Untangling your organization’s decision making
Any organization can improve
the speed and quality of its decisions by paying more attention to what it’s
deciding.
It’s the best and worst of times for decision makers. Swelling
stockpiles of data, advanced analytics, and intelligent algorithms are
providing organizations with powerful new inputs and methods for making all
manner of decisions. Corporate leaders also are much more aware today than they
were 20 years ago of the cognitive biases—anchoring, loss aversion,
confirmation bias, and many more—that undermine decision making without our
knowing it. Some have already created formal
processes—checklists, devil’s
advocates, competing analytic teams, and the like—to shake up the debate and
create healthier decision-making dynamics.
Now for the bad news. In many large
global companies, growing organizational complexity, anchored in strong
product, functional, and regional axes, has clouded accountabilities. That
means leaders are less able to delegate decisions cleanly, and the number of
decision makers has risen. The reduced cost of communications brought on by the
digital age has compounded matters by bringing more people into the flow via
email, Slack, and internal knowledge-sharing platforms, without clarifying
decision-making authority. The result is too many meetings and email threads
with too little high-quality dialogue as executives ricochet between boredom
and disengagement, paralysis, and anxiety. All this is a recipe for poor
decisions: 72 percent of senior-executive respondents to a McKinsey survey said they thought bad
strategic decisions either were about as frequent as good ones or were the
prevailing norm in their organization.
The ultimate solution for many
organizations looking to untangle their decision making is to become flatter
and more agile, with decision authority and accountability going hand in hand.
High-flying technology companies such as Google and Spotify are frequently the
poster children for this approach, but it has also been adapted by more
traditional ones such as ING. Agile organization models get
decision making into the right hands, are faster in reacting to (or
anticipating) shifts in the business environment, and often become magnets for
top talent, who prefer working at companies with fewer layers of management and
greater empowerment.
As we’ve worked with organizations
seeking to become more agile, we’ve found that it’s possible to accelerate the
improvement of decision making through the simple steps of categorizing the
type of decision that’s being made and tailoring your approach accordingly. In
our work, we’ve observed four types of decisions :
·
Big-bet decisions. These infrequent and high-risk decisions have the
potential to shape the future of the company.
·
Cross-cutting decisions. In these frequent and high-risk decisions, a series
of small, interconnected decisions are made by different groups as part of a
collaborative, end-to-end decision process.
·
Delegated decisions. These frequent and low-risk decisions are
effectively handled by an individual or working team, with limited input from
others.
·
Ad hoc decisions. The organization’s infrequent, low-stakes decisions
are deliberately ignored in this article, in order to sharpen our focus on the
other three areas, where organizational ambiguity is most likely to undermine
decision-making effectiveness.
These decision categories often get
overlooked, in our experience, because organizational complexity, murky
accountabilities, and information overload have conspired to create messy
decision-making processes in many companies. In this article, we’ll describe
how to vary your decision-making methods according to the circumstances. We’ll
also offer some tools that individuals can use to pinpoint problems in the
moment and to take corrective action that should improve both the decision in
question and, over time, the organization’s decision-making norms.
Before we begin, we should
emphasize that even though the examples we describe focus on enterprise-level
decisions, the application of this framework will depend on the reader’s
perspective and location in the organization. For example, what might be a
delegated decision for the enterprise as a whole could be a big-bet decision
for an individual business unit. Regardless, any fundamental change in
decision-making culture needs to involve the senior leaders in the organization
or business unit. The top team will decide what decisions are big bets, where
to appoint process leaders for cross-cutting decisions, and to whom to
delegate. Senior executives also serve the critical functions of role-modeling
a culture of collaboration and of making sure junior leaders take ownership of
the delegated decisions.
Big bets
Bet-the-company decisions—from
major acquisitions to game-changing capital investments—are inherently the most
risky. Efforts to mitigate the impact of cognitive biases on decision making
have, rightly, often focused on big bets. And that’s not the only special
attention big bets need. In our experience, steps such as these are invaluable
for big bets:
·
Appoint an executive
sponsor. Each initiative should have a sponsor,
who will work with a project lead to frame the important decisions for senior
leaders to weigh in on—starting with a clear, one-sentence problem statement.
·
Break things down, and
connect them up. Large, complex decisions often have
multiple parts; you should explicitly break them down into bite-size chunks,
with decision meetings at each stage. Big bets also frequently have
interdependencies with other decisions. To avoid unintended consequences, step
back to connect the dots.
·
Deploy a standard
decision-making approach. The most important
way to get big-bet decisions right is to have the right kind of interaction and
discussion, including quality debate, competing scenarios, and devil’s
advocates. Critical requirements are to create a clear agenda that focuses on
debating the solution (instead of endlessly elaborating the problem), to
require robust prework, and to assemble the right people, with diverse
perspectives.
·
Move faster without losing
commitment. Fast-but-good decision making also
requires bringing the available facts to the table and committing to the
outcome of the decision. Executives have to get comfortable living with
imperfect data and being clear about what “good enough” looks like. Then, once
a decision is made, they have to be willing to commit to it and take a gamble,
even if they were opposed during the debate. Make sure, at the conclusion of
every meeting, that it is clear who will communicate the decision and who owns
the actions to begin carrying it out.
An example of a company that does
much of this really well is a semiconductor company that believes so much in
the importance of getting big bets right that it built a whole management
system around decision making. The company never has more than one person
accountable for decisions, and it has a standard set of facts that need to be
brought into any meeting where a decision is to be made (such as a problem
statement, recommendation, net present value, risks, and alternatives). If this
information isn’t provided, then a discussion is not even entertained. The CEO
leads by example, and to date, the company has a very good track record of
investment performance and industry-changing moves.
It’s also important to develop
tracking and feedback mechanisms to judge the success of decisions and, as needed,
to course correct for both the decision and the decision-making process. One
technique a regional energy provider uses is to create a one-page
self-evaluation tool that allows each member of the team to assess how
effectively decisions are being made and how well the team is adhering to its
norms. Members of key decision-making bodies complete such evaluations at
regular intervals (after every fifth or tenth meeting). Decision makers also
agree, before leaving a meeting where a decision has been made, how they will
track project success, and they set a follow-up date to review progress against
expectations.
Big-bet decisions often are easy to
recognize, but not always . Sometimes a series of decisions that might appear
small in isolation represent a big bet when taken as a whole. A global
technology company we know missed several opportunities that it could have
seized through big-bet investments, because it was making
technology-development decisions independently across each of its product
lines, which reduced its ability to recognize far-reaching shifts in the
industry. The solution can be as simple as a mechanism for periodically
categorizing important decisions that are being made across the organization,
looking for patterns, and then deciding whether it’s worthwhile to convene a
big-bet-style process with executive sponsorship. None of this is possible,
though, if companies aren’t in the habit of isolating major bets and paying
them special attention.
Cross-cutting decisions
Far more frequent than big-bet
decisions are cross-cutting ones—think pricing, sales, and operations planning
processes or new-product launches—that demand input from a wide range of
constituents. Collaborative efforts such as these are not actually single-point
decisions, but instead comprise a series of decisions made over time by
different groups as part of an end-to-end process. The challenge is not the
decisions themselves but rather the choreography needed to bring multiple
parties together to provide the right input, at the right time, without
breeding bureaucracy that slows down the process and can diminish the decision
quality. This is why the common advice to focus on “who has the decision” (or,
“the D”) isn’t the right starting point; you should worry more about where the
key points of collaboration and coordination are.
It’s easy to err by having too
little or too much choreography. For an example of the former, consider the
global pension fund that found itself in a major cash crunch because of
uncoordinated decision making and limited transparency across its various
business units. A perfect storm erupted when different business units’
decisions simultaneously increased the demand for cash while reducing its
supply. In contrast, a specialty-chemicals company experienced the pain of
excess choreography when it opened membership on each of its six governance
committees to all senior leaders without clarifying the actual decision makers.
All participants felt they had a right (and the need) to express an opinion on
everything, even where they had little knowledge or expertise. The purpose of
the meetings morphed into information sharing and unstructured debate, which
stymied productive action .
Whichever end of the spectrum a
company is on with cross-cutting decisions, the solution is likely to be
similar: defining roles and decision rights along each step of the process.
That’s what the specialty-chemicals company did. Similarly, the pension fund
identified its CFO as the key decision maker in a host of cash-focused decisions,
and then it mapped out the decision rights and steps in each of the
contributing processes. For most companies seeking enhanced coordination,
priorities include:
·
Map out the decision-making
process, and then pressure-test it. Identify
decisions that involve a cross-cutting group of leaders, and work with the
stakeholders of each to agree on what the main steps in the process entail. Lay
out a simple, plain-English playbook for the process to define the calendar,
cadence, handoffs, and decisions. Too often, companies find themselves building
complex process diagrams that are rarely read or used beyond the team that
created them. Keep it simple.
·
Run water through the
pipes. Then work through a set of real-life
scenarios to pressure-test the system in collaboration with the people who will
be running the process. We call this process “running water through the pipes,”
because the first several times you do it, you will find where the “leaks” are.
Then you can improve the process, train people to work within (and, when
necessary, around) it, and confront, when the stakes are relatively low,
leadership tensions or stresses in organizational dynamics.
·
Establish governance and
decision-making bodies. Limit the number of
decision-making bodies, and clarify for each its mandate, standing membership,
roles (decision makers or critical “informers”), decision-making protocols, key
points of collaboration, and standing agenda. Emphasize to the members that
committees are not meetings but decision-making bodies, and they can make
decisions outside of their standard meeting times. Encourage them to be
flexible about when and where they make decisions, and to focus always on
accelerating action.
·
Create shared objectives,
metrics, and collaboration targets. These
will help the persons involved feel responsible not just for their individual
contributions in the process, but also for the process’s overall effectiveness.
Team members should be encouraged to regularly seek improvements in the
underlying process that is giving rise to their decisions.
Getting effective at cross-cutting
decision making can be a great way to tackle other organizational problems,
such as siloed working . Take, for example, a global finance company with a
matrix of operations across markets and regions that struggled with
cross-business-unit decision making. Product launches often cannibalized the
products of other market groups. When the revenue shifts associated with one
such decision caught the attention of senior management, company leaders formalized
a new council for senior executives to come together and make several types of
cross-cutting decisions, which yielded significant benefits.
Delegated decisions
Delegated decisions are far
narrower in scope than big-bet decisions or cross-cutting ones. They are
frequent and relatively routine elements of day-to-day management, typically in
areas such as hiring, marketing, and purchasing. The value at stake for
delegated decisions is in the multiplier effect they can have because of the
frequency of their occurrence across the organization. Placing the
responsibility for these decisions in the hands of those closest to the work
typically delivers faster, better, and more efficiently executed decisions,
while also enhancing engagement and accountability at all levels of the
organization.
In today’s world, there is the
added complexity that many decisions (or parts of them) can be “delegated” to
smart algorithms enabled by artificial intelligence. Identifying the parts of
your decisions that can be entrusted to intelligent machines will speed up
decisions and create greater consistency and transparency, but it requires
setting clear thresholds for when those systems should escalate to a person, as
well as being clear with people about how to leverage the tools effectively.
It’s essential to establish clarity
around roles and responsibilities in order to craft a smooth-running system of
delegated decision making . A renewable-energy company we know took this task
seriously when undergoing a major reorganization that streamlined its senior
management and drove decisions further down in the organization. The company
developed a 30-minute “role card” conversation for each manager to have with
his or her direct reports. As part of this conversation, managers explicitly
laid out the decision rights and accountability metrics for each direct report.
This approach allowed the company’s leaders to decentralize their decision
making while also ensuring that accountability and transparency were in place.
Such role clarity enables easier navigation, speeds up decision making, and
makes it more customer focused. Companies may find it useful to take some of
the following steps to reorganize decision-making power and establish
transparency in their organization:
·
Delegate more decisions. To start delegating decisions today, make a list of the
top 20 regularly occurring decisions. Take the first decision and ask three
questions: (1) Is this a reversible decision? (2) Does one of my direct reports
have the capability to make this decision? (3) Can I hold that person
accountable for making the decision? If the answer to these questions is yes,
then delegate the decision. Continue down your list of decisions until you are
only making decisions for which there is one shot to get it right and you alone
possess the capabilities or accountability. The role-modeling of senior leaders
is invaluable, but they may be reluctant. Reassure them (and yourself) by
creating transparency through good performance dashboards, scorecards, and key
performance indicators (KPIs), and by linking metrics back to individual
performance reviews.
·
Avoid overlap of decision
rights. Doubling up decision responsibility
across management levels or dimensions of the reporting matrix only leads to
confusion and stalemates. Employees perform better when they have explicit
authority and receive the necessary training to tackle problems on their own.
Although it may feel awkward, leaders should be explicit with their teams about
when decisions are being fully delegated and when the leaders want input but
need to maintain final decision rights.
·
Establish a clear
escalation path. Set thresholds for decisions that
require approval (for example, spending above a certain amount), and lay out a
specific protocol for the rare occasion when a decision must be kicked up the
ladder. This helps mitigate risk and keeps things moving briskly.
·
Don’t let people abdicate. One of the key challenges in delegating decisions
is actually getting people to take ownership of the decisions. People will
often succumb to escalating decisions to avoid personal risk; leaders need to
play a strong role in encouraging personal ownership, even (and especially)
when a bad call is made.
This last point deserves
elaboration: although greater efficiency comes with delegated decision making,
companies can never completely eliminate mistakes, and it’s inevitable that a
decision here or there will end badly. What executives must avoid in this
situation is succumbing to the temptation to yank back control (Exhibit 7). One
CEO at a Fortune 100 company learned this lesson the hard way. For many years,
her company had worked under a decentralized decision-making framework where
business-unit leaders could sign off on many large and small deals, including
M&A. Financial underperformance and the looming risk of going out of
business during a severe market downturn led the CEO to pull back control and
centralize virtually all decision making. The result was better cost control at
the expense of swift decision making. After several big M&A deals came and
went because the organization was too slow to act, the CEO decided she had to
decentralize decisions again. This time, she reinforced the decentralized
system with greater leadership accountability and transparency.
Instead of pulling back decision
power after a slipup, hold people accountable for the decision, and coach them
to avoid repeating the misstep. Similarly, in all but the rarest of cases,
leaders should resist weighing in on a decision kicked up to them during a
logjam. From the start, senior leaders should collectively agree on escalation
protocols and stick with them to create consistency throughout the organization.
This means, when necessary, that leaders must vigilantly reinforce the
structure by sending decisions back with clear guidance on where the leader
expects the decision to be made and by whom. If signs of congestion or
dysfunction appear, leaders should reexamine the decision-making structure to
make sure alignment, processes, and accountability are optimally arranged.
None of this is rocket science.
Indeed, the first decision-making step Peter Drucker advanced in “The effective decision,” a 1967 Harvard Business
Review article, was “classifying the problem.” Yet we’re struck, again
and again, by how few large organizations have simple systems in place to make
sure decisions are categorized so that they can be made by the right people in
the right way at the right time. Interestingly, Drucker’s classification system
focused on how generic or exceptional the problem was, as opposed to questions
about the decision’s magnitude, potential for delegation, or cross-cutting
nature. That’s not because Drucker was blind to these issues; in other writing,
he strongly advocated decentralizing and delegating decision making to the
degree possible. We’d argue, though, that today’s organizational complexity and
rapid-fire digital communications have created considerably more ambiguity
about decision-making authority than was prevalent 50 years ago. Organizations
haven’t kept up. That’s why the path to better decision making need not be long
and complicated. It’s simply a matter of untangling the crossed web of
accountability, one decision at a time.
http://www.mckinsey.com/business-functions/organization/our-insights/untangling-your-organizations-decision-making?cid=other-eml-alt-mkq-mck-oth-1706&hlkid=58f8ec3b737641baa2500ca18d10e0a7&hctky=1627601&hdpid=1159abee-cf16-4c8c-b8a5-b38463d1c4ee
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