by Thomas H. Davenport
In recent years decision makers in both the public and private sectors have made an astounding number of poor calls. For example, the decisions to invade Iraq, not to comply with global warming treaties, to ignore Darfur, are all likely to be recorded as injudicious in history books. And how about the decisions to invest in and securitize subprime mortgage loans, or to hedge risk with credit default swaps? Those were spread across a number of companies, but single organizations, too, made bad decisions. Tenneco, once a large conglomerate, chose poorly when buying businesses and now consists of only one auto parts business. General Motors made terrible decisions about which cars to bring to market. Time Warner erred in buying AOL, and Yahoo in deciding not to sell itself to Microsoft.
Why this decision-making disorder? First, because decisions have generally been viewed as the prerogative of individuals—usually senior executives. The process employed, the information used, the logic relied on, have been left up to them, in something of a black box. Information goes in, decisions come out—and who knows what happens in between? Second, unlike other business processes, decision making has rarely been the focus of systematic analysis inside the firm. Very few organizations have “reengineered” their decisions. Yet there are just as many opportunities to improve decision making as to improve any other process.
Useful insights have been available for a long time. For example, academics defined “groupthink,” the forced manufacture of consent, more than half a century ago—yet it still bedevils decision makers from the White House to company boardrooms. In the sixteenth century the Catholic Church established the devil’s advocate to criticize canonization decisions—yet few organizations today formalize the advocacy of decision alternatives. Recent popular business books address a host of decision-making alternatives (see “Selected Reading”).
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Selected Reading
Blink by Malcolm Gladwell, is a paean to intuitive decision making.
The Wisdom of Crowds by James Surowiecki, argues for large-group participation in decisions.
How We Decide by Jonah Lehrer, addresses the psychobiology of decision making and the limits of rationality.
Predictably Irrational by Dan Ariely, considers behavioral economics and its implications for decision making.
Nudge by Richard Thaler and Cass Sunstein, is influencing discussions about behavior-oriented policy in Washington, DC.
Two books on analytical and automated decision making:
Competing on Analytics by Thomas H. Davenport and Jeanne G. Harris.
Super Crunchers by Ian Ayres.
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However, although businesspeople are clearly buying and reading these books, few companies have actually adopted their recommendations. The consequences of this inattention are becoming ever more severe. It is time to take decision making out of the realm of the purely individual and idiosyncratic; organizations must help their managers employ better decision-making processes. Better processes won’t guarantee better decisions, of course, but they can make them more likely.
A Framework for Improving Decisions
Focusing on decisions doesn’t necessarily require a strict focus on the mental processes of managers. (Though, admittedly, the black box deserves some unpacking.) It can mean examining the accessible components of decision making—which decisions need to be made, what information is supplied, key roles in the process, and so forth. Smart organizations make multifaceted interventions—addressing technology, information, organizational structure, methods, and personnel. They can improve decision making in four steps:
1. Identification.
Managers should begin by listing the decisions that must be made and deciding which are most important—for example, “the top 10 decisions required to execute our strategy” or “the top 10 decisions that have to go well if we are to meet our financial goals.” Some decisions will be rare and highly strategic (“What acquisitions will allow us to gain the necessary market share?”) while others will be frequent and on the front lines (“How should we decide how much to pay on claims?”). Without some prioritization, all decisions will be treated as equal—which probably means that the important ones won’t be analyzed with sufficient care.
2. Inventory.
In addition to identifying key decisions, you should assess the factors that go into each of them. Who plays what role in the decision? How often does it occur? What information is available to support it? How well is the decision typically made? Such an examination helps an organization understand which decisions need improvement and what processes might make them more effective, while establishing a common language for discussing decision making.
3. Intervention.
Having narrowed down your list of decisions and examined what’s involved in making each, you can design the roles, processes, systems, and behaviors your organization should be using to make them. The key to effective decision interventions is a broad, inclusive approach that considers all methods of improvement and addresses all aspects of the decision process—including execution of the decision, which is often overlooked.
4. Institutionalization.
Organizations need to give managers the tools and assistance to “decide how to decide” on an ongoing basis. At Air Products and Chemicals, for example, managers are trained to determine whether a particular decision should be made unilaterally by one manager, unilaterally after consultation with a group, by a group through a majority vote, or by group consensus. In addition, they determine who will be responsible for making the decision, who will be held accountable for results, and who needs to be consulted or informed.
Companies that are serious about institutionalizing better decision making often enlist decision experts to work with executives on improving the process. Chevron, for example, has a decision-analysis group whose members facilitate decision-framing workshops; coordinate data gathering for analysis; build and refine economic and analytical models; help project managers and decision makers interpret analyses; point out when additional information and analysis would improve a decision; conduct an assessment of decision quality; and coach decision makers. The group has trained more than 2,500 decision makers in two-day workshops and has certified 10,000 through an online training module. At Chevron all major capital projects (which are common at large oil companies) have the benefit of systematic decision analysis.
An organization that has adopted these four steps should also assess the quality of decisions after the fact. The assessment should address not only actual business results—which can involve both politics and luck—but also the decision-making process and whatever information the manager relied on. Chevron regularly performs “lookbacks” on major decisions, and assesses not only outcomes but also how the decision might have employed a better process or addressed uncertainty better.
Let’s look at how two companies have improved their decision making.
Better New-Product Decisions at ETS
The Educational Testing Service develops and administers such widely recognized tests as the SAT, the GRE, the TOEFL, and the AP. In 2007 Kurt Landgraf, ETS’s CEO, concluded that the organization needed to accelerate and improve decisions about new products and services if it was to continue competing effectively. ETS had previously employed a stage-gate approval process for new offerings, but the organization’s matrixed structure and diffuse decision-making responsibility made the process ineffective.
