightlifting: Your company is antifragile when it’s composed of more muscle than bone. Yes, bones can recover from a break, but often in a weakened state. A muscle is strengthened by damage. Weightlifters build muscle by pushing it past the limit. A stressed muscle is riven with tiny tears and, as the muscle repairs itself, it actually rebuilds stronger and bigger than before.

This morning, I forwarded the article along to some other entrepreneurs, and one responded thusly (I paraphrase):

Thinking about this, we should never have 100% client satisfaction. We should be doing little experiments all the time, and experiencing little failures here and there, with the result being that a small percentage of clients isn’t happy. If we don’t do that, none of our clients will ever be ecstatic.

I love that observation, even as someone who makes a living monitoring customer satisfaction. If 100% of our clients will recommend us, then we’re never failing to meet expectations, and that suggests we’re not taking enough small risks to keep driving our business forward in an enduring (and antifragile) way.

Why is entrepreneurship on the decline?

A couple weeks ago, Ben Casselman of the WSJ presented some trends about entrepreneurship in the United States. Nowadays, he writes,

Companies add jobs more slowly, even in good times. Investors put less money into new ventures. And, more broadly, Americans start fewer businesses and are less inclined to change jobs or move for new opportunities.

The changes reflect broader, more permanent shifts, including an aging population and the new dominance of large corporations in many industries. They also may help explain the increasingly sluggish economic recoveries after the past three recessions, experts said.

Stephen Bainbridge added some thoughts as to why entrepreneurship is declining. He writes, “First, the dearth of US citizens pursuing careers in science and engineering. Second, the impact of law and regulation.” A lot of folks seem to be echoing his first point. I don’t buy it, and will share more about why at the end of this post. But, I completely agree about the second point. Bainbridge elaborates:

When you add up the growing costs of regulation and the growing risk of litigation, there’s no wonder smaller firms and start ups struggle. Only big firms can achieve the sort of economies of scale that make such costs bearable.

Regulation and litigation are absolutely stifling the growth of new businesses, and completely favoring large, established corporations. I’ve written some about that (here and here and here and here), and many other people have as well. Even so, all the bellyaching doesn’t seem to be altering the growth trajectory of litigation and regulation.

Here are a few more reasons why I believe entrepreneurship is on the decline:

Continue reading “Why is entrepreneurship on the decline?”

Skin in the game

When an employee of a small business acts maliciously or negligently while working on the business’ behalf, the business owner shoulders the responsibility and liability. While the owner enjoys personal liability protections via the veil of the LLC, the business loses it’s profits, pays damages, and suffers in all sorts of ways. In the shorter term that means sleepless nights and painful expenses for the business owner. In the longer term, the owner’s reputation, the business’ reputation, and the ability for the owner to earn a living is impaired. In extreme cases, their livelihood might be destroyed.

This isn’t necessarily top-of-mind when business owners are considering new hires. Instead, they’re really thinking about all the great things a talented person can bring to the company. But in the back of their minds, they’re still asking themselves, “Might this person do anything really horrible that would jeopardize the strength of our business and/or my personal reputation?”

Nassim Taleb calls this attachment to outcomes “skin in the game.”

In the case of small businesses, the biggest beneficiary of the business’ success is generally the owner or owners, and those are usually the same folks who feel the most pain in the case of failures.

But if a high-ranking politician’s employees cause a bunch of innocent people to die, or if they single out a group for persecution, or if they wreak havoc on our environment through cronyism and misguided policy, then the worst outcome is they don’t get to ride on Air Force One for another term. The more likely outcome is the issue will go away after they deny responsibility or (if it’s too glaringly undeniable) promise to crack some skulls.

The small business owner doesn’t deny responsibility or promise to crack skulls. The small business owner says, “I’m sorry. Here’s how I screwed up. I won’t do it again. Please forgive me.” They do so because they have skin in the game, they are attached to the outcome, they feel personally responsible, and they act accordingly. Sometimes they handle it poorly. Sometimes they handle it well. Rarely do they avoid the consequences for a poorly handled mistake, and often they enjoy a reward for handling a difficult situation with aplomb.

But that’s not how it is everywhere. Wherever people benefit from socialized risk and privatized reward, you’ll see responsible agents avoid the risks associated with bad decisions and (even worse) benefit from immoral acts. It happens in government. It happens in finance. It happens to our environment. It happens with war. It happens in education. It happens in agriculture. It happens in health care. Even in small business, it can happen. It happens anywhere people don’t see it for what it is and prevent it from happening. And when the insidious dynamic finally weasels its way into a society, leaders must have the courage to root it out and eliminate it before it metastasizes.