From McKinsey Quarterly, June 2017
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 biasesanchoring, loss aversion, confirmation bias, and many morethat undermine decision making without our knowing it. Some have already created formal processeschecklists, devil's advocates, competing analytic teams, and the liketo shake up the debate and create healthier decision-making dynamics.
Exhibit 1 [see above]
Growing organizational complexity and proliferating digital communications are a recipe for poor decisions.
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 (for more, see our recent McKinsey Quarterly interview "ING's agile transformation"). As we've described elsewhere, 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.
The ABCDs of categorizing decisions.
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 betsBet-the-company decisionsfrom major acquisitions to game-changing capital investmentsare 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:
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.
Big-bet decisions often are easy to recognize, but not always (Exhibit 3). 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.
A belated heads-up means you are not recognizing big bets.
Far more frequent than big-bet decisions are cross-cutting onesthink pricing, sales, and operations planning processes or new-product launchesthat 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 (Exhibit 4).
Too many cooks get involved in the absence of processes for cross-cutting decisions.
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:
When you are locked in silos, you are unlikely to collaborate effectively on cross-cutting decisions.
Delegated decisionsDelegated 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.
Drawn-out and complicated processes often mean more delegating is needed.
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.
Top-heavy processes often mean more delegating is needed.
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.
Aaron De Smet is a senior partner in McKinsey's Houston office, Gerald Lackey is an expert in the Washington, DC, office, and Leigh Weiss is a senior expert in the Boston office.