Down the rabbit hole – How cognitive bias leads to failure

The resources industry is going through hard times.
Wouldn’t it be wonderful if we all pulled together?
Sadly, many operators and clients still prefer to blame the contractor for their troubles.
But clients do not help themselves when they assign unilateral blame. They are entering a vicious cycle of declining performance, delay and expense, degraded quality and an increasingly toxic relationship.

Then why do it?

They try to solve complex problems from within the frame of reference that created them.
They jump at simple perceived causes for the problems. Then they apply solutions that treat the symptoms but not the illness. Rather than stepping back when the solutions have unexpected side effects, they apply them more intensively and deepen the fundamental problem.

Perceived causes

Clients often explain problems through a default set of perceived causes.
These perceived causes all have one thing in common. They legitimise the client’s avoidance of responsibility for the status of a troubled project. When a client is unable to accept responsibility, the client will interpret a contractor’s behaviour in ways that reinforce but do not challenge this mindset.
The client may truly believe that the contractor is uniquely at fault. But this lack of awareness can have damaging consequences.
Clients may believe that costs are high because the contractor’s rates are too high. When shown conflicting data, they may then dismiss it as inaccurate, not relevant, or concocted by the contractor.
They may believe that even if rates are competitive, the contractor must be charging high margins. They may then reject accurate data on the true costs.
They may believe that the contractor bills too many hours because it is is either incompetent or over-billing on purpose.
They may believe that quality is entirely within the contractor’s control, independent of the quality of the original specification. If quality is unsatisfactory they may believe the contractor is skimping on quality assurance to save costs. Or they may simply believe that the contractor employs incompetent people.
They may believe that their documentation is complete and comprehensive. If the documentation is not at fault then it must be entirely the contractor’s responsibility to find and resolve any issues.
Believing that the documentation is not at fault, they may assume that the contractor asks questions because it does not know how to read a specification. Or they may believe that the contractor does not listen or has misinterpreted the requirements. Or they will assume that the contractor raises issues to avoid responsibility or draw the job out and maximise billable hours.

Much of this may be true. But many clients seem unable to deal with the possibility that it may not be true, and that their thinking may be biased or erroneous.
And they simply may not be able to recognise that actions based on erroneous beliefs in any way contribute to the problem.

Symptomatic solutions

When a client focuses on perceived causes that reinforce their beliefs, they will prefer punitive, self-protective symptomatic solutions. Such solutions allow them to continue to deny responsibility.
Symptomatic solutions respond to what the client perceives the issue to be, not what it actually is. But the simple answer is often the wrong one.
Symptomatic solutions may play out in several ways.

Too expensive? Reduce charge rates

The client may repeatedly pressure the contractor to reduce its charge rates. The client may threaten to withhold business if the contractor does not do so. And the client may do this regardless of market conditions or what the contract allows.

Too many hours? Stop paying for them

Even in a reimbursable arrangement, the client may refuse to pay for hours billed over the initial estimate.
The client may argue that it should not have to pay for rework, however caused.
The client may argue that the contractor is not delivering the agreed productivity, regardless of the reason.
The client may pressure the contractor to reduce indirect hours as non-productive. But these may include necessary supervision, quality control and project management.

Poor quality? Reject the deliverables

The client may demand that the contractor replace “non-performing” personnel.
They may require extra quality assurance and supervision at the contractor’s cost.
They may have the work re-done by others, without giving the contractor an opportunity to address the concern.
They may narrow the quality acceptance criteria, then refuse to accept non-conforming deliverables.

Unexpected side effects

Symptomatic solutions reinforce the client’s beliefs. The client feels righteous and justified. But the apparent solutions may in fact cause more of the problems they are meant to solve.
Service contractors typically operate on slim margins and can be quite vulnerable.
Faced with an aggressive client, a contractor will naturally act defensively and seek to minimise both pain and damage.
Forced to cut rates, the contractor may replace high-performing (but low-margin) personnel with more cost-effective personnel to protect margin. Quality, productivity and schedule suffer.
The contractor may cut value-adding back-office services or defer investment in improvements. While the client may not see the impact in the short-term, eventually quality and innovation suffer.
The contractor may subcontract or move services off-shore to reduce overheads. Project risk goes up.
The contractor may “work-to-rule” and minimise any activities that it thinks it may not be paid for. The contractor may redeploy personnel to more profitable projects. Quality suffers.
The contractor may suspend services entirely. Schedule suffers.
Quality continues to decline due to reduced quality assurance, lower capability of personnel and inadequate supervision.
The contractor may rush work to minimise penalties. Quality suffers.
The contractor may hide issues or blame others to avoid further penalties.
Faced with potentially losing scope, the contractor will seek to maximise overhead recovery. They will do the fast, low-risk, most profitable work first at the expense of an optimised schedule.

But if the client’s symptomatic solutions are making things worse, now what?
It is necessary to look deeper: at the fundamental causes of the problem.

Fundamental causes

Fundamental causes of the problem are often not easy to see. They require both client and contractor to acknowledge their underlying biases and assumptions.

The client

The current market is challenging. There are fewer larger projects being executed.
Pressured by declining revenues, clients have shed large numbers of personnel. Often retained personnel were selected on the basis of cost or conformance to norms rather than capability. The more senior and independent-minded were often the first to be cut.
The loss of in-house expertise has real consequences for a client’s self-awareness and capacity to recognise, describe and deal with complex problems.
Downward cost pressure also drives centralisation and a transactional focus. This may leave management of the contractor in the hands of people with little understanding of or empathy for the contractor.
They may never have been in a position where they had to question their beliefs and perceptions. They do not understand the purpose of the contractor’s questions, so respond slowly, inadequately, or not at all.
They may be over-optimistic about technical risks and scope quality due to lack of experience. They may not be able to recognise legitimate concerns.
They may not be able to explain what they need, so they leave it to the contractor and become frustrated when they do not get what they expect.
Even highly experienced people may be unable to deal effectively with the contractor because of commercial constraints imposed by remote senior management.

The contractor

Contractors are operating in a more risky and less profitable environment.
In a market with low commodity prices and high volatility, clients start fewer projects and are more risk-averse.
Fewer projects mean increased competition. Increased competition and price pressure from clients means contractors must cut rates or reduce risk contingency to win the same amount of work.
Fewer projects mean reduced total billable hours against which to distribute fixed cost.
Rate pressure combined with high fixed costs means margin pressure.
Greater individual project risk means more troubled projects to offset with reduced margins.
Pressured to take on risky work in a tough environment, contractors may be over-optimistic in assessing the likelihood, severity and controllability of a potential adverse event.
They may also over-estimate their capability to deal with a poorly-defined scope or a difficult client.

What to do?

Recognising the more complex problem should lead to a sensible conversation about the fundamental solution.
Both parties need to acknowledge their responsibility.
Both parties need to recognise their capability and constraints.
Both parties need to explore the implications of their own behaviour and their responses to the other party’s behaviour.
Risk and reward should be fairly allocated and in line with market realities.
Uncertainty and ambiguity needs to be recognised and openly discussed.
As a result of focusing on the actual problem and the fundamental solution, a potential disaster project can be turned around.

See also

    • Kruger, J., & Dunning, D. (1999). Unskilled and Unaware of It: How Difficulties in Recognizing One’s Own Incompetence Lead to Inflated Self-Assessments. Journal of Personality and Social Psychology, 77(6), 1121–1134.
    • Optimism bias.
    • Argyris, C. (1977). Double loop learning in organizations. Harvard Business Review, 55(5), 115–125. https://doi.org/10.1007/BF02013415
    • Nickerson, R. S. (1998). Confirmation bias: A ubiquitous phenomenon in many guises. Review of General Psychology, 2(2), 175–220. https://doi.org/10.1037/1089–2680.2.2.175
    • Kahneman, D. (2011). Thinking, Fast and Slow. Penguin Books.