AI Is Fallible. Systems Aren’t (If You Build Them Right)

Hey, this is AI Roland. And welcome to another snackable episode of the Business Lunch podcast. And today we're talking about why the real power in AI isn't the model and it's the protocols around it. Let's jump in. Here's something that'll blow your mind. Even the most advanced AI systems today get things completely wrong 15 to 20% of the time. And businesses are betting billions on them anyway.

That's a pretty alarming statistic when you think about what's at stake, especially in fields like healthcare or finance, where mistakes could be catastrophic.

Exactly. And that's why we're seeing this massive shift in how companies approach AI. It's not just about having the smartest AI anymore. It's about building systems to catch those errors before they cause damage.

You know, I was reading about how some major banks implemented something called rag retrieval, augmented generation. They managed to cut their error rates by 63%.

And here's what's fascinating about that. They didn't just make the AI smarter, they built these comprehensive protocols around it. Kind of like how airlines have strict checklists for everything.

So it's really about creating a safety net for decision making.

Precisely. And there are two main types of protocols companies are using. Ones that help make decisions faster and ones that make the business more valuable by reducing risk. But here's the key. You have to get the sequence right.

What do you mean by getting the sequence right?

Well, think about it like building a race car. First you make sure it won't fall apart. Then you worry about making it faster. Same with business protocols. First stabilize your decision making, then accelerate it.

That reminds me of what Amazon did with their warehouse robotics. That $775 million investment completely transformed their business model.

Exactly. By converting variable labor costs to fixed costs, they increased their operating leverage from 3.2x to 4.5x. Every 1% increase in sales now generates a 4.5% increase in operating profit. But, and this is crucial, that kind of leverage can cut both ways.

Like what happened with Southwest Airlines during COVID right?

Yes. Southwest intentionally kept their operating leverage lower than other airlines. When air traffic dropped 70%, their losses were 175% of revenue decline, while competitors lost 245%. It's a perfect example of how these systematic decisions about leverage can make or break a company.

That's fascinating, but how do companies actually implement these systems in practice?

Well, there's this interesting framework called the triple check that many are using. First you compare outputs from three different AI systems. Then you you verify 20% of supporting claims and finally test edge cases. It's like having multiple safety nets, each catching different types of errors.

You know what's interesting about that? It seems to combine both technological and human oversight in a really structured way.

And that combination is becoming increasingly valuable to investors. Companies with well documented protocols and decision making systems are commanding higher valuations because they're more predictable and transferable.

So these protocols are basically becoming a form of intellectual property.

Exactly. They're assets that can be valued and traded, just like patents. But here's what's really interesting. Implementing these systems isn't easy. About 43% of companies cite security concerns as their biggest challenge, followed by budget constraints at 42%.

But the payoff seems worth it. Didn't you mention something about companies seeing dramatic improvements?

Yes. Advanced users of Agile and DevOps see 20 to 40% better results in their business metrics compared to basic users. Both. But, and this is crucial, it's not just about implementing technologies. You need a comprehensive system that includes both technical and human elements.

That makes me think about the balance between automation and human judgment. How do companies get that right?

Well, take the International Actuarial Association's AI framework. They specifically address things like fairness, bias and transparency. They make it clear that even the most advanced AI systems need human oversight at critical points.

So it's really about finding the sweet spot between automation and human expertise.

Expertise, Exactly. And that sweet spot is different for every organization. But here's what's need clear protocols for when and how humans enter the decision making process. It's like having emergency procedures in a nuclear power plant.

That's quite a vivid comparison. It really drives home how crucial these systems are.

And here's what makes it all so powerful. When done right, these systems create what I call founder independence. At the cognitive level, your business can operate effectively even when key people leave, because the decision making capability is built into the system itself.

That must be particularly valuable for growing companies and startups.

It is. But timing is everything. There's this fascinating threshold. You shouldn't even start optimizing your systems until 40% of your users would be very disappointed if your product disappeared. It's about getting the sequence right.

So the key takeaway is that success today depends more on your systems than your individual capabilities.

Exactly. We're seeing the emergence of a new kind of business asset. These protocols and decision making systems that can transform how organizations operate and create value. It's not just an evolution in how we do business, it's a complete paradigm shift.