The Safety Net (Download PDF)
An Independent Devil’s Advocate Review
“More often than not, failure in innovation is rooted in not having asked
an important question, rather than having arrived at an incorrect answer,”
Clay Christensen has observed. Unfortunately, the internal process safeguards
that we proposed in chapter 10 are no guarantee that the important
questions will be asked about unfounded assumptions, unattainable
forecasts, untreated deal fever, or any one of the many other individual
and organizational tendencies that can lead to ill-conceived strategies. In
the heat of the moment, even the most experienced executives and the
strongest safeguards can fail.
Steve Hilbert, the CEO of Conseco who acquired Green Tree Financial,
is a testament to this hazard. Hilbert had successfully built Conseco
through dozens of acquisitions. He had a rigorous acquisition process
and a crack team, both honed through almost two decades of deals. Yet,
in Conseco’s biggest deal, Hilbert’s experience failed him. His vision of
taking Conseco “to the next level,” to create a broader financial-services
company— a financial-services Wal-Mart for middle America— led him
to pay an exorbitant premium for a company that was clearly in trouble.
He was willing to gamble more than $6 billion based on his vision and
just seven days of due diligence. Given that the investor and analyst skepticism
was immediate and overwhelming, he surely faced internal skepticism
as well. But that skepticism was muted. It is well nigh impossible for
someone inside an organization to tell the CEO that his rousing vision is
flawed and that he has fallen victim to deal fever.
To protect against the most dramatic strategic failures, we call for an
additional safety net— a series of rigorous “ second-chance” hearings by
an independent devil’s advocate.
Whenever an organization is embarking on a high-stakes strategy, it
should subject that strategy to an independent devil’s advocate review.
Ideally, as we described in chapter 10, this is a formal part of the strategy
development process. It is one of our “first, decide how to decide” process
safeguards: it should be well understood by all involved before the strategy
itself emerges. Just the anticipation of the review, we believe, will lead
to better outcomes. In addition, strategy developers would benefit from
the questions raised by the devil’s advocate throughout the process, rather
than see them as attacks on their hard-earned positions. The CEO would
also get feedback and challenges along the way, before making any sort of
public commitment and risking embarrassment if he later backed away
from the strategy. This independent devil’s advocate review would culminate
in a final “ last-chance” review, which should be done toward the
end of the strategy-formulation process but before it’s too late, before the
momentum is so great that almost nothing could stop the strategy. As one
executive put it, “Once the lawyers enter the room, it’s too late to turn
back.” In the event that, for whatever reason, the devil’s advocate review
is not initiated during the planning process, we believe CEOs should still
commission a formal review at the end of the strategy-setting process.
We find that a devil’s advocate review can build consensus among a
management team and can convince a board that it doesn’t need to probe
too deeply into a strategy; if a formal review from an independent viewpoint
can’t find a problem with a strategy, then it’s hard for the board or
executive team to object. Some CEOs have commissioned reviews even
after a strategy is set to identify the problems that might surface and let
everyone be better prepared if they do. We still believe the review should
happen before the big bet is placed, but we won’t argue with success.
Whenever a review happens, and for whatever particular purpose,
here is, perhaps, one of the most sensitive aspects of our recommendation:
The independent devil’s advocate process and, especially, the result
of its last-chance review, should be completely transparent to the board
of directors. Based on our research and consulting experience, many
CEOs are hesitant at adopting this suggestion. They suspect that such
transparency might disrupt their carefully managed board interactions.
Our experience is that, properly orchestrated, such transparency raises
the level of constructive discourse between management and board
The key is to establish the right guiding principles, which we will lay out
later in this chapter. One ex-CEO, who retired a few years ago after a long
run at the top of a business with more than $20 billion in annual revenue,
helped us sharpen the design of this safety net in this key aspect. While
many CEOs are loath to do anything that would cede any authority, he said
that he’d accept a formal devil’s advocate review as long as we maintain a
key distinction: that between governance and management. He said he’d
resist any attempt to take over the management of the business from him.
But he accepted that, in the interest of good corporate governance, the
board had every right to understand and react to his decisions.
This is what we’ve been saying all along: that we’re not trying to take
decision-making authority from the CEO or anyone at another level of the
business who has earned the right to decide about a strategy. But we thought
it might be worth putting the issue in a CEO’s terms: The devil’s advocate
review is about governance, not about usurping management authority.
As for how to organize a devil’s advocate review: The review should be
orchestrated by someone with credibility, objectivity, and some level of
inoculation from organizational politics and pressures (acknowledging,
of course, that no one is completely immune). This might be an independent
director or some recently retired senior manager with no ax to grind.
The reviewers should consist of, in large part, credible, objective outside
reviewers with no stake in the outcome. The reviewers should be told to
argue the “no” side, with license to raise any question whatsoever to
ensure that the strategy is in the best long-term interests of the
Skillful orchestration is an imperative. The closest analogy to the
independent devil’s advocate is probably the formal due diligence conducted
in the course of acquisitions and joint ventures. In particular, our
reviews conceptually overlap with “strategic due diligence,” the stage that
probes the logic of the transaction to ensure that it is aligned with the
strategy of the acquirer.
Yet, by the time the strategic due diligence is reached, it is usually too
late to address the misaligned goals and flawed strategies that doom most
acquisitions, irrespective of the quality of the acquisition target. This
happens, in part, because by the time the due-diligence stage is reached,
the corporate strategy motivating the transaction is pretty much assumed,
and not an open topic of discussion. The due-diligence team is assembled
to assess the quality of the target and to assign the right price to it, not to
assess the motivating strategy or the target’s fit with that strategy. Even if
the motivating strategy were subject to inspection, due-diligence teams
are usually not equipped to address it. Due diligence requires extensive
investigation into every aspect of the target, including legal, financial,
accounting, tax, operational, human resource, technology, and organizational
issues, just to name a few. Team members are chosen for their
expertise and doggedness at ferreting out the details and skeletons in one
or a few of those areas. They rarely have the context, skills, or time to
relate the findings back to the original strategy. As a result, flawed strategies,
and even the lack of a strategy, are usually not flagged in the due diligence
process. For example, a study by Bain of 250 senior executives
involved in major acquisitions found that more than 40 percent had no
clear strategy of how the acquisition would boost profits and market
value. Of those who claimed that they did, half admitted that they discovered
that their approach was wrong.
The devil’s advocate process that we propose occurs earlier, when it
might still be possible to head off the issues that would otherwise not be
addressed until strategic due diligence.
Formal due diligence is less common for strategic moves that do not
involve outside transactions. For example, Green Tree’s mortgage loan
strategy, FLYi’s decision to become an independent carrier, or Kodak’s
decision not to pursue digital photography in earnest would normally not
have sparked a due-diligence review. Yet these sorts of decisions would
clearly have benefited from an independent devil’s advocate review.
The exact design of the independent devil’s advocate review will depend
on the context and particulars of the strategy in question. But, based on
our research and experience, here are five general principles to follow:
1. Establish a clear and limited charter.
2. Organize for success.
3. Focus on the strategy, not the process that produced it.
4. Deliver questions, not answers.
5. Come to closure.
To continue reading, down Chapter 11 “of Billion Dollar Lessons.”