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| Guidelines to keep in mind. |
Hello,
The decisions you make as they relate to your organization can have significant impact in both the near and long term, up to and including the very survival of the business itself.
Today's newsletter focuses on the importance of establishing processes for the important ones.
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Regards,
Charlie Goodrich
Founder and Principal
Goodrich & Associates
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A Process Approach to Better Decision-Making
I have talked before about the need for process and the distinction between transaction processes and decision-making processes. Today's newsletter takes a close look at the latter. Decision-making processes are fundamentally about the allocation of resources and the setting of internal and external performance expectations - things like where to invest resources and how much (resources being people, money, time and so forth).
People strive to perform to expectations and those expectations, when met, need to drive an adequate return on those resources. So the consequences of each decision tend to be large. Transaction processes, on the other hand, typically revolve around the sales or procurement cycles; they are fundamentally high in volume and mostly routine. Normally, errors in this area are not too costly. Why have a process for decision-making? When talking about decision processes, we are mostly talking about a series of decisions that must be made, over time, that are largely the same in nature. For example, approving lease renewals for a retailer, capital equipment purchases for a manufacturer, or hiring key executives. Under these circumstances, processes help in a number of ways:- Avoiding recreating the wheel each time. Is the decision to invest in new capital equipment or sign or renew an office lease really that different for each piece of equipment or office lease? Rarely.
- Ensuring that best practices (for your company) are followed.
- Ensuring that learning from prior, similar decisions, is applied and not forgotten.
- Controlling who makes the decision and under what circumstances they are allowed to do so.
Decision-making guidelines to keep in mind Many years ago, during the Larry Bossidy era, I met the corporate director of capital planning at then Allied Signal (now Honeywell). I assumed the director would have a sizable staff to review capital project requests for this very large manufacturing company.
Was I wrong! During Allied Signal's annual operating and strategic planning cycle, major investment programs were reviewed. After that, if the project was under $200MM or so, no further approvals or reviews from corporate were needed. The Group CFOs did have sizable staff that reviewed capital projects and followed up to evaluate how those projects were performing. Further, Allied Signal had a very strong internal audit function that assured senior management of the integrity of each group's financial performance - care had been taken that the Groups were properly staffed to make these decisions, and compensation at the senior group level was strongly weighted to long-term results. Compare this to how my first employer - Container Corporation of America (CCA) - operated. Here, plants would submit detailed write-ups of capital projects in the annual planning process; these then went through detailed review processes. As a financial analyst in the shipping container division, I reviewed numerous projects from approximately 30 plants that were then reviewed by the division controller, etc. Before I got the projects, they had already been reviewed by the plants' general manager, a regional controller, and a regional manufacturing manager. After the division controllers review, the projects were then reviewed by the division general manager. The entire capital plan was then reviewed by the CFO and then CEO. Finally, when it came time to actually initiate the project, the whole process was repeated. Whew, not an efficient approach by any means. All this to say that in making good process decisions, you'll want to keep a number of guidelines in mind:- Consider where in the organization the decision should be made. If a decision is critical for the success or failure of something for which an executive is accountable, that person should make it. In other words, anyone responsible for certain results should be able to make the key decisions that drive those results. (Note, however, that if the costs of a wrong decision are high - too high from the organization's perspective - a senior management review of some form is needed.)
- Establish a formal process to review decisions after the fact, to see how they worked out. Were costs different than expected? Was revenue off the mark? Etc. Most important, learn why these variances occurred so that better decisions can be made in the future.
- If yours is a volatile industry - and you have volatile cash flow as a result - have a senior level go/no go approval processes. Allied Signal was sufficiently diversified and kicked out lots of cash, so funding these projects was not an issue. At CCA, by contrast, cash flow was tied to pricing for our paper mills and therefore very unstable.
- Consider culture as well as control systems. Absent a strong culture of accountability, the process will necessarily need to force review higher up the organization. This applies across the board to processes involved in acquisitions, hiring key talent, establishing large contracts and so forth.
Finally, what about one-off decisions? Well, if the decision is small or inconsequential, wing it. If the decision is major (selling/liquidating the company, hiring a new CEO, etc.), get outside, expert advice to help you frame a process you can use to reach an appropriate conclusion. And remember, advisors advise only. They can't replace you, the final decision maker. The decisions you make as they relate to your organization can have significant impact in both the near and long term, up to and including the very survival of the business itself. Make sure you establish processes for all of these important decisions, sooner rather than later. |
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Please share with your colleagues
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Heard on the Street
Robots are going to steal everyone's jobs. So says just about everyone - except economists. Read the short reason why not, here, as explained by Donald J. Boudreaux, Professor of Economics and Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center, George Mason University.
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About Us
Goodrich & Associates is a management consulting firm. We specialize in helping our business clients solve urgent liquidity 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.
To ensure that you continue to receive emails from us, please add [email protected] to your address book today. Goodrich & Associates respects your privacy. We do not sell, rent, or share your information with anybody. Copyright © 2017 Goodrich & Associates LLC. All rights reserved. For more on Goodrich & Associates and the services we offer, click here.Newsletter developed by Blue Penguin Development |
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