Smart Decision Making – The Role of Results and Intuition in Modern Business
In this interview, I have the distinct honor of interviewing Professor Zeger Degraeve, who is the ‘Sheikh Mohammed bin Rashid Al Maktoum Professor of Innovation, Professor of Decision Sciences’ at London Business School. Not only is Zeger a fascinating individual and an insightful teacher, but also brims with a bountiful supply of energy, zeal and experience. Here we talk about the fundamental issues in today’s business environment…the decisions we face, the results we’re held accountable for…and perhaps a clearer way to approach decision making than just relying on gut feel.
[JJ] We face many decisions on a day to day basis, ranging from personal to business…and from the critical life-changing type to the more mundane. Shouldn’t decisions be judged on the basis of the results they achieve?
[ZD] The result is irrelevant … as a measure of decision quality. People, including managers and business leaders typically equate the quality of a decision with the quality of the result. When people observe a good result they conclude that they made a good decision. Likewise, when a bad result is observed, people conclude that a bad decision was made. This is untrue. Decisions and results are two different things. Time elapses between a decision and the realisation of its result. Decisions are made at a specific moment in time. Afterwards, people implement these decisions and the result is observed in the future. The future is uncertain, there are no facts about the future, and nobody has a crystal ball. In the future, events can happen that managers and organisations cannot control. Also, events can happen that managers could not foresee. Such events can cause good decisions to have a bad result and vice versa. Therefore, the quality of the result is not an indicator of decision quality and the result is irrelevant as a measure of decision (and execution) quality.
[JJ] What is then a measure of decision quality?
[ZD] Decision quality is measured at the moment you make the decision. Decision making is a process. To determine quality in general we need a criterion. So it is for decision quality. There are thousands of criteria in business: profit, cost, ROI, cash, P/E ratio, belonging to the field of Finance; sales volumes, market share, customer satisfaction, belonging to the field of Marketing; inventories, efficiency, quality, belonging to the field of Operations; employee effectiveness, belonging to the field of HR/Organisations, etc. We make decisions in all functional areas in business. The underlying process is the same for making decisions in any functional area in business. That’s why decision making is a generic leadership skill. The criterion results from answering to the question “What are we trying to achieve with this decision?” A second question in a good process of decision making is “What can we feasibly do?” The answer will give the alternatives, actions, choices that the decision makers have. Finally, a third question is “What do we have to watch out for?” The answer to this question leads us to specify the consequences of our possible alternatives. Good decision making requires also relevant and useful information.
Deciding is valuing your alternatives at the moment you have them, on the criteria you have identified and with the best information available at that time. Value is the only justification for your actions in business.
The answers to the questions on Criteria, Alternatives, and Consequences come from the decision makers’ knowledge, understanding, experience, and intuition about the business issues. The Process of Decision Making therefore is a mechanism to leverage the collective knowledge, experience, intuition of a group, team or organisation. It allows this intuition to be discussed, challenged and refined. That’s why we have depicted intuition at the bottom of the decision making pyramid, its foundation. The Process of Decision Making is therefore as follows:
The Process of Decision Making:
I C A C I: Information, Criteria, Alternatives, Consequences, Intuition.
[JJ] What about Experience? Doesn’t this play a big role in decision making?
[ZD] People’s experience is relative. In some situations we have more, in others we have less. Therefore, good decision making requires managers to be humble, recognising the context and ascertaining whether their knowledge, experience, intuition applies more or less … Good decision making starts by recognising that there is no monopoly on wisdom, we can all learn something from each other.
The Process of Decision Making forces us to be reflective, analytical. We all know we have to use process while making decisions. However, how many times do we really do this consciously? Typically, we rather act than reflect. This finds its origins in evolutionary psychology, our survival instinct.
The Process of Decision Making is essentially about effective communication, i.e. the three questions above. As a result of effective communication, the parties involved develop a shared understanding of the issues they are dealing with. This ultimately leads to joint commitment to action, subtly different from agreement which is merely notional.
Joint commitment to action means that if your alternative has not been chosen at the end of a decision process, by virtue of having carried out good process, you have been involved and you will understand that your alternative is also not flawless and that the alternative chosen is not a bad one.
[JJ] How valuable, in your opinion, is Intuition in today’s increasingly complex and rapidly evolving business landscape?
[ZD] Decision Making considers intuition as vital. Intuition is critical, intuition is vital; intuition is what makes us stand out. But all intuition is not equal. Intuition can be a very bad teacher. Intuition is effective when it is informed intuition, intuition developed through experience. Intuition is ineffective if it is not grounded in experience, in areas where we do not have any experience about.
The Process of Decision Making allows us to tap into our intuition, to reveal our intuition, hidden assumptions, and experiences. It leverages our intuition, exposing it, confronting it with other experiences, finally allowing us to question each others intuition. The Process of Decision Making constantly creates opportunities for insight. Aren’t we going to be more effective decision makers if we rely on both process and intuition, rather than relying on any one by itself?
[JJ] Ok…so we’ve established that the quality of results are not the best measure of decision quality. What are the downsides of using results as such a measure?
[ZD] Using the result as a measure of decision quality leads to crisis, ultimately bankruptcy of our organisations. We understand now that it is wrong to use the result as a criterion for decisions, but if it were harmless to do so, then this would not be such a big deal after all. However, assume a great business opportunity arises where a manager makes a good decision but experiences a bad result because of some outside uncontrollable and/or unforeseen event. This manager will typically not be promoted and could even be fired, being blamed for the bad result. By this action, the boss has fired a good decision maker but the boss has done something much worse to the organisation. Clearly, the manager’s colleagues, the team, the division, the whole organisation will soon realise that this manager was unjustly held accountable for the bad result, blamed unjustly. Who else in this organisation will want to take initiatives, make decisions, experiment, and innovate? People will realise that when they have a bad result they will be blamed for it irrespective of process quality. A blame culture for bad results stifles experimentation, innovation, trial and … error. If we do not tolerate failure and error in our business initiatives, we kill trial. Business activity is the primary engine for personal income growth, value creation and societal economic development. A blaming culture has implications beyond the boundaries of our businesses. Our blaming culture prohibits societal growth, development, evolution. Managing to results leads to crisis.
[JJ] If we are not accountable for the result, what then are we accountable for?
[ZD] Of course, we are accountable. But we need to be held accountable for the right things. We need to be held accountable for things under our control, i.e. good process and process quality, not for uncontrollable events.
Conversely, if we just want good results, it is easy to understand that ultimately, any process to achieve good results will do, … even illegal process in the limit … this is the origin of crisis and bankruptcy. Likewise, a manager who achieves an excellent result but in the process of achieving it has de-motivated his team, is clearly not a good leader.
Think of the current economic crisis. Subprime mortgages were driven by banks wanting to do more and more business without carefully looking at the quality of this business, the risks involved in people not being able to repay their mortgages. Almost anybody could get a mortgage. And banks repackaged these loans in CDOs to sell to investors, again doing more and more business without looking at the quality, i.e. the inherent risk associated with such business.
Tools such as Management by Objectives and Balanced Score Card are good. Such management tools answer the question on criteria in the Process of Decision Making. Their proper use is for setting objectives, criteria, and measuring progress on them. However, such tools should not be used for evaluating people working towards the set objectives.
[JJ] The result is not irrelevant … for our organisations, … and for our CEOs.
[ZD] Of course, the result is not irrelevant for our organisations. A company that always makes good decisions, and always is excellent at execution but that always has bad results, will also go bankrupt. The CEO is ultimately responsible for the good results for the organisation, a responsibility to the shareholders who demand good results. Then the question arises: what can companies do to achieve good results?
Companies typically do two things to achieve, on average, better results. One is good process. Managers can learn to become better business executives. They can learn the Process of Decision Making; learn how to be better at execution, also building knowledge, experience, and informed intuition about their business. It is about becoming better, more thoughtful business leaders, becoming more aware, knowing better what they are doing. The other is managing the risk inherent in any single business project, division, product, market, service and delivery channel. Diversification is a way of managing risk inherent in single projects. By having multiple products, markets (globalisation), services and delivery channels, an organisation diversifies its risk. Some projects/businesses will be successful. Others might be less successful and still others might fail. That is also the reason why the CEO can be held responsible for the result. CEOs oversee the whole organisation and their risk is diversified as a result. However, as we go down the organisational hierarchical chain, the divisions, departments, teams and projects become less and less diversified. It is bad CEOs who enforce their responsibility for the result down the organisational hierarchical chain. Isn’t that exactly what many CEOs have been doing, i.e. they need good results, and therefore they have delegated this responsibility to everybody in their organisations. Down the organisational hierarchy, managers are in charge of single products, single markets, a single delivery channel, a single service and, as a consequence, they are exposed to the inherent risk associated with these single business projects. Many CEOs have not understood this very well. It is bad CEOs who do not shield their managers from the risk inherent in their less diversified projects and do not recognise quality of process.
[JJ] So obviously leaders and managers should be judged by the quality of their decisions…not just results. However, how does one measure the quality of results in real life business practice…and what are your suggestions to business leaders in implementing such an approach, especially with regards to compensation structures?
[ZD] Managers get bonuses for good results. Our compensation systems are built around achieving good results. This is simply wrong. It is the wrong use of a bonus to motivate, to encourage managers to achieve good results and reward them for these. If a bonus is used to reward good results, it implies that managers are evaluated on their results, and ultimately they could do anything to achieve such good results, … even illegal process in the limit. The proper use of a bonus is for enjoyment, collective organisational enjoyment of the good fortunes of the organisation if good results happen. Any other use of a bonus is misplaced. However, good managers will in the long run have good results more often than bad managers using wrong process. It is possible that bad managers using wrong process will enjoy good results. But their luck will run out eventually. Therefore, time, i.e. the long run is necessary to evaluate the quality of managers. This is consistent with our earlier observation of diversification because over time, managers will make many, many decisions and take many, many actions such that their decisions and actions are diversified. If they use good process, on average they will experience good results more often than bad results. Organisations should therefore reward on the longer-term performance achievements of managers. This can be done by many means such as promotions to levels of higher responsibility and authority, base salary increases. Ultimately, our career progress and base salaries should reflect our intrinsic quality and the quality of our contributions to our organisations. Controversially, even managers with bad results should be rewarded … if they have used good process.
About Zeger Degraeve
Sheikh Mohammed bin Rashid Al Maktoum Professor of Innovation, Professor of Decision Sciences, and Faculty Director, Dubai Centre at London Business School
Zeger Degraeve is a leading expert in decision-making, operations research and managing project portfolios. An award-winning teacher, he has contributed to executive development programmes in Europe, Africa, Asia, the Middle East and North America for leading businesses including: HSBC, Cadbury Schweppes, Novartis, Rio Tinto, E.on, Carlsberg, Zain/Celtel, Orascom, Dubai Holdings and IBM.
Career experience: After studying at the Universities of Ghent and Leuven, Zeger Degraeve gained his PhD from the Graduate School of Business at the University of Chicago. He was Professor of Management Science in the Department of Applied Economics at the Katholieke Universiteit Leuven in Belgium, before joining London Business School in 1999. Since March 2002 he has served as Associate Dean of the Executive MBA and Executive MBA-Global Programmes, and he has also served as Deputy Dean (Programmes) and a member of the School’s Management Committee. He is an award-winning teacher and contributor to the Accelerated Development Programme and the Senior Executive Programme.
Zeger Degraeve established London Business School’s new centre in Dubai, and since September 2007 he has been the centre’s faculty director. In July 2008, he was appointed Sheikh Mohammed bin Rashid Al Maktoum Professor of Innovation at London Business School. This is in recognition of his innovative work establishing London Business School programmes at a foreign location, a first in the School’s history.
Publications, consultancy and other activities
Alongside his academic career, Zeger Degraeve also provides consultancy support across a range of issues including: operations management, logistics and supply chain management, environmental planning and purchasing strategy development. Recent consultancy clients include the European Commission, Andersen Business Consulting, National Economic Research Associates (NERA) and McKinsey and Co.
Zeger Degraeve’s research has won several awards, including: the Association of the European Operational Research Societies’ (EURO) Prize for Best Applied Paper and the Chairman’s Award for the Best Applied Contributed Paper by INFORM (The Institute For Operations Research and Management). He has published over 50 articles on decision making, optimization, scenario analysis and risk assessment for leading journals, including: Management Science, Operations Research, Journal on Computing, European Journal of Operational Research, Interfaces and Harvard Business Review. He is also a regular speaker at international conferences.
A great short video: