Ouch! This is a question few people want to be asked, as it forces them to talk about a time when they were less than awesome. In a job interview, any little sign of weakness or failure could lose you that dream job, so you may find this one of the questions you dread most.
So how can you answer it?
Why the question is asked
In reality, the interviewer doesn't care whether or not you have failed in your life. Everyone has failed at something, but what the interviewer wants to know is how you handled that failure.
Some people are experts at failure, and they learn from their mistakes and improve their lives. Others, however, tend to crack under the pressure of a failure, and they start to spiral out of control and just make things worse.
What the interviewer wants to know is how you handle failure, as well as how you perceive said failure. If you have a positive outlook on your mistakes, it shows you can learn from them. If you show that you can respond to failure and clean up the problem, it proves your grace under fire.
How to answer the question
My advice: be honest.
No doubt you can think of dozens of failures in your life, things you've tried and found you were no good at. Don't worry about how many times you've failed, but think about all of your failures to see if you can come up with one that you've turned into something good.
Here's an example of a failure that you can turn into a positive thing:
"When I was in 'X' company, I was in charge of four employees. I wanted to run things perfectly, so I spent every moment micro-managing the people working with me. Not only did things not get done well, but in many cases they didn't get done at all because I was so busy with the details that I failed to see the big picture. However, once I adjusted my management style, I was able to lead the team to new heights of success. We broke 'X' record or achieved 'X' big goal."
Sure, you failed, but you turned it around and took it someplace good. That's what the interviewer wants to hear, and that's what will help you paint your failure in a positive light.
When you are asked this question, don't get embarrassed or flustered. Stay calm, and show that you can admit when you have failed. It takes a big man or woman to admit mistakes, as it's embarrassing. Show that you can take responsibility for your screw-ups, and it will get you a lot further. Remember: everyone makes mistakes and fails, but it's how you respond in those situations that matters most.
If you can show that you are open to your mistakes and willing to learn from them, it will get you a lot further than saying, "I have never failed."