Sales momentum is flagging in your company in the face of tough competition and everyone’s bonus is at stake. The executive team is reviewing a radical drop in price proposed by a business unit team to kick-start performance: it presents good strategic analysis and reasonable financial projections. The executives each give their opinion: finance is against, sales is for the move. Everyone has a different opinion and there is no clear-cut data to see which path is right. After a frustrating 30 minutes debate, The CEO makes the final call on a multi-million dollar decision that will decide the company’s success that year…
This scenario is not uncommon in many of the telecommunications companies and banks I have worked with over the years. The process for big commercial decisions under time pressure is deeply unsatisfying. Although most people want the right decision for the company, the data is often insufficient to make a clear decision. In this vacuum the ego and biases of executives and middle managers becomes the dominant dynamic.
How can this be changed? First, we need to appreciate the common biases that we are prone to as humans and ensure key commercial decisions are structured to help eliminate some of these biases. Second, each decision is only as good as the data that supports it: companies need stronger commercial programme governance to ensure that data is there when it is needed. Finally, rigorous training and learning from past decisions is critical to ensure decision-making is improved.
Are humans biased?
Behavioural Economics has highlighted how humans are biased: they do not make rational decisions. For all their intelligence and success, managers and executives are not immune to these factors. Three of these biases are rife. The very success of executives makes them prone to overconfidence biases: a belief that because they have had success, what they have experienced is a good guide to the future. The world is more random than that. Second, everyone is prone to anchoring and framing biases. If a stupidly aggressive option and a ridiculously conservative option is compared to the “middle way” option, this option is chosen 99% of the time. Finally, executives are also prone to recency bias: to over-weight recent experience. If the last project, weeks results, etc are bad there is far more pressure to change something fast!
There is no magic cure for these management biases (telling an exec they have recency bias is unlikely to improve their mood) but awareness of our biases alone is a good thing. Psychological studies are increasingly seeing evidence for decision-overload in executives: decision-making becoming poorer as they make more decisions in the day. The most basic solution might be ensure that all big decisions have solid pre-reads and are made early in the day when everyone is fresh!
A strong governance framework
Solving for biases by only talking to executives about big decisions when they are fresh seems a little bit patronising. A strong enhancement to this is to create a stronger governance framework around decision-making. Capital One, the US-based bank, is world-renowned for its analytical approach but what is less remarked is the strength of its governance around decisions. Capital One insists that major decisions build “test and learn” information that will guide future decisions by ensuring appropriate hold-outs are made. It was this disciplined scientific approach that enabled it to have better data than other banks and emerge stronger, not weaker, from the Global Financial Crisis.
A strong governance framework for decisions will review strategy, financial projections, risks but also think heavily about underlying assumptions and devise a strong testing approach to ensure the strategy can be assessed after launch. It is the focus on challenging assumptions and building better data through testing that is the difficult cultural step for many companies. A strong templated governance framework can help.
The final step is to put aside more time is to ensure a process of reviewing decisions. Many companies do not take time to review decisions. The act of codifying knowledge should be systematised and become a critical part of the career path for all commercial and data roles. In McKinsey, the “formula” for becoming partner was to have two strong client relationships but also having becoming a leading expert on a topic that is codified in their global knowledge management platform.
The journey to better decisions is hard: it requires the breaking of deeply ingrained cultural habits. Fortunately the solution is not hard, it just takes the willpower from senior executives and simple processes to help the organisation learn.
Join us at the Chief Data & Analytics Officer Sydney happening on March 6-8, 2017. For more information, visit chiefdataanalyticsofficersydney.com
By Stephen Smyth:
Stephen Smyth started his career at Capital One, the US bank, where he instantly fell in love with the “test and learn” scientific method that Capital One pioneered in banking. Working with them over 10 years in the UK, France and Spain; Stephen finished up shortly after leading Capital One’s UK Product & Credit team during their successful navigation of the Global Financial Crisis. After Capital One, Stephen joined the Marketing practice at McKinsey and as an Associate Principal he specialised in commercial analytics and pricing strategies for banks, high tech and telecommunications companies.
After McKinsey, Stephen joined Vodafone in the UK leading their Customer Value Management and Consumer Operations teams before leaving to Australia to head up product and pricing for Vodafone Australia. Over the last 3 years, Vodafone has successfully turned around its business growing in customer numbers, revenue, margin and customer satisfaction.
Stephen Smyth is British and has a MA in Natural Sciences from the University of Cambridge and a MBA from INSEAD. He lives in Sydney with his wife and three children. An avid cricket fan, he awaits next summer’s ashes series with keen expectation and trepidation.