Reverse Engineering Success: The Inversion Approach to Compliance

When it comes to decision-making, a common approach is to work forwards—to start from a problem and try to figure out the steps toward a solution. However, there is a lesser-known, yet profoundly effective mental model that turns this logic on its head: inversion. Coined by the German mathematician Carl Gustav Jacob Jacobi, the idea is encapsulated in the phrase "Invert, always invert" ("man muss immer umkehren").

The inversion mental model asks you to work backward from an undesirable outcome, rather than from a goal, to ensure success. If you can identify everything that could go wrong, you can avoid it. This approach is especially powerful in compliance, where the stakes of failure—whether in regulatory, ethical, or legal terms—are high.

The Inversion Mindset: "Where I’m Going to Die, So I’ll Never Go There"

Warren Buffett's longtime partner, Charlie Munger, succinctly captured the essence of inversion when he said: “All I want to know is where I’m going to die, so I’ll never go there.” This simple, almost humorous statement is deceptively profound. It suggests that avoiding failure is sometimes more effective than actively pursuing success.

In compliance, the consequences of failure—fines, reputational damage, loss of trust, or even business collapse—are often more salient than the benefits of success. Therefore, by identifying potential failure points and systematically working to prevent them, businesses can enhance compliance outcomes.

Inversion in Action: How to Apply it to Compliance Success

Let’s explore how the inversion mental model can be used in compliance to achieve effective management systems and prevent costly missteps.

1. Identify the Worst-Case Scenario

Start by asking the question: "What does complete compliance failure look like?" This step forces organizations to imagine worst-case scenarios such as regulatory fines, legal liabilities, fraud exposure, or reputational damage. By visualizing this end state, it becomes easier to define what exactly needs to be avoided.

For example, a financial institution might define complete failure as being caught in a money laundering scandal. Once this is identified, the next step is to prevent it by putting stringent controls and risk measures in place.

2. Work Backwards to Pinpoint the Causes

Once you have a clear picture of what failure looks like, work backward to identify the factors or decisions that could lead to that outcome. What behaviours, systems, or processes, if left unchecked, could contribute to compliance failure?

If you think about a company being fined for non-compliance with anti-corruption laws, you would analyze what activities might trigger this failure. These could include lack of internal reporting, unclear policies on gifts or entertainment, or failure to conduct due diligence on third-party vendors.

3. Remove or Mitigate Potential Pitfalls

Now that you’ve identified the causes of failure, the next step is to eliminate or mitigate these risk factors. This could mean revising internal policies, improving risk programs, conducting more control effectiveness assessments, or implementing predictive measures.

To continue the financial institution example, once the risk of a money laundering scandal is identified, steps to mitigate it might include establishing more rigorous customer identification programs (KYC), improving transaction monitoring systems, and ensuring employees receive regular anti-money laundering (AML) training.

4. Create a Feedback Loop

Inversion is not a one-time strategy but a continuous process. Regularly revisit the question: "Where could we fail?" This creates a feedback loop where potential issues are constantly identified and addressed. By staying vigilant, businesses can adapt to changing regulations and internal weaknesses that might arise.

This loop is critical in industries like healthcare or finance, where regulatory landscapes are continually shifting. The ability to foresee potential failures before they happen gives businesses a proactive advantage in compliance management.

Why Inversion Works So Well in Compliance

Compliance success increases the probability of mission success. However, the reverse is almost always true: compliance failure leads to mission failure.

The regulatory environment is complex, and failure to meet all your obligations can often arise from blind spots or unforeseen circumstances. The power of the inversion mental model is that it forces organizations to consider these blind spots and address them head-on.

Moreover, effective compliance frameworks rely heavily on preventative controls—governance, programs, systems, and processes designed to reduce the likelihood of non-compliance. The inversion method aligns perfectly with this focus. By working backward from a failure scenario, companies can enhance the design and effectiveness of these functions.

Avoiding Failure is Success in Compliance

Achieving compliance success can be challenging for many to conceptualize. The inversion mental model offers a valuable approach by shifting focus to failure prevention. Rather than solely pursuing an idealized compliant state, this method emphasizes systematically identifying potential failure points and taking steps to avoid them. In essence, compliance success often stems from a thorough understanding and mitigation of possible pitfalls.

In the end, Munger’s advice rings true: "All I want to know is where I’m going to die, so I’ll never go there." In compliance, this means that knowing where your business is vulnerable and proactively avoiding those pitfalls is often the key to long-term success.