June 2000 Making Better Decisions Faster Does your organization need a Chief Decisions Officer? By Ralph L. Keeney Executives and managers in companies from Internet startups to multinational corporations know it. In today's world, you need to make better decisions faster in order to survive and prosper. The bad news is this isn't easy; the good news is you can definitely achieve it. How? By following six important guidelines: 1. Commit to improving decision-making. You must decide that it is worth the effort to develop and implement a strategy to improve your organization's decision-making. It often is. Why? Because the only way that you exercise any control over your future is through the decisions that those in your organization make and implement. These decisions influence, to the extent you can, whether your organization will prosper or fail, whether you have fun or pray for retirement. Merely tweaking some aspects of your current decision-making processes will not significantly improve decision-making. A complete strategy is needed. First, thoroughly understand how decisions are currently made in your organization. Conduct a decision audit. This should indicate what decisions are made well and why, what decisions are made poorly and why, and what decisions are made too slowly and why. 2. Create a lean decision-making style. You want to promote a decision-making style in your organization that fosters quick, good decision-making. Clarify who is responsible for each decision. Whenever possible, an individual rather than a group should be responsible. If a group is responsible, limit the size of the group. In addition, specify how the group will make the choice (e.g. by majority vote). Do not require a consensus on what alternative is best. Rather, allow differences in opinions and preferences to be expressed to utilize the best judgment of each group member. Then, seek consensus on what choice should be followed given the individual opinions. The appropriate resources — not too little or too much — should be available for each decision. These resources include who should work on the decision and the time and money available. A date should be set for when the decision should be finalized. The final decision should be documented and signed by the individual responsible. 3. Recognize and reward good decisions. Everyone in an organization needs to understand that a good decision does not necessarily lead to a good outcome. The reason is due to circumstances beyond your control. Even though your Florida distribution center was destroyed by a hurricane, it was not necessarily a poor decision to locate the center there. Indeed, the chance of such an event may have been explicitly considered in selecting that location. An organization should reward good decision-making. When a major hotel chain began to recognize exemplary service by employees with $500 rewards, good service rapidly increased. Recognizing good decisions throughout an organization would have a similar effect. In addition, be sure to avoid penalizing someone just because of a poor outcome. Individuals in many insurance companies make the choice not to settle a lawsuit if the settlement costs are felt to be "too much." Even so, sometimes the company loses the case in trial. One major company required each individual who lost such a case to travel to corporate headquarters to explain their "poor choice." As a result, plaintiff's attorneys generally felt that they could get 10 percent more in a settlement from this company. If individuals are penalized because of widely acknowledged "bad-luck" outcomes, over-conservatism will occur and many poor decisions will result in the future. 4. Facilitate the learning of fundamental decision-making skills. Psychologists have uncovered many ways that our minds play tricks on us as we make decisions. We tend to anchor our thoughts on things we know well or on information that easily comes to mind. We are essentially programmed to think in the box where we are anchored. The problem is that the box is often much too small. By understanding these psychological traps and developing skills to avoid them, we can greatly enlarge the box in which we do our thinking. Decision-making is a skill that can be learned and improved by study and practice. An organization should promote training courses and workshops that include: How to make an informed choice by breaking any decision into its elements: objectives, alternatives, consequences, uncertainties, tradeoffs and risk tolerance [1]. How to gather information for each of these elements (e.g. set objectives, create alternatives, make tradeoffs). Documented examples of both good decision-making and poor decision-making. Psychological traps that afflict decision-makers. It is through learning and understanding that we can avoid our past mistakes and enhance the likelihood of excelling at decision-making in the future. 5. Acquire necessary information before specific decision problems arise. You take a first aid kit on a hike to be prepared and save time in dealing with many, not all, medical problems. If you had a decision-aid kit, you could prepare for possible future decisions and make them more quickly when they occur. You can create such a kit. Most decisions in an organization are made to achieve the same overall objectives. Articulate your organization's objectives ahead of time. Use them to focus quickly on any decision: create better alternatives and appraise how well each achieves your objectives. An organization should specify its risk tolerance for profits and/or costs. In a recent workshop on decision-making for a blue chip organization, I asked the following question: You can choose an innovative but risky alternative for a certain business practice or retain the current alternative. The new alternative has a 50% chance of failing. If it fails, you will switch back to the current alternative and have lost $10 million in the process. If the innovative alternative succeeds, you will save money. How much money do you need to save in order to be indifferent between the two alternatives? The responses of approximately 40 managers ranged from $10 million to $100 million. If people in your organization made decisions consistent with these preferences, one manager would turn down a 50-50 chance at saving $60 million and losing $10 million, and another manager would accept a 50-50 chance of saving $12 million and losing $10 million. From a corporate viewpoint, making decisions this way doesn't make sense. Instead, specify your corporate risk tolerance as a policy stating, for instance, that a 50-50 chance of losing $10 million and saving $15 million is indifferent to no change in costs. Then, make better decisions more quickly by using this policy. Many decisions in an organization depend on the same critical tradeoff between, for example, profits in the short term and market share at the end of the term. Make this tradeoff specific and use it consistently. A few years ago, American Express quantified their preferences over the net present value of profits for the next three years and market shares in both the travel card and charge card markets. The results were used to evaluate customer acquisition strategies [2] and may have contributed to the first gain in market share for American Express in 10 years [3]. 6. Be smart in addressing specific decisions. For an important decision, outline how it should be made and allocate resources to make it. Then appropriately frame the decision by listing the specific objectives that you hope to achieve. Use these objectives to stimulate the development of a broad set of alternatives. Then do a quick "fire drill" appraisal of each of the alternatives. "Quick" here means within an hour or two in most cases. This kind of analysis, based on many assumptions and judgments, might indicate your best choice. If not, it should indicate where additional time and effort is worthwhile. More time is wasted gathering unnecessary information than on any other aspect of decision-making. Recognize that information is valuable in decision-making only if it helps you choose. If a million dollar, six-month study of the environmental contamination of competing sites could not affect your decision of where to locate a research facility, that information is useless to help make your siting decision. Whether the chosen site is contaminated may affect your cost of developing at the site, but that isn't the decision. So much effort is often focused on identifying the best alternative that we fail to recognize that it is frequently more important to identify the poor alternatives. In any decision process, eliminate inferior alternatives as soon as you can and focus on the real contenders. If you have 15 alternatives and 12 are readily identified as inferior to at least one other alternative, eliminate them. Then, which of the better three is chosen may not matter much. If your organization is always choosing among the better alternatives, though sometimes not picking the best, your organization would be doing remarkably well overall. A Comment on Implementation Ensuring that all the people who make decisions in an organization follow the six guidelines outlined in this article is clearly a major task. Who should have the responsibility for making it happen? In some sense, everybody in the organization should. But as indicated above, it's important to have an individual with the ultimate responsibility. Perhaps that individual should be a Chief Decisions Officer (CDO), a person charged with ensuring decision quality throughout the organization. I know of no company with exactly such a title, but some companies have individuals who play such a role. ICE Wireless, a new Internet firm, faces many decisions of young firms: obtaining customers, who to partner with, attracting and selecting funding. As vice president of Decision Science at ICE Wireless, part of my role is to help us all follow the guidelines above. I mention this because I try to practice what I preach and help others in our organization do the same. References Hammond, J.S., R.L. Keeney, and H. Raiffa, Smart Choices: A Practical Guide to Making Better Decisions, 1999, Harvard Business School Press, Boston, Massachusetts Keeney, R.L. and Q. Lin, 2000, "Evaluating Customer Acquisitions Using Multiple Objectives," Interfaces, 30, to appear. Frank, S.E., 1997, "American Express Credit-Card Share Increased to 18.9% in First-Half of Year," The Wall Street Journal, September 22, pp. A3. Ralph L. Keeney (KeenyR@aol.com) is a professor at the Center for Telecommunications Management at the University of Southern California and the vice president of Decision Science at ICE Wireless (icewireless.com) in San Francisco. Table of Contents OR/MS Today Home Page OR/MS Today copyright © 2000 by the Institute for Operations Research and the Management Sciences. All rights reserved. Lionheart Publishing, Inc. 506 Roswell Street, Suite 220, Marietta, GA 30060, USA Phone: 770-431-0867 | Fax: 770-432-6969 E-mail: lpi@lionhrtpub.com URL: http://www.lionhrtpub.com Web Site © Copyright 1999, 2000 by Lionheart Publishing, Inc. All rights reserved.