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Lesson #1: Smart Companies Encourage Smart Failures

Article Overview: At Charles Schwab, management makes a clear distinction between a noble failure and a stupid failure. While the company does not allow the idea of an acceptable failure to permeate its operations, it does allow for mistakes to be made, where they are not made in vain.

Lesson #1: Smart Companies Encourage Smart Failures

At Charles Schwab, management makes a clear distinction between a noble failure and a stupid failure. While the company does not allow the idea of an acceptable failure to permeate its operations, it does allow for mistakes to be made, where they are not made in vain.

Schwab understood that in his line of work, failure was going to be an inevitable and inescapable fact of life. “You've got to understand that markets go both ways, up and down,” he says. “Over longer periods, stocks generally have always gone up. But any specific stock may never come back.” In fact, while index funds can almost guarantee long-term growth, argues Schwab, “buy an individual stock and you never know.” You could go to zero.”

It is for that reason that Schwab decided to implement a set of criteria that would determine whether or not a failure was what he called a noble one. First, there needs to be a plan in place before the failure occurs. Everyone needs to know what they are doing and every step needs to have been thought out carefully. There needs to be enough management discipline that if it was looked back upon down the road, everyone would agree the planning and actions were thoroughly done.

Secondly, a noble failure is one where a contingency plan is present. Should any initial failure occur, the plan needs to be adequate and enacted in order to ensure the least amount of damage done.

Thirdly, after every failure, there needs to be a debriefing. All of the actors involved need to assess the situation to see what can be learned from it and what could be done differently next time. Without this kind of reflection, Schwab believed that his company would have no way of acting smarter the next time around.

At company headquarters, Schwab makes sure to display all of their failed innovations. New employees are also provided with those failures and lessons in a videotaped orientation. “When celebration of noble failure becomes institutionalized, people within the organization are more willing to reassess earlier decisions.”

Schwab once said, “I’m sure luck helps every successful entrepreneur. But it doesn’t come [without] a lot of preparation and hard work.” It is in that very preparation and hard work that the value of a failure is determined. If failures come about as a result of a well-thought out plan of action, then there is always something to be learned from them. On the other hand, if a failure is the result of “how you react,” then there is little to gain. “We get emotional and do dumb things,” says Schwab. And smart failures are not the result of doing dumb things.

In Schwab’s line of work, when down is up, up is down, and vice-versa. He often makes his moves when everything seems to be going wrong, and nobody else wants to invest. Because of that risk, Schwab needs to ensure that he does not make a mistake. And if he does, that it is a mistake worth making.

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Article Tags: actors, celebration, charles schwab, company headquarters, contingency plan, distinction, fact of life, index funds, inescapable fact, initial failure, innovations, lesson 1, management discipline, noble failure, orientation, periods, reflection, smart companies, stock, stocks



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