January 2020 Vol. 9 No. 1
charlie goodrich

If you’ve been reading this newsletter for a while, you know that I lean heavily towards the analytical: data, facts, planning, etc. In practice, unfortunately, those are not always available in sufficient quality or quantity.

In those situations - when analysis is not enough to make a wise decision - gut feel plays an important role.
Please respond with your thoughts and comments,
Charlie Goodrich
Founder and Principal
Goodrich & Associates
In this issue…
Gut feel… What It Is, When and How to Use It
Heard On The Street
About Us
Gut feel… What It Is, When and How to Use It
Many years ago, a highly acclaimed former boss of mine made the following statement:

“When I got my engineering degree, I learned how to draw a straight line with at least 30 data points and regression analysis. When I got my MBA, I learned how to draw a line with just two data points. When I became a management consultant, I learned to draw a line (even curves) with just one data point. Now that I am a general manager, I can do it all with gut feel.”

Gut feel matters. But what is it and why is it important?

Gut feelings are those thoughts that come quickly to mind; they tell you what needs to be done, even if you can’t explain why. It’s your subconscious at work, pulling together all the information tucked inside your brain — information that you either don’t have time to recall or simply can’t consciously extract. Some of it is hardwired from eons of evolution. The rest is the result of our life experiences.

When should we use gut feel?  When analysis is not sufficient to make a good decision. Typically, that occurs when:

  1. There is insufficient time to do analysis;
  2. There is insufficient data;
  3. There is uncertainty, as opposed to risk.

In my crisis management assignments, I rely on gut feelings often, particularly those of my client. Will that stretched vendor keep shipping, or is the vendor at the breaking point and will they soon refuse to ship without payment? When will a key customer likely pay a large invoice? And, I use my gut feel to judge if management is too scared or too optimistic on these calls.

Uncertainty Vs. Risk

Risk is when the odds of an outcome can be calculated. That means we must know all the probabilities, all the possible outcomes, and all the consequences of those outcomes. That rarely is the case.  So, most “risk” analysis will be helpful, but still insufficient, for decision making purposes. It’s always insufficient when projecting the future, because there is no assurance the future will be like the past.

Of course, in some circumstances, uncertainty may be infinitesimal. For example, when projecting that the same collection of chemicals will react the same way, time after time.

But in business, that level of sureness is the exception. When life and people are involved, there is always huge variation and a lack of analytical predictability. Gut feelings help a lot here; it’s not so much “yes” or “no” as it is a matter of degree.

[For more on uncertainty vs. risk, read our previous newsletter, here .]

Tips On Using Gut Feel

Depending on timing and other limitations, not all of the following may be practical. Consider implementing those that are…

Don’t be afraid to use gut feel.

If you don’t use it, you are ignoring lots of information buried in your brain, even if you can’t consciously process it. But gut feel starts with evidence of some sort; something triggers it, after all. And yes, that means the longer you have been around, the more experiences you have stored, and the more useful gut feel will be.

Think about why you have this gut feeling.

Then probe and rationally confirm. This can be a useful way to narrow down a conscious analytical decision process or, as a starting point for further analysis. Even if our initial hypothesis is flat out wrong, quite a bit can be learned by chasing it down.

Test your gut feelings.

Look for concurring evidence. If possible, make a projection based on these gut feelings and then see if you are right. Then learn why. At this point, you will have pulled your subconscious thoughts into the conscious, testable and learnable realm.

The higher the degree of uncertainty, the more you should rely on gut feel.

For example, a new client of mine is a private manufacturing company that takes a commodity, runs it through a simple process, bags it and sells it.

Initially, I learned that when the company takes its physical inventory, it adjusts the final count to an agreed upon number between management and a company advisor. Perpetual versus actual variances are as much as 50%! What?! But when I dug in, I found that the inventory measurement system is very imprecise — best case, it’s plus or minus 15% of what is counted. Next, I learned that the inventory usage (what comes out of the perpetual inventory) is based on a very small sample with a very imprecise measurement. Yes, some data is used. But not enough, and what they have is not satisfactory.

So, what is one to do? Better measurement of everything involved with this commodity is needed, of course. And while it’s true that this situation shouldn’t exist, how different is it really from the last tough, unstructured problem you faced? There may be limited and bad data, but a decision of some sort must be made today. At that point, it’s time to lean on gut feel more than shaky data.

The more a decision involves people, the more you should rely on gut feel.

People and the way they behave are not very quantifiable. For example, when I was in the rent a car business, I had to transition the organization from a decentralized, area-based business to a centralized, region-based one. And I had to move fast. We were losing far more than our shirts and the finance and accounting organization in the field had largely imploded.  There was no time to plan a detailed regionalization process.

So, I winged it, based in large part on gut feel. There was a lot of resistance (there always is with significant change) and I didn’t have the luxury of pausing, investigating, and analyzing the objections in depth. We were moving so fast that we could have easily ran over a cliff and had our “Road Runner” moment. But we never did. Several reasons why, but mostly because I relied on my gut feelings on whether the objections to change were valid or not. It worked.  The years of driving organizational change paid off with reliable “gut calls.”

Give Gut Feel Its Due

If you’ve been reading this newsletter for a while, you know that I lean heavily towards the analytical: data, facts, planning, etc. In practice, unfortunately, those are not always available in sufficient quality or quantity.

Gut feelings may be “soft,” but when based on wisdom and experience acquired over years and decades, they play an important role in guiding smart business decisions.
Heard on the Street
What is going on now between the United States and Iran, and what will likely happen in the near future?

Read a short analysis by George Friedman, founder of Geopolitical Futures, here.
About Us
Goodrich & Associates is a management consulting firm. We specialize in restructuring and insolvency problems. Our Founder and Principal, Charlie Goodrich, holds an MBA in Finance from the University of Chicago and a Bachelor's Degree in Economics from the University of Virginia, and has over 30 years experience in this area.

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