Other parts of this series:
Somebody said to me the other day that we’ve been living with almost daily near-death experiences since March. Which explains why we are so stressed.
But if we’re stressed, how do we explain how so many companies managed to execute a five-year digital strategy – 260 weeks of work – in just 10 short weeks?
I’m always interested in what the field of behavioral economics can tell us about why we behave the way we do.
It seems to me there are competing motivations at work. People avoid risk because they want to avoid losses. But we also take risks so that we can maximise gains.
Research as recent as 2016 (Schindler & Pfattheicher) found that people are more willing to take risks to avoid a loss than to make a gain. Some research suggests that the motivation to avoid a loss is twice as great as it is to gain something.
Pre-pandemic, most companies’ five-year digital strategies were aimed at gaining extra market share, or more customers, or higher revenues or profit. It was all about gain.
But after lockdown was imposed, going digital was all about loss-aversion. For many companies and even industries, the pandemic was an existential threat. In order to stay in business at all, companies had to move online, and move quickly. So they did. In ten weeks instead of 260.
Right now, there’s a lot of talk about how companies should not reopen, but reinvent. We’ve certainly seen what’s possible in terms of execution in the last few months. There is enormous upside to moving more quickly than the competition.
So it’s interesting that we seem to have reached a new equilibrium, where companies have moved their operations online, and are consolidating. Implementing new strategies may lead to a gain, but it’s not as compelling a case as avoiding a loss.
We’ve just been through a collective trauma of having a pandemic imposed on us. We responded by going online quickly, sorting out the teething problems and continuing to serve customers.
Most companies have a pipeline of other strategic initiatives, but the urgency to execute seems to have burned off. Maybe it’s because those strategic initiatives are about gaining something, not about avoiding a loss.
There’s another piece of research that can explain why boards behave as they do. It’s called Status Quo Bias. It turns out people regret bad outcomes more if they took some action that caused the bad outcome, than if the same bad outcome was a result of doing nothing.
So there’s a built-in bias not to act. Firstly, acting may involve risk, which may involve loss. And that’s what we want to avoid. And secondly, acting means taking some responsibility for the outcome. If the outcome is bad, we regret taking the action in the first place. If we don’t act, then nobody can blame us for the bad outcome.
Then there’s the sunk cost fallacy which has been documented since 1985.
Research in 2018 found that rats, mice and humans are all sensitive to sunk costs after we’ve made a decision to pursue a reward.
Accenture calls this the “technical debt”, which is broadly defined as the money it would take to upgrade legacy technology.
We supported recent research that found of the 400+ companies surveyed, half had more than 50% legacy technology across all enterprise functions. That represents a lot of sunk cost.
The good news is that 25% of companies had started their journey to the cloud and other enabling technologies and another 42% were planning to.
Whether it’s accelerating their online offerings, moving to the cloud, adopting AI or any number of strategic initiatives, there is a lot of gain to be had, and a lot of losses to avoid.
In the next few articles I will bring you my take on our Intelligent Organization research and how South African companies can use its insights to their advantage.