Throwing Good Money After Bad

There's a great article in Forbes that features new data on leadership succession. The article unveils research conducted by the Kellogg School of Management that states that when leaders leave their jobs organizations rush to replace them with people inside the company who are familiar with the original issue and former leader. Makes sense especially when you are in bad economic times and your desperately trying to hold onto the ship that’s caught in a horrible torrential monsoon.

As the research demonstrates, it leads to a huge problem which they call “escalation of commitment.” Essentially when you put someone in a job they shouldn’t be in. It’s when an organization decides to stick with a course of action they invested in and they continue to put more time, energy and money this way – even when it’s failing. You can put a fancy label on this, I call it a bad and potentially destructive business decision. Ram Charan, a leadership expert I deeply admire would say that this shows how an organization doesn’t invest in putting “know how’s” in the right job.

Why does this happen? Because surely the person replacing the leader has a tie to the person (e.g. share the same ideals, friends, close respected associates, etc). This not so seemingly clouded judgment at the time is the exact reason why someone on the inside may really be the wrong person to fill a “failed leader’s shoes.”

I’ve seen this paradox with clients I coach. Someone from the inside may be appointed who is not qualified for the job, may be the person’s best friend or is way too close to an initiative that’s going awry. Because of this personal connection, the new person is loathe to change course and even if they do, it’s often too late. Ford Motor Company appointed Alan Mulally from Boeing and Ed Whitacre from AT&T was appointed to chair General Motor’s new board. Perhaps organizations need to take a page out of this research and listen up.

“Organizations hoping to escape past failures need to balance their preference for the familiarity and knowledge that an insider affords against the entrapment an insider may suffer. Although outsiders undoubtedly take longer to understand a problem, our research suggests that once they do, their psychological independence can limit their tendency to throw good money after bad.”

Amen!