Decision Making in Turbulent Times
Summary
- 50% of all business decisions fail
- There are lots of reasons
- Nobody is exempt, least of all financial institutions (I’m trying to say this politely). I know because I’ve worked inside a lot of them.
- The cost of poor decision making is shockingly high.
- It is a solvable problem.
The longer version
All of us are experienced decision makers, indeed we’ve been making them our entire adult lives. And how did we come by our decision-making skills? Through a combination of personal experiences, so trial and error, and to a lesser extent watching and learning from others (oh if we only did that better). But does that mean we are good decision makers? Trained decision makers? The data says no.
“In tracking the success rate of decisions made by executives and managers at 356 different companies, Dr. Paul Nutt from Ohio State University, found that ‘more than 50 percent of all decisions failed; they were quickly abandoned, only partially implemented, or never adopted at all.” Business Think: Rules for Getting It Right—Now, Marcum, Smith, Khalsa
50% failure rate? That’s a pretty astonishing statistic. So what’s going on here? Having worked intensively in banks and more broadly with large commercial and governmental organizations on complex decision processes since 2002 (and more generally as a consultant for 25 years), here’s my diagnosis.
1. The organizational overhead associated with running and working inside a large enterprise creates decision sclerosis. More time is spent packaging and filtering points of view than in inquiry and debate. Ceaseless one-hour meetings over larded-up PowerPoint decks make it nearly impossible to thoughtfully consider critical decisions in a quality way. Decisions are litigated and relitigated, worked and reworked, without meaningfully advancing the ball. A small group of people tends to feature in every decision dialog meaning a too small set of experiences and points of view.
2. A culture of advocacy puts a premium on putting forward a single recommendation, fully formed, and then advocating like crazy to get it across. Exploring alternatives is regarded as a failure, particularly at the point that the recommendation reaches the approval level. Challenges to the point of view are regarded as personal affronts and can be politically risky. Executives, arguably the most experienced decision makers with the broadest perspective, are left in a position of having to inspect quality in at the end when they finally see “the deck.”
3. All of us, senior and junior people, fall victim to common and predictable decision traps, due to what psychologists calls “cognitive biases” that lead people to make poor quality decisions. For example . . .
- Plunging in: Beginning to gather information and reaching conclusions without any thought to what problem you’re really trying to solve and what alternatives you should be considering.
- Frame Blindness: Working on the wrong solution because you didn’t take time to define the right problem.
- Frame Stickiness: We see our situations through one frame at a time. Once we lock into a frame, we tend to stay there. Most problems should be examined through more than one frame.
- Lack of Frame Control: Failing to proactively frame the problem in multiple ways; being duly influenced by the frames of others.
- Incrementalism: making small and often meaningless changes to previously considered alternatives and thinking it’s a new alternative.
- Jumping at the first possible solution.
- Over-valuing alternatives presented by others, particularly by “experts.”
- Overworking the problem so that when you finally get around to choosing, one or more of the alternatives are now gone.
- Sunk Costs: Protecting earlier choices, even if they were bad choices, even if the conditions under which they were good choices no longer exist.
- Intangibles: ignoring or giving undo weight
- Neglecting the values of a key constituency
4. Many of the decision processes used in large enterprises, and financial institutions are hardly exempt, are surprisingly flawed. Business cases are often poorly done and fail to adequately explore risks and uncertainties: the range between best case and worst case scenario almost never explore the full range of risk. Many critical decision conversations take place in a data-free environment. Almost all decision processes take way too long and yet deliver low quality recommendations: the problems are poorly framed, there is little or no obvious exploration of alternatives, trade-offs are clearly drawn, information is used poorly. In particular, banks are poor users of information when it comes to making complex decisions, relying on information they can readily access, vs information that would be useful to look forward (which often means modeling uncertainty).
5. Finally, large organizations are famous for making commitments and then not allocating the resources (enough, the right ones, or any at all) needed, or worse, making conflicting commitments, more like intentions really, and then pushing these conflicts down to less skilled people to resolve.
The result? In the small, a huge drag on the organization in the form of wasted resources, lost opportunities, decreased morale, and costly follow-on effects. In the large, what Professor McNutt calls “decision debacles,” the kind that wind up in the media. I could make a list of some recent whoppers, but why?
- Most senior executives are only peripherally or occasionally aware of the generally poor state of decision making in their organization. There are a couple of reasons why.
- The first is their own success. Particularly with fast-trackers, executives view their organizations through the lens of their own decision making biases, experiences, and perceived skills. They easily forget the dysfunction because they were so good working around it.
The decisions that make it to the top are generally the best vetted, the best thought through, the best business-cased, the best packaged. They don’t see the rest of what goes on. Nor should they.
Having worked in lots of big companies, and lots of big banks, and having been involved in lots of complex decision processes both as consultants and trainers, I can say with absolute confidence, that there isn’t a bank in the country that couldn’t benefit from what one of our clients calls a “disciplined decision making process.”
Some banks, BAC is an example, have grappled with this general problem using Six Sigma. It’s not the hammer to drive every nail—it’s a process intended for use in data rich environments to engineer out variability—but it’s useful for a certain class of decisions. But what about decisions around which there is a lot of uncertainty, or what the academics call “instability?” Over in Treasury, the quants and math majors understand decisions like these. So they build models and execute strategies to hedge and lay off risk. Over in the credit shops, they kind of understand this line of thinking, doing similar types of analysis to estimate the borrower’s capacity to repay, if not on an individual basis, at least across a portfolio. But what about the general class of business decisions that require a mix of data and judgment, the kind that leaders have to make all the time? As I’ve hopefully illustrated, we don’t do those well in large part because nobody trained us how to do it right.
Lots of people have thought about decision making in “environments of uncertainty.” Some of the academics are guys like Ron Howard at Stanford, Paul Nutt at Ohio State, and Howard Raiffa at Harvard. Professor Howard in particular was responsible for articulating the principles of something called Decision Analysis or what we call Decision Quality. A company I started with two other men, Clint Korver and Bob Cronin, descends from that lineage. DQI was the first company to bring the framework and tool set to financial services companies. It is THE best practice way of making, and causing others to make, high quality decisions.
The general principles for making high-quality decisions are richly detailed on two websites . . .
www.decision-quality.com
www.kevinhoffberg.com
The best practice way for deploying high quality decision processes against wicked problems is detailed at . . .
I am a director at both DQI and GroupPartners.
Tags: DecisionQuality, Decision Analysis, Howard Raiffa, Ron Howard, Paul Nutt, GroupPartners
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