On my white board sits a list of topics that are near and dear to my heart; topics that I think about often and want to espouse, pontificate and illuminate. Most often, I think I have original ideas on these subjects and while I don’t feel I have the time to get it all out at once, I keep this list with the intention of banging them out slowly – one by one. And almost without fail, in my regular reading or research, I’ll come upon an article or book on one of these topics and then suddenly, like a bolt of revelation, someone’s beaten me to the punch; made the key insights that I thought were my domain.
The Surety of Fools
One such happening as I perused the New York Times Magazine, a gentleman by the name of Daniel Kahneman wrote an article entitled“The Surety of Fools”, an adaptation from his book entitled “Thinking, Fast and Slow”. He hit on a key observation that is at the core of what I’ve been writing about over these last few months; misperceptions of risk. I won’t rehash the whole article, but in essence, Mr. Kahneman points out how we often hypothesize based on logic, but when empirical evidence belies our theories, we simply don’t believe the facts. He calls this phenomenon the “illusion of validity.” I love this premise as I see it so often with investment managers, news reporters, mortgage brokers, sport team coaches, politicians, voters and prognosticators in general – they all create their own reality.
Creating Your Own Reality
We ALL do it to some degree. We watch the news channel that validates our set biases. We befriend people who support and validate our opinions and views. On the topic of investment risk, operational risk and risk in general, how does that phenomenon play out? Do we see the facts and are we able to evaluate data without bias? Mr. Kahneman illustrates the reality of investment bias with examples of studying investment managers and how their performance is measured. The vast majority of investment managers he studies do not perform better than a purely random pick of stocks. Yet, the illusion of validity causes the management of the largest investment firms to bonus and commission those managers as if they are keenly skilled; as if the fund managers have brought tremendous value to their client’s interests. They create their own reality – instead of accepting that the unbiased data shows no value in their management of investment assets.
Life Sciences’ High stakes
There are even greater risk examples. Life Sciences companies such as pharmaceuticals, biotechnology and medical device firms have huge investments and pressures to produce new products. Each development stage requires rigorous testing and massive volumes of data. While the FDA enforces regulations and these companies are regularly audited both internally and externally, the pressure to produce is high. Time is of the essence when it comes to bringing a new drug to market; both for the sake of patients as well as profits. How well is the data reviewed and scrutinized before passing each validity stage? Is there a bias that errs on the side of validation ahead of rejection? Absolutely. Kahneman’s Illusion of validity is at play and the consequences are immense.
The Supply Chain Fog
For Life Sciences companies the risks involve patient health as well as immense risks to the company including product recalls, regulatory findings, lawsuits, and ultimately, reputation damage. The organizations I’ve worked with over these last few years are extremely diligent in their processes and methods for R&D, trials, manufacturing as well as distribution. But other operational risks do exist. In a post last year by Daniel R. Matlis entitled, “Life Science Executives Concerned about Outsourcing and Globalization Unintended Consequences”, Mr. Matlis notes, “In the drive to lower costs, manufacturing and sourcing of ingredients and components in countries such as China and India are playing a more prominent role. Yet, according to the research, outsourcing to manufacturers in developing economies carries significant operational risks. Industry Executives surveyed for the research said that Raw Materials sourced outside the US represented the greatest risk to the Value Chain, with 94% of those who responded seeing it as a significant or moderate risk. When comparing the risk profile of US vs. foreign raw material Suppliers, United States Suppliers were classified as low risk nearly 10 times as often as foreign Suppliers.” Any Life Science company’s ability to define, monitor and track each and all of their third party providers adds a level of complexity and difficulty. This difficulty stems from what consultants at Nimbus have labeled the “fog of process accountability, control and oversight.”
To be certain, this fog exists to some degree everywhere and obviously with supply chain partners even more so, but how well an organization tries to create clarity of process definition and clarity of quality both from within and beyond the enterprise is critical when managing operational risk. Perhaps the biggest concern I have with the phenomena of “creating your own reality” is the fact that the “fog of accountability” provides a condition for pushing forward; an excuse for not accepting what the data is revealing; and a scenario wherein doubt can always be cast on outliers.
Focus on the Facts
I spent part of last week with a biotechnology firm’s scientific directors, their CIO and colleagues from TIBCO, briefing them on my company’s software technologies and how they apply to the wide variety of process areas they represent. The volume of data and the complexity of that data as it applies within their product trials is tremendous. Next week I’m with a medical device company who’s in the process of a major transformation and will need to address most every operational area as part of a corporate spinoff. These are just a couple of quick snapshots, but they epitomize the speed with which organizations change, adapt, and grow. Speed and volume is only increasing – further escalating the demands for validation of each initiative.
I can only hope that Mr. Kahneman’s “illusion of validity” is tempered when organizations manage operational risk and the key decisions that drive product development. The stakes are indeed high when it comes to Life Sciences, but every industry is predisposed to this condition. In short, we can never be to too sure. Let’s not fall too in love with our own marketing slogans. Let’s understand the complexity that we’re faced with, make our best, valid judgments and do the best with the facts we have. While there is never purity in our judgments, we can at least try to be aware of the propensity to fulfill objectives through maintaining a blindness to the facts.