The study of decision-making has been with us for over 2,500 years, arguably starting with Confucius who said that decisions should be informed by benevolence, ritual, reciprocity and filial piety. Things became more scientific in the sixteenth century when Blaise Pascal and Pierre de Fermat developed the concept of calculating probabilities for chance events. This was followed by Carl Gauss in the seventeenth century who developed a structure for understanding the occurrence of random events. But it wasn’t until the introduction of computing for management information systems in the late 1960’s that the concept of decision-support in the business world took off.
Today, Business Intelligence is a term applied to any kind of system that helps managers make decisions – with the aim of those decisions resulting in the best performance that can be obtained. But herein lies the dilemma – what is the best performance in any given situation and how does an organisation know if it is obtainable?
Most people – and in fact most organisations - would judge the quality of a decision solely by its outcome, which doesn’t make sense. For example, would you advise someone to put everything they had onto Red 36 on a roulette table? If the number came up would that be a good decision? What if the ball fell into Black 35 and the person lost everything, would the same course of action now be a bad decision? In this example, the decision is probably a bad one irrespective of the outcome. The reverse can also be true in that bad decisions can result in great outcomes.
To make matters more confusing, a recent study entitled ‘The End of Rational Economics’ concludes that the recent financial crisis was caused by people making irrational decisions based on bad assumptions motivated by cognitive biases. The author Dan Ariely Professor of Behavioural Economics at Duke University, goes on to say that multiple experiments show that human beings are incapable of making good decisions as we are emotional, myopic and easily confused and distracted!
However, this doesn’t mean we should give up trying to make good decisions. Instead, based on our knowledge of our irrationality, organisations should develop systems and processes that try to negate those irrational tendencies.
Professor Marc Buelens, Doctor in Industrial Psychology at Ghent University, comments that although organisations can’t judge a decision based on its outcomes, they can judge the quality of the decision-making process, the depth and breadth of content and the quality of alignment with values and strategy.
So with this in mind, “good decisions” are based on the following traits:
Good decision’s are based on context
To start with, organisations need to decide on what needs to be decided and who should take those decisions. This should be outlined in an organisation’s strategic plan that includes objectives, the values that guide the organisation, the ways in which those objectives are to be achieved, timescales and milestones that are envisaged, those responsible for success, and the risks and assumptions being made about the marketplace. (For more detail on this see our recent FSN article on ‘How good is your strategic plan’)
It is only when this information is presented in the context of the decision being made that realistic decisions can be formulated. To get the best decision, organisations should look to develop multiple scenarios and then challenge and compare those alternative courses of action, so that the most promising, according to the organisation’s risk appetite, can be adopted.
Good decision’s are well executed
It is often said that a good decision executed quickly beats a brilliant decision implemented slowly. For decisions to mean anything they need to be communicated and executed in a timely matter. But so often decisions do not get through this phase.
A survey conducted by Marakon Associates found that, on average, only 50 - 60% of the potential within a strategic plan is delivered with the under performance being put down to a breakdown in planning or execution. Notice that the blame wasn’t attributed to the decisions made but rather to the fact that the decisions were not executed.
To execute well means that people need to understand their role – what it includes and what it doesn’t include; have the resources available to carry out that role; and receive compensation on the completion of their role and the objective it supports.
Good decision’s require continuous feedback and adjustment
One thing that is sure about any plan is that they rarely work exactly as planned. Assumptions about the marketplace could be wrong, customers may not react as expected and the organisation’s ability to perform may be impaired by other operations. All of which can change the landscape in which the decision was taken.
So it’s vital that all aspects of the plan are monitored, and just as in the same way as when driving a car we make constant course corrections to arrive at our chosen destination, so it is with the actions that support decisions.
The role of technology
Technology has a key role to play. Technology by itself cannot make informed decisions – systems can only summarise and present information that’s been given, but it can do that quickly and help surface trends and variances that would otherwise remain hidden.
Technology systems need to be configured to put the relevant data for any decision into context. This can take the form of a strategy map that shows the relationship between individual roles and corporate objectives along with associated KPI’s. To this managers can develop action plans to meet given milestones and submit expense and other resource plans needed to implement them.
From this, executives can assess the impact of different scenarios on projected financial statements to support decisions.
Once made, technology can track the progress of decision-based activities and show how these affect current and forecast outcomes, which in turn can be used as the basis for making adjustments.
Technology’s role is to ‘track the facts’ before and after decisions are made to help reduce the effect of irrational behaviour.
Source: FSN
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