It’s an exciting time for corporate leaders and decision-makers. Artificial intelligence, smart algorithms, and a plethora of data are providing teams with powerful ways for better decision making. Blogs, books, podcasts, and TED talks raised everyone’s awareness of cognitive biases. Few leaders haven’t heard about anchoring, or confirmation bias. Organizations created formal processes like checklists, competing teams, brainstorming sessions to improve decision making. With all these advances, one might expect that corporations have significantly improved their decision making.
The truth couldn’t be far from it.
Today, most organizations make bad decisions. Even worse, organizations make more bad decisions than good ones. According to a McKinsey survey, 72% of senior executives say that bad decisions are at least as frequent in their organizations as good decisions.
There are numerous reasons for this.
Over the last 20 years, organizations have grown and become more complex. They are geographically diverse. They employ remote international teams. Most have kicked off transformation programs in recent years that introduced more activities and products. Along the way, their leaders have tried to delegate authority and hold their teams more accountable. These changes result in many more decision-makers. To exacerbate this, adoption of agile practices led to distributed decision making, which is good. But for many organizations, it resulted in a lack of focus, which is terrible.
I often find that top management lack the insights, as well as the time to engage with their teams. They don’t have capacity left to handle all the requirements of their daily jobs, let alone tackle big and risky initiatives. All of this creates a recipe for poor decisions.
Many organizations have processes for most everything. Yet, a large number of them don’t have procedures in place to categorize decisions. This is an area that is often overlooked.
When an organization can’t categorize decisions, it also can’t ensure that the right group of people are involved in making those decisions. As a result, death by committee and dysfunctional decision cycles frustrate both employees and leaders.
None of this should be rocket science. As I’ve worked with organizations, I’ve found that there are three reasons why companies fail in better decision making. Understanding and tackling these three areas would allow corporate leaders to make significantly better decisions.
Lack of strategic clarity
Strategic clarity is a key challenge for many organizations. When strategy is ambiguous, and employees are unclear about the strategy, an organization will get in for trouble.
According to a Deloitte study, 30% to 40% of CFOs at large North American companies name framing and adapting their strategy among the top three company-level challenges.
It shouldn’t surprise you that businesses that have high strategic clarity outperform those with moderate strategic clarity. LSA Global researched 410 companies and found that aligned companies grow revenue 58% faster. They are also 72% more profitable. Furthermore, aligned companies outperform their peers in engaging their employees by a factor of 16 to 1.
If your organization is following a cost-cutting strategy, any action that would increase costs should be considered unaligned with your strategy. The reality is that in most organizations, departmental incentives are not aligned and create many conflicts.
I have encountered companies where the manufacturing function was incentivized to reduce costs while sales was incentivized to sell more regardless of cost. As a result, when an additional sale opportunity came forward, manufacturing and sales functions got into conflict.
Unclear processes, accountabilities and authorities for decision making
Researchers from McKinsey argue that it’s possible to improve corporate decision making by categorizing the decisions. The authors identify four categories: ad hoc decisions, delegated decisions, big bet decisions, and cross-cutting decisions. These decisions differ in their scope and impact, as well as their frequency of occurrence and familiarity to the organization.
By way of example, if you’re dealing with a decision that can influence the future of the company, this should be categorized as a big bet decision and handled appropriately. A big-bet decision doesn’t occur too frequently but can have consequences for the organization. Therefore, a big bet decision is inherently risky and requires special attention by top leadership. Ideally, an executive should be involved in identifying the type of decisions that will need to be made.
Big bet decisions also benefit if the organization has a robust approach for decision making. It’s essential to bring the right people with diverse backgrounds to help solve the problem and create an environment where they can have debates. This requires an organization to have adopted approaches, such as Socratic questioning, for example.
On the contrary, delegated decisions are narrower in scope and impact. They are frequent and, therefore, should be made by the appropriate management team or leader. It would be a waste of time and resources to bring these types of decisions forward to debate with higher management.
Yet, in most organizations today, hours are spent on these types of decisions. In reality, delegated decisions should be made by the appropriate management team or person and don’t require further input or discussion from the leadership team. Anything different is a waste of expensive leadership time.
Analysis by McKinsey reveals that the opportunity cost of using leadership time ineffectively costs a typical Fortune 500 company 530,000 days of wasted manager time. This is equivalent to approximately $250 million in wages annually.
This should explain why it is vital to have a clear definition of the type of problems and how to delegate them and who should be accountable — having clarity around who is involved in what kind of business problem will eliminate a lot of waste, resources and endless discussions.
Perhaps more importantly, delegation makes empowerment real. It creates a bias for action, increases the response time and authority, but also improves engagement.
Lack of commitment
In many organizations, executives leave a meeting assuming that there was alignment to find out later that nods of agreement or show of hands were not sincere commitments. I experienced many times that despite visible agreement in meetings, some executives would try to change a decision by making the rounds with the CEO or other key leaders after the meeting was over. This behavior should never be tolerated.
In his April 2017 letter to Amazon shareholders, CEO Jeff Bezos introduced the concept of “disagree and commit”. Disagree and commit is a management technique for handling conflict. Expecting and demanding teammates to voice their disagreement is an integral part of this approach. But, once a decision has been made, everyone should commit to it regardless of their perspectives.
Conclusion
Good leaders should be aware of these three failure modes and actively monitor whether or not their organizations suffer from it. There are three actions that leaders can take to make sure that they create a better environment for decision making.
1. Improve strategic clarity and reasoning.
One of the actions that will help increase strategic clarity is arming the employees with a clear understanding of the corporation’s strategy. That means that every employee, no matter what their rank is, should be able to articulate what the organization’s strategy is. They should also be in a position to make a choice and articulate why that choice supports the strategy while another doesn’t. This requires a clear definition of strategy, ample communication to the organization, receiving alignment from the rank and file so that its implementation is successful.
2. Clarify decision categories, authorities, and accountabilities.
Leaders can improve the speed and quality of their decisions by paying more attention to what they are deciding. Successful organizations have a way to categorize the type of decisions and who should be around the table for making those decisions. Authority and accountabilities should be clear to everyone so that the organization can adopt a bias for action. This will also help not wasting time in endless meetings with top leadership whose time is expensive.
3. Build an all-in culture.
Creating an “all-in” culture where disagreement doesn’t inhibit commitment is critical. Leaders should purposefully create a culture where disagreement and dissent is welcome. But when the team commits to a decision, there should be no going back. This will significantly improve retention and engagement as no one wants to work in an organization where post-meeting discussions and questioning commitments are the norm.
The path to better decision making doesn’t need to be complex. It’s a matter of achieving alignment and clarity, untangling the web of accountability, and ensuring that commitments are held sincerely.