How Well Do You Decide?

Taking a methodical approach to improving decision making can boost revenue, shareholder return, and return on invested capital.
David McCannOctober 7, 2010

No executive would argue with the notion that a company’s ability to effectively make and execute decisions is a cornerstone driver of performance.

But most, when asked just how adept they are in this area, admit they simply don’t know, says Michael Mankins, a partner with management-consulting firm Bain & Co. “Any response to the question would be inherently relative,” he says. “Unless you know how good other companies are at decisions, how can you gauge your own effectiveness?”

Providing that context was part of the motivation for a Bain survey of 760 executives and a new book, Decide and Deliver (Harvard Business Review Press), co-written by Mankins. He will present the research findings and advice for improving decision effectiveness at the upcoming CFO Rising West conference, to be held October 24-27 in Las Vegas.

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Bain asked respondents to rate their company’s skill in four dimensions of decision making and execution:

• Quality of decisions: with the benefit of hindsight, what percentage of the time have you chosen the right course of action?

• Speed: do you make critical decisions faster or slower than your competitors?

• Yield on decisions: what percentage of the time do you execute critical decisions as intended?

• Effort (the time, trouble, and expense to make and execute decisions): do you feel you’re putting in the right amount of effort, too much, or too little?

Michael Mankins

Answers to the questions resulted in a “decision score” for each company. The research results, viewed in the aggregate, demonstrate strong correlations between each of the four dimensions and company performance. Compared with other companies, those in the top quintile of decision scores provided five to six percentage points greater shareholder return, return on invested capital, and revenue growth.

The correlations hold firm across all geographic areas, industries, and company sizes, says Mankins. However, the four decision dimensions do not carry equal weight from industry to industry. For example, in the aerospace business, a company may have to live with the result of a poor-quality business for decades, while for a technology firm, speed may be as important as quality. And in retail, the execution of decisions matters more than either quality or speed.

Using the top quintile for comparison purposes is meaningful because those companies have an average decision score of 71, compared with 28 for the others. Consequently, average companies in the bottom four quintiles could realistically improve their decision effectiveness by 2.5 times, the book points out.

Bain was mindful that because the research was based on self-reported assessments, the findings could be subject to the “halo effect,” meaning that people who work for companies with strong financial results, for example, might report better performance in other areas as well, such as decisions. But the firm found that most companies didn’t score uniformly well in all four areas of decision effectiveness, a different result from what would have been expected had the halo effect been significant.

Clients often ask Bain whether there are trade-offs among decision quality, speed, yield, and effort, the authors write. For example, if you push too hard to make decisions faster, won’t you end up making poorer-quality decisions? But the research found that the companies that make decisions fastest are actually four times as likely to make high-quality decisions as are those with average or low speed scores.

Bain also found a strong correlation between decision effectiveness and what it calls “organizational health.” To gauge the latter, the survey asked participants to rate the extent of their agreement with statements such as “people understand their priorities clearly enough to be able to make and execute the decisions they face” and “our culture reinforces prompt, effective decisions and action.”

The book outlines a five-step process for improving decision effectiveness. The first step is to assess your decision effectiveness and how your organization affects it by creating scorecards, taking the same approach Bain took with its survey questions.

The second step is to identify the relatively small number of critical decisions that probably drive 80% of the company’s value. Those include not only major strategic choices but also daily operational decisions that cumulatively create (or destroy) great value.

Third is to redesign individual critical decisions for success. Does everyone understand what the decision is? Are procedures for decision making and execution well defined and understood? Does everyone know the timetable?

The fourth step is to align the organization to support decisions. “Fixing individual decisions is a start, but it rarely solves the whole problem,” the authors write. Sometimes the organizational structure makes it impossible for decision makers to act quickly. Other times the style of decision making — too much emphasis on consensus, for example — slows things down.

The final step is to embed the changes in everyday practice. This step isn’t sequential: once a company is on the path to decision effectiveness, it may find all kinds of ways to celebrate good decisions, reward those responsible, and create tools for redesigning individual decisions.