Those of you who regularly read this blog (both of you) know that a continued theme is one of management decision making and behavior in the face of economics incentives. A friend recently characterized this as "if long term customer success is such a powerful idea, why don't firms do it?"

Well, it's interesting to study management decision making in a different context to see if anything can be learned. Most of us are tuned in daily to congressional testimony (yeah right) so I'm sure that this piece from Andrew Lo of MIT's Sloan School didn't escape your notice. Skip past the theory and you get this interesting behavioral vignette:

Consider, for example, the case of a Chief Risk Officer (CRO) of a major investment bank XYZ, a firm actively engaged in issuing and trading collateralized debt obligations (CDO's) in 2004. Suppose this CRO was convinced that U.S. residential real estate was a bubble that was about to burst, and based on a simple scenario analysis, realized there would be devastating consequences for his firm. What possible actions could he have taken to protect his shareholders? He might ask the firm to exit the CDO business, to which his superiors would respond that the CDO business was one of the most profitable over the past decade with considerable growth potential,other competitors are getting into the business, not leaving, and the historical data suggest that real-estate values are unlikely to fall by more than 1 or 2 percent per year, so why should XYZ consider exiting and giving up its precious market share? Unable to convince senior management of the likelihood of a real-estate downturn, the CRO suggests a compromise -- reduce the firm's CDO exposure by half. Senior management's likely response would be that such a reduction in XYZ's CDO business will decrease the group's profits by half, causing the most talented members of the group to leave the firm, either to join XYZ's competitors or to start their own hedge fund. Given the cost of assembling and training these professionals, and the fact that they have generated sizable profits over the recent past, scaling down their business is also difficult to justify. Finally, suppose the CRO takes matters into his own hands and implements a hedging strategy using OTC derivatives to bet against the CDO market. From 2004 to 2006, such a hedging strategy would likely have yielded significant losses,and the reduction in XYZ's earnings due to this hedge, coupled with the strong performance of the CDO business for XYZ and its competitors, would be sufficient grounds for dismissing the CRO.

Drop the reference to CDO's and insert "bad profits" in a customer context. What Lo is saying is that an ability to foresee future economic positives and negatives (in our world through NPS) does not necessarily result in management being able to take action. Competitive context (we are as bad to our customers as our competitors are) together with short term profit motives from shareholders combine to incent management into the wrong behavior. In the CDO example, it's an economic cliff. In the NPS example, it can be an economic spiral that's equally powerful and negative.

The solution (of course) is to focus efforts on building a robust metric that provides boards and management with a long term view of their business economics through the eyes of their customers. At least then, they may be aware of the precipice, or opportunity, ahead. Then again, doing something about it is an altogether different story.

Training programs for pilots sometimes debate the merits of testing pilots on their ability to recover from "unusual attitudes". Now I know what you are thinking; "unusual attitudes" these days in the airline industry could be a cabin staff who actually enjoy working for their airline. But I don't mean that.

An unusual attitude is when a pilot finds his or her airplane moving in a direction that is, well, suboptimal. All of this falls into the usual FAA lexicon of euphemisms which include remarks like "controlled flight into terrain" - otherwise commonly referred to as a crash. If the plane is pointing down, up, left or right to a considerable degree more than is "normal" it's an unusual attitude. You can think of normal as being simply defined as a condition where the pilot doesn't need to do anything radical to avoid executing a "controlled flight into terrain".

At first glance, the idea of training pilots to recover from that situation seems to lack controversy. But you would be wrong! The logic goes like this (and I will translate from FAA to English as we go): Any pilot whose skill level (lack of skills) is such that he or she is capable of creating the conditions (losing control) by which a plane enters an unusual attitude (ohmygodwearegoingtodie) is unlikely to posess (or suddenly develop in the 3 seconds of panic and terror they have to react) the skills required to recover the plane safely. Therefore, examiners and trainers would be better off investing the time spent training recovery into time spent avoiding the unusual attitude in the first place. The same argument is made around spin recovery, another nasty little aeronautical maneuver that rarely results in happy endings (passengers walking off the plane after it's re-introduction to the ground).

Data would suggest that many companies, indeed some industries, find themselves in the business equivalent of an unusual attitude, perhaps even a spin. A significant NPS gap between you and your competition could be the equivalent of the flashing light in the cockpit warning "eject! eject!" - although a more accurate analogy might be the cabin staff reporting that the majority of passengers have already grabbed parachutes and left via the rear exits.

The problem, from a change management perspective is this: can any management process whose approach and skill level is such that it has put the business in such an attitude, be capable of saving the business before it executes the economic equivalent of a plane crash?

Based on our study of five years of Net Promoter programs (the best practices of which are codified in our upcoming book) we believe that this issue gets to the heart of success of failure in your program, and here's why.

Successful programs start from a perspective of change management. Leaders recognized that the behavior that put the company in their current situation would have to change significantly in order to facilitate a recovery. Sometimes, this change of heart is a result of a crisis in their business; in other circumstances it is a consequence of new management arriving. Interestingly, these two represent the most frequent circumstances under which the Net Promoter program is initiated in a manner that links to longer term success. Rarely, an existing management team in smooth and level flight, seems to have the foresight to create a disruptive program in anticipation of challenges ahead.

If a "change orientation" drives success, what's the best way to describe the opposite condition? The most frequent case seems to be the gradual co-option of the new program by existing programs or team members, leading to a program so severely compromised that it melts into oblivion. That's quite a mouthful, so perhaps you might think about it as the "organizational antibodies" successfully mounting a defense against the foreign invader. These programs die with a whimper, not a bang, as the organization absorbs them into the status quo without any real explicit decision to do so.

When the economic thunderstorm hits, recovery might be beyond the skills of this organization; customers and shareholders both might be looking for the "eject" button.