Accept no unnecessary risk.” — Navy Operational Risk Management
“Those who will not risk cannot win.” — John Paul Jones
In today’s security environment, which features an explosion of complexity and uncertainty, understanding what is necessary risk and what thoughtful risk-taking looks like is more important than ever, but neither is explicitly debated or well-understood.
One result is that conflicted views on risk are not uncommon in the fleet, with some simultaneously seeing the Navy as operationally risk averse and guidance such as Operational Risk Management (ORM) as largely facilitating risk avoidance, while also viewing senior leadership initiatives such as the Fleet Response Plan, Sea Swap/multi-crewing, Optimal Manning and Sea Enterprise as unnecessarily risk-seeking.
A key reason for the divergent views is that, despite a heavy emphasis in the fleet on teaching the ORM process, broader discussion of the underlying rationale for taking risks is rare in many commands, spanning the mission spectrum of force employment to force development — the war-fighting to the business ends of the department. The lack of clarity regarding the desired risk calculus — what kinds of bets we want to see leaders at each level making and why — in conjunction with a commonly perceived near-zero-defect culture, dynamic threat environment and strained resources, poses an increasing challenge for the Navy and the broader Defense Department. The combination of ambiguous risk tolerance signals and our long history of war-fighting success encourages status quo thinking, suppressing subordinate appetite for exploring untraditional approaches while simultaneously robbing seniors of broad support for change initiatives. The comfort we find in traditional capabilities and strategy, and particularly from relying primarily on the American way of fighting — the use of overwhelming resources and force — has limited our collective initiative in confronting increasingly uncertain and asymmetric conflict. The growing challenge we must tackle is the divergence between the progressively more complex security environment and our historic practice of fielding forces primarily to achieve capability overmatch against predicted threats.
The crux of the challenge is that although the resources we have to implement this approach are unrivaled, so are our worldwide responsibilities and investment requirements — and the increase in requirements to address growing complexity is outstripping likely growth in resources. Our favored approach is not sustainable across the full spectrum of emerging threats. The new era of persistent conflict and sustained global engagement must be tackled more comprehensively. Growing security complexity and uncertainty must be countered by a balance of focused resource growth and thoughtful risk-taking that collectively generate required force capabilities, capacity and agility.
The scope of today’s security challenges is extraordinary. Concurrent with the fights in Iraq and Afghanistan, we face an aggressive worldwide militant Islam movement that threatens governments and strategic waterways, growing nuclear capabilities in Iran, a rapidly accelerating Chinese military buildup and a resurgent Russia proliferating advanced weapons. In this hemisphere, Latin American narco-terrorists hold American hostages and destabilize societies. We are confronted with adaptive state and non-state adversaries increasingly employing irregular and asymmetric warfare approaches, a breakdown in weapons of mass destruction control regimes, and an increased expectation for military contributions to homeland defense and disaster and humanitarian relief. Across the scope of these challenges, rapid and easily accessible worldwide information flows expand conflict into wider domains, including the Internet and media, and the broader effects of globalization and technology proliferation drive substantially increased complexity. In particular, the globalization-driven economic interdependency that features more than 90 percent of world commerce moving by sea, and the considerable economic vulnerability associated with widespread use of just-in-time supply chains, places a heavy premium on the security provided by naval forces.
The combination of these elements is yielding an unprecedented level of complexity and uncertainty in the national security environment. As the Chairman of the Joint Chiefs Adm. Mike Mullen recently observed, “If we have learned nothing else since 9-11, it is that our future will be marked by uncertainty and irregular and increasingly unrestricted warfare.” The deputy chief of naval operations for information, plans and strategy, Vice Adm. John Morgan, further observed, “For the Navy, it’s become a very uncertain world. The very clear problem we have to deal with is complexity and the need to provide a wide spectrum of response.” Unfortunately, coping with uncertainty generally drives an appetite for extra resources, whether it is variability in travel destination weather driving you to pack a heftier suitcase, lack of tactical intelligence driving increased Predator orbits, or unfocused LPD 17 requirements driving double-digit cost growth. Consequently, it’s not surprising that the scope and uncertainty of today’s security challenges are driving requests for substantial resource increases. Last February, the Defense Department presented Congress with budget requests totaling $716 billion, a number that Secretary Robert Gates characterized as evoking “sticker shock,” and yet one that — despite its size — was developed only after intense give and take within the Department regarding proper priorities. The fiscal year 2008 elements of these requests alone, totaling $623 billion, are 50 percent greater than the equivalent 2002 levels in constant dollars, and an additional $40 billion of 2008 funding has since been requested. A key element of the challenge we must confront is that future growth in defense funding is likely to decrease as competing domestic priorities are reasserted following a period of subordination to war needs, and as a result of the explosive growth in non-discretionary federal entitlement spending. Over 60 percent of federal spending today is non-discretionary spending essentially on autopilot, and this percentage continues to grow. In 1966, defense spending represented 43 percent of total federal spending; last year it was 20 percent, including the costs for Iraq and Afghanistan operations. Even with successful advocacy by today’s leaders of the imperative to grow defense budget share, the long-term picture of growing defense requirements, record levels of entitlement spending and pervasive budget deficits suggests that, as U.S. Comptroller General David Walker recently told a Naval Academy audience, “For your generation, squeezed budgets are going to be a fact of life.”
ADAPTING FOR UNCERTAINTY
Constrained resources and dramatically increasing environmental complexity jointly drive the need to attack security uncertainty more comprehensively than by relying primarily on resource and capability overmatch across the full scope of possible conflict. Anticipating and responding to each possible new requirement or threat by developing dedicated capabilities and specialized defense-in-depth is unlikely to be routinely achievable, and is plainly not affordable, particularly when the essence of our adversaries’ strategies is often asymmetric — focusing on gaps and seams in our capabilities. To prevail in this environment and to reduce vulnerability to adversary initiatives, choices regarding the proper assets and capabilities to emphasize and develop need to be made at every level of leadership.
In a security environment in which seeing far ahead is increasingly difficult, a premium accrues to force attributes of adaptability, flexibility and speed of response. This characteristic suggests that the hard choices required will increasingly involve complementing key capabilities with initiatives that improve force agility and capacity, providing the operational maneuverability and horsepower to respond to unanticipated or unlikely threats. Unfortunately, we generally see reflexive cultural distrust with Navy initiatives that propose to harvest a portion of status quo overmatch to achieve greater overall force responsiveness, as with a number of Sea Enterprise initiatives, or that seek capacity growth through increased asset productivity, as with the Fleet Response Plan. Overcoming this substantial cultural drag requires aggressive change leadership of the type provided by former Chief of Naval Operations Adm. Vernon Clark when he battled the Navy’s “culture of consumption” — the prevailing attitude of free readiness for warfighters, or by former Navy Secretary Richard Danzig when he attacked the “culture of conscription” — the prevailing attitude of free manpower. These kinds of thoughtful and well-articulated departures from established practice — the essence of proper risk-taking — will increasingly be key to achieving the critical force attributes that provide advantage in dealing with ambiguity and uncertainty.
The ability to adaptively evolve an organization in this way when faced with environmental change is the essence and ultimate challenge of leadership. Our success in developing leaders able to meet this challenge in the face of not just extraordinary environmental change, but also extraordinary pace of such change, will greatly impact the Navy’s success in future conflict. The fact that the risk-taking skills adaptive leaders require to lead this type of change are unlikely to fortuitously emerge with promotion to senior ranks argues for broad and continuous development of these skills over the full course of a career. But given existing cultural perceptions and the high personal and unit stakes involved, developing in subordinates a career-long enthusiasm for explicit risk engagement remains a substantial leadership challenge.
DEVELOPING THOUGHTFUL RISK-TAKERS:
1. ATTACK ZERO DEFECT OBJECTIONS
Developing the required risk orientation in subordinates starts with providing a clear understanding of the difference between leadership enforcement of accountability following basic subordinate decision-making errors and leadership support of thoughtful risk-taking. When the commanding officer of the destroyer Arleigh Burke was relieved recently after a grounding while returning to Norfolk, Va., the fact that she was the sixth Navy CO to be relieved in six weeks made news. Columnist Max Boot of the Los Angeles Times observed: “These firings have sparked debate in military circles, with some critics from the other services charging that the Navy is guilty of a ‘zero defect’ mentality that would have robbed it of such distinguished leaders as Admiral Chester Nimitz, the World War II hero who grounded his first command in 1908.” Boot concluded: “No one should get cashiered for honest mistakes, especially if the errors are the result of calculated risk-taking in the volatile caldron of conflict. But if officers show themselves unable to perform effectively, they need to be sent packing.”
Serious debate over whether one should be cashiered for honest mistakes might be useful in certain cases and would certainly make for lively discussion, but the fundamental obligation of leaders to clearly define and consistently enforce high standards by imposing consequences when subordinates fail to meet expectations is unarguable. What is equally central to proper leadership, however, is clearly differentiating for subordinates the distinction between calculated risk-taking designed to achieve an objective, or to provide fruitful learning when falling short of the objective, and basic operational or personal conduct errors. Running aground while entering homeport is an event, for example, that generally would not be associated with thoughtful risk-taking. Developing subordinates who confidently engage the uncertainty faced at their particular level of responsibility starts with providing clear guidance on what proper risk-taking practices look like at that level and by providing assurance that these are not zero-defect propositions. Leaders must demonstrate unambiguously that the proper types of bets properly made, in accordance with their guidance, will be routinely supported.
2. BRING ORM FUNDAMENTALS ALIVE
ORM principles are a key element of the type of guidance needed to control and justify risks, applicable to deterring foolish gambles as well as supporting assertive leaders taking needed risks. Too often, however, ORM concepts are left behind in the training room or are only weakly understood and applied, which results in similar recurring instances of poorly reasoned decisions throughout the fleet. Proper development of thoughtful risk-takers requires leaders who aggressively drive subordinate familiarity of ORM through routine use at all levels of their unit, by active personal example and teaching and, in particular, by teaching subordinates how to avoid the common, recurring risk judgment errors.
The most common risk-taking error is to make risk decisions based primarily on consideration of hazard probability alone. Just as shrewd investors routinely consider the probability and size of proceeds, and seasoned bettors routinely consider odds and payout, professional risk managers act on the fundamental ORM tenet that risk must be clearly evaluated in two dimensions — probability and magnitude — and unlikely but extremely harmful hazards must be assigned a risk mitigation priority equal to lesser, more likely hazards. In cases ranging from junior sailors choosing to drink and drive to a combatant commander’s direction for the destroyer Cole’s vulnerable pierside refueling stop, explicit consideration or action reflecting the magnitude of risk presented was missing. This error continues to appear regularly in Navy mishap reports and has been prominent in a number of this nation’s highest-profile disasters, including the Challenger and Columbia space shuttle incidents and the FBI’s Robert Hanssen Russian mole scandal. When credible and persistent indications of an event judged as possible, but unlikely, combine with a severe magnitude, explicit action is required.
This type of error is very commonly associated with misguided course-of-action analysis of the type demonstrated in the following example. Following a Class C helicopter flight mishap ($10,000 to $200,000 of damage) resulting from a poorly executed practice autorotation — a dynamic maneuver to survive certain inflight emergencies, the squadron commanding officer recommended that autorotations only be practiced in simulators, which provide a safe but substantially lower fidelity representation of the maneuver. His reasoning was that instances of actual emergencies requiring real autorotations are very rare, while the Class C mishap (and professional embarrassment) costs resulting from intense practice of the maneuver accumulate across the fleet quite regularly — at least once every other year or two. The benefit didn’t seem worth the cost. This type of analysis, comparing the cost of the hazard to the probability of the benefit, is an incorrect apples and oranges comparison. The correct analysis is to assess both dimensions of the hazard — probability and magnitude (cost) — and compare the result to the probability and magnitude of the benefit. The combination of obvious, near certain costs and a weak understanding of risk fundamentals distorted the analysis by suppressing explicit consideration of a low probability but tremendously significant potential benefit — the saving of lives. This example highlights how proper use of ORM principles can facilitate calculated risk-taking — in this case the conduct of actual vice simulated practice autorotations, countering the notion that ORM is only a tool for risk avoidance. The broader and more critical lesson to teach, however, is that low probability does not always equal low risk, and the lowest probability hazard you face is not always the hazard presenting the least risk. Risk must be understood and controlled in both dimensions — probability and magnitude.
3. DEVELOP THE DISCIPLINE OF EXECUTION
One particularly damaging consequence of the error of making risk decisions based primarily on consideration of probabilities is that it naturally follows that unlikely but potentially severe hazards or important benefits may be dismissed entirely — after all, they’re not likely to happen. The disregard of established risk controls often evident in fleet mishaps is one symptom of the underlying complacency and lack of execution discipline associated with this improper understanding of the nature of risk. When unlikely hazards are characterized primarily by probability, risk controls are easily dismissed as intrusive and unnecessary. Similarly, when leaders harbor misplaced confidence in their ability to anticipate unlikely hazards, risk controls are often considered discretionary. In both cases, deviations from established risk controls become standard procedure, resulting in risk accommodation — the routine acceptance of an uncontrolled hazard. Risk accommodation increases cumulative risk exposure through routine exposure to the uncontrolled hazard, and the increased exposure consequently increases the probability of the hazard occurring. The very bet upon which the deviation was founded — low probability of an unhappy outcome — accordingly changes for the worse, often dramatically and without explicit recognition by decision-makers. Examples of risk accommodation in the fleet include routine deviations from mission preparation procedures, system configuration or execution limitations, and Standard Operating Procedure guidance.
Leaders who choose, or carelessly fall into, risk accommodation strategies set up our people to fail. Striving to achieve complex operational outcomes without first firmly establishing routinely disciplined execution of the processes creating those outcomes is not an approach that is sustainable — it’s simply gambling. Thoughtful risk-taking is entirely different than the common phenomenon of simple misplaced motivation — the undue focus on outcome at the expense of process, manifested by poorly considered shortcuts and lack of execution discipline. Ironically, and often tragically, misplaced motivation is most common in the environments least forgiving of the deficiencies that accrue from it — the deployed, embarked and wartime environments. Our collective experience in these unforgiving arenas has consistently proved that you have to be smart and disciplined to operate successfully for a sustained period. Even in war, where one-time heroics or gambles are occasionally necessary when planning falls short, we would never consider directing our sailors and Marines to execute a plan that routinely relied on such efforts, a sure-fire losing approach. During periods of war, the critical combat assets and lives we destroy and damage through ill-conceived deviations and error can contribute substantially to our enemy’s objectives, in some cases more than the enemy could ever hope to achieve on its own. Since the initiation of Operation Iraqi Freedom in March 2003, for example, the Navy and Marine Corps have lost 15 times as many aircraft in mishaps across the fleet as to enemy action.
The key lesson to be embraced at all decision-making levels is that demanding operational pressures such as those seen during war do not mean that established risk controls and the principles of ORM are discarded. War does mean that, when operationally compelling, we consciously accept greater risk in mission design and execution — greater hazard probability and/or magnitude — than we would accept during peacetime. The principles of ORM, however, remain unchanged. It is only after the discipline of execution is firmly in place that full combat readiness and operational excellence are sustainable, and the potential established for thoughtful risk-taking excursions from existing practice. There is no shortcut past this foundation.
4. EMBRACE INNOVATION WITH RISK CONTROLS
The growing imperative to operate more effectively given constrained resources and increasing war-fighting requirements drives the need to build on disciplined execution with thoughtful excursions from current practices — a process of continuous innovation. When designing initiatives with the potential for improved effectiveness, or at least the potential for fruitful learning regarding improved effectiveness, the guiding ORM principle is to accept the risk associated with new approaches only when the potential benefits outweigh the costs. The consideration is similar to the concept of expected value, used to evaluate propositions such as; would it make sense to incur a cost of one dollar for a 50 percent chance of gaining two dollars? How about for a 25 percent chance of gaining four dollars? Which proposition is preferable… and why? Expected value analysis shows that while the two cases cited are not the same — one has twice the upside magnitude of the other each time pursued — the probability-payoff products in both cases are one dollar, which is the average expected payoff per event in each case over multiple plays. Paying a dollar per event to repeatedly undertake each of these propositions would be a value-neutral proposition.
Operationally and strategically, our risk calculus is never completely certain or quantifiable, but it is imperative that relative assessments of the probability and magnitude of costs and benefits take place to make well-informed decisions regarding the analysis and design of new initiatives — the scenarios considered, tradeoffs made and risk controls selected. Even when key parameters can be characterized only by a range of values, rather than artificially precise exact figures, these assessments force decision-makers to explicitly consider and convey underlying assumptions and beliefs, facilitating transparency of the scenario elements and debate of the initiative features. Further, the assessments provide the foundation for the subsequent critical step of proactively taking actions to improve the broad probability-magnitude calculus, stacking the odds for success in our favor while lowering the chances of unwelcome surprises.
The flight-test community is expert at dealing with change and uncertainty, and offers many useful examples of how this type of analysis can positively influence excursions into new areas of learning. Effective risk controls they employ include:
å Make embedded assumptions and tradeoffs explicit, forcing open consideration in place of unexamined or unchallenged consensus. Assertively challenge and understand every assumption.
å Incrementally expand the envelope being explored in order to develop multiple, short-term, cycles of learning. Control both the pace of change and the number of parameters simultaneously being changed. Modify initial plans based on this ongoing learning.
å Always leave yourself an out — anticipate “worst case” scenarios and develop appropriate operating margins, or appropriate recovery options when these margins are unknown or are being probed.
å Verbalize what you see and assertively engage on deviations from your expectations. In particular, when first perceived, immediately and aggressively arrest trends toward extremis (deviation from the plan in a substantially negative way), using the options and branch plans updated from previous learning cycles.
å Attack change with stability in key parameters: leadership, scheduling and routine, and equipment and crew preparation.
å Accelerate learning with event debriefs as thorough, or more thorough, than pre-event briefs.
å Above all, consciously and continuously make informed risk decisions. Do not let events or schedules gain momentum on their own.
The value of proactive risk controls is often substantial but also highly dependent on the controls being well-aligned with the actual hazards and benefits of the proposed change. Unfortunately, decision-makers are particularly susceptible to self-deception. Well-known biases in assessing risk include harboring the illusion that the environment is more favorable than it actually is, giving greater weight to evidence that supports our view than to evidence that calls our preconceptions into question, overly valuing familiar or short-term considerations while discounting future issues and effects, and not acting aggressively to prevent a problem that we have not personally experienced or that has not been made real to us through vivid information. These biases are generally self-serving in that they typically support a view of the world as we would like it to be.
When dealing with risk and uncertainty, strong countermeasures are required to keep these kinds of self-serving leadership biases in check. Two of the strongest remedies are diversity in decision-maker backgrounds and a culture of assertive communication up and down the chain of command. The value of diverse perspectives in developing optimal solutions for subjective or ambiguous issues is well-recognized across many disciplines. Those in the military who have served in units that execute complex tasks, such as battle staffs or other complicated team functions, fully understand what a train wreck it would be if everyone on the team were just like them. For this reason, Navy diversity efforts should be strengthened, broadening the demographic focus to embrace the performance-based power of differences in every form — gender, ethnic, professional and international. The fresh thinking required to confront new threats and surging complexity dictates stretching the select-in-your-own-image promotion focus to one that harvests the most innovative and successful leaders across the full spectrum of experience and perspective.
Developing the required culture of assertive communication also is challenging. Although recognizing that there is a proper time to debate and a proper time to execute, the inherent reticence of many service members to verbalize their concerns and insight dictates that leaders seize every possible opportunity to convey the value of appropriate subordinate communication, particularly when that perspective is new or counter to established thinking. As the former chairman of the Joint Chiefs Gen. Peter Pace recently remarked, “One of the things I most valued was having someone at the table say, ‘I see it differently.’ The decision didn’t always end up their way, but they were always welcome at the table.” Public encouragement of the process of sharing thoughtfully different perspective, emphasizing the end-state rationale of well-informed decisions rather than incorporation in every case of the views provided, is immensely helpful in lowering the threshold for communication and establishing the required culture.
A STRATEGIC FOUNDATION
Contemporary events speak strongly to the far-reaching consequences associated with the risks senior leaders take, emphasizing the value of refining and upgrading these skills over the course of a career. In hindsight, for example, it’s clear that portions of the initial Iraq war planning reflect a number of the cited planning biases and absence of the highlighted risk controls, and Navy Secretary Donald Winter’s recent public expression of frustration regarding the damaging “culture of over-optimism” creating havoc within our shipbuilding programs further underlines the broad impact of these issues at senior levels. Expertise in making decisions under uncertainty is at a premium in senior positions precisely because these kinds of high-stakes issues are often in play.
Decisions at senior levels are also consistently challenging because of the longer time horizons considered. Strategic decisions, for example, are informed by a range of possible futures and subject to what Nassim Taleb in his popular book refers to as the “black swan problem” — the issue of not knowing what we don’t know. (Taleb cites the people of the Old World who were unaware of black swans before the discovery of Australia as the basis for the name.) In a world that features a remarkable proliferation of threats and potential adversaries with access to the most current commercial technologies and, in some cases, to extraordinarily lethal weapons, the possible consequences of a security black swan — the next 9/11 — are substantial.
This inherent uncertainty and the inevitable opportunity costs for any strategic allocation of resources make the assumption of risk at the strategic level unavoidable. Department leaders engage this risk with comprehensive scenario analyses and war games, allocating risk exposure by a portfolio approach that lessens risk in certain capability areas at the expense of greater risk in others. This approach addresses the inevitability of some element of surprise by seeking to develop a balance of forces that yield the greatest aggregate war-fighting capability and least collective security risk to the nation. This type of integrated portfolio approach is most effective when the force employment and development initiatives within each element of the defense portfolio not only work to improve war-fighting effectiveness within that element, but also are aligned with the key drivers of the broad strategic objectives across the portfolio.
In today’s environment, it’s clear that one important driver of war-fighting value across the portfolio and, thus, key consideration for evaluating performance initiatives, is contributions to the agility, flexibility and capacity of the forces fielded by the top-level portfolio resource allocation choices. The tremendous potential of these kinds of initiatives to provide commanders at all levels with improved margins and options — the tools of the test pilot — brings not only the possibility of improved overall operational performance, but also the possibility of a reduction in the aggregate risk that results from making strategic commitments in a rapidly changing and ambiguous environment. The improved ability to sense and respond to events not precisely forecast when the strategic allocation commitments were made is exactly why this kind of experimentation is so favored by all the services, at multiple levels. Examples range from force development initiatives such as the Air Force’s Air Expeditionary Force and Operational Support Enterprise, the Army’s Force Generation and Business Transformation initiatives, the Navy’s Fleet Response Plan and the Army’s Force Generation and Business Transformation initiatives, to unit-level force employment developments such as expansion of submarine overland tactical mission capability and improvements in aircraft squadron mission readiness using Naval Aviation Readiness Integrated Improvement Program tools.
The Navy’s ability to dominate conflict in the emerging security environment rests squarely on our leaders’ ability and willingness, at every level and in the face of uncertainty and complexity, to grab opportunities like these that best position us to improve war-fighting effectiveness and win in combat. The process of flexibly seizing these opportunities will be disciplined by unit leaders providing the type of guidance and personal example discussed here, and by healthy competition for the resources needed to fully exploit major opportunities. The fact that the choices regarding which risk-taking opportunities should be pursued often will occur under conditions of substantial uncertainty means that, at every level, these choices will regularly hinge less on judgments of what is certain or familiar than of what is important.
In today’s environment, the important opportunities for improving war-fighting effectiveness most often will feature flexible, agile and interoperable forces, advocated with a persuasive blend of intuition backed up by comprehensive risk analysis. Advocates who press initiatives that feature growth in predictable or familiar approaches, of stovepiped capability that anticipates traditional threats, or that feature largely intuition, fair share or decibel-driven reasoning, will be less successful. Increasingly, we will see the skills necessary to translate ambiguity and uncertainty into focused and meaningful action — the art of thoughtful risk-taking — as vital to our future, as essential as the skills we use to translate knowledge into action. Our ability to broadly develop leaders with these essential skills, producing the change agents who drive the required experimentation, adaptation and operational improvement, will be both the hardest competitive advantage for us to achieve and the hardest for others to duplicate. In the emerging security environment, in which taking risks clearly will not be discretionary and, accordingly, where those who will not risk cannot win, our growing ranks of disciplined risk-taking leaders will be one of our most critical and enduring war-fighting advantages.
Navy Capt. William K. Lescher is the Program and Budget Analysis Division chief in the Joint Staff J-8 Directorate. He learned about risk while flying from small combatants in the helicopter anti-submarine light community, as an experimental test pilot, and while commanding two squadrons and a wing. The opinions here are the author’s own and do not necessarily reflect those of the Navy or Defense Department.