When a company has a problem, you will hear many different explanations for why.
FACT: Profit is down 20%
The Top 4 Executives all know why:
Finance Director: “Profit is down because revenues are down and costs are up”
Sales Director: “Profit is down because our products are not as good as competitor’s products, so we had to cut the price on our products to sell them”
Marketing Director: “Profit is down because we cut our product development budget 2 years ago”
Chief Executive Officer: “Profit is down because our shareholders wanted short term returns and so we could not reinvest in the business”
Which is “right”? The answer is they all may be – they are just looking at the business from different perspectives. This is another illustration of the “Six Blind Men and the Elephant” parable.
In business problem solving, we need to move beyond superficial explanations. The Finance Director’s “Profit is down because revenues are down and costs are up” is a good example of a superficial explanation. It is right…but not very useful. If we fix this problem – for example by cutting costs – without an understanding of why revenues are dropping we will find that our solution does not stick. Yes, temporarily we will return to profit after the cost cut, but then revenues will continue to fall and we will find ourselves back in negative profit very quickly. We have not solved the fundamental underlying problem.
It is possible to keep tracing back cause and effect in pursuit of ONE ultimate cause. At a certain point, you will realise that you have gone to far when your causes are no longer actionable. Yes, the ultimate cause of the business problem is the Big Bang that kicked off the Universe. But so what? Catch yourself and stop this sort of analysis paralysis.
Definition of “Root Cause”
Superficial causes are not very useful for resolving problems because the problems will recur.
Ultimate causes are not very useful either because you can’t take action on them.
Root causes are the sweet spot – causes you can take action on that will prevent the problem ever recurring.
Two ways to use Root Cause Analysis
Root Cause Analysis maps out the full Cause and Effect relationships in order to see the full picture. As with the “Profit Down” example above, this cause and effect map can cover different functions and time horizons. There are two ways to use it:
Hypothesis driven. We can also use it to map out our hypothesis of the causes, narrowing down from all possible causes to the 1 or 2 that we think are most important. This can be stimulus material for a great team dialogue. If desired, each link of the cause and effect can be validated with data and evidence to create the most accurate picture possible.
Building a hypothesis-driven Root Cause Analysis is a great team activity because it forces each team member to make their assumptions of what happened explicit so that it can be easily understood (and challenged!) by other people. A good Root Cause Analysis captures the best thinking of everyone in the team. A great way for the Blindmen to identify the Elephant!
How to do a Root Cause Analysis
Root Cause Analysis is best done with a team around a white board (it is an iterative process of erasing things and moving them around, you won’t get it right first time).
Start by writing the problem you want to explain. This should be factual – losing market share, going bankrupt, sales below forecast, missing budget.
Next comes the key question “why?”
You don’t want to jump too many stages in logic, because the value of the hypothesis tree comes from making the small steps explicit. For example, leaping from “The business went bankrupt” to “because management was bad” is not very useful, even if it was true. You are far more likely to get insight if you go first to “because the business ran out of cash” and develop the logic in small steps
If you are doing a Hypothesis driven root cause analysis, you will need to be disciplined about what
The art is to create a picture of cause and effect that capture all the key relationships, and leaves out the mere contributory factors. You will have to apply the 80/20 rule at every stage, mapping the major cause and leaving out the minor ones.
The objective is not to be “right”, but to be “useful” – gain an insight about the fundamental causes that will help you improve your problem-solving.