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Making Judgment Calls

By Thomas H. Davenport and Brook Manville

More often than any of us might care to admit, the course of human affairs relies on great judgment.

Even in this age of abundant data and rocket-science analytics, many decisions force people to draw on their accumulated wisdom to make the right call. Sometimes that's because the absolute right answer can't be known; the question at hand relates to a future too full of uncertainty. Other times, the optimal solution could be determined based on accessible information, but the urgency of the situation means it can't be assembled in time. In still other cases, conflicting values come into play and the trade-offs defy easy quantification.

As societies and their organizations experience ever-accelerating rates of change, we suspect all these conditions will apply more often, and more decisions than ever will come down to judgment calls.

The question is, how can we make sure those calls are made well? Is it enough to choose smart leaders who seem to have their people's interests at heart, and trust their wisdom?

 

Tom Davenport on making judgement calls...

 

A look at one particularly pure example of that approach, firms' pursuits of mergers and acquisitions, suggests the answer is no. This is a realm where we see top leaders of enterprises making the highest-stake decisions with the least input from others, and the results hardly vindicate the process. Estimates based on reliable studies indicate that between 50 and 70 percent of M&A deals fail to realize their goals, and many destroy value outright. As we embark on a discussion about how good judgment happens, it might be useful to reflect on why, in M&A decision making, it so reliably doesn't.

Take, for example, the 2000 notorious decision by Time Warner CEO Jerry Levin to merge his company with America Online (technically a purchase of Time Warner with inflated AOL stock). We could go on and on about poor M&A decisions, and probably many of our readers could, too. The stories become infamous precisely because they are the kinds of "big swings" that make or break reputations, and often bring out the worst in managerial decision making. The merger machinations have to be kept at least somewhat close to the vest, and the rationale for the deal is all rooted in future potential, not past experience (or data based upon it). Therefore such decisions are routinely entrusted to solitary leaders at the top-and they are thus the greatest case against the ability of those solitary leaders to exercise great judgment at the scale of the organization.

But M&A decisions are hardly the only kinds of moves that single-minded enterprises make badly. Missteps occur in every sphere of business and organization-in matters of strategy, innovation, operations, and people-most of which are minor, but some of which have huge consequences.

Strategy making is probably most rife with poor judgment, though the flawed deliberations behind most dumb decisions never come to light. Sins of omission-roads foolishly not taken-surely outnumber sins of commission. When these do become known, they become sources of acute embarrassment, even to leaders long acknowledged to be great, as Ken Olsen, the co-founder and longtime CEO of Digital Equipment Corporation, found out.

Olsen guided the company to dominance of the mini-computer category during its first 30 years.[1] As a testament to his vision, Digital became the second-largest computer company in the world after IBM. But by the mid-1980s, it became obvious to most observers that the world was moving on to personal computers.

Not to Olsen, however. He doggedly maintained that the mini remained the next big thing. His words are amusing at this point: "Customers don't want a computer that sits on a desk. Customers want computers that sit on the floor."[2] Even if they did want computing on their desktops, Olsen argued that "most people in an organization want terminals."[3] Olsen also stuck by Digital's proprietary VMS operating system while the rest of the world shifted to Unix and Windows.

With a leader with his head in the sand, Digital couldn't stay in business for long. By 1998, the company was sold to Compaq for $9.6 billion, well below its peak annual revenues of $14 billion.

Olsen was surely not the first great industrialist who erred by believing his gut was unimpeachable and his vision reliable. Henry Ford, who built one of the world's largest and most successful car companies, committed his share of bad judgment, though he obviously also made numerous good decisions. He perfected the assembly line, virtually defined vertical integration, and doubled the wages of his workforce to $5 a day, thus making them much more loyal as employees and consumers of his cars. But Ford also made some truly awful decisions. He stopped improving the Model T, declaring it "already correct" and the only car anyone could ever need-and it rapidly lost market share in the 1920s. He decided to build a prefabricated industrial city in the rain forest of Brazil that he called Fordlandia, intending it to be a cheap source of cultivated rubber for tires. But according to historian Greg Grandin, Ford was too distrustful of experts to consult even one on the subject of rubber trees.[4] It was an agricultural and social disaster, was sold at a $20 million loss, and rotted in the jungle. Worst of all, he allowed his name to be used for anti-Semitic causes and arguments, and met with associates of Hitler from Germany.

Even the late Steve Jobs of Apple, the contemporary decision maker most acclaimed for his golden touch during the last decade or so, had moments when his judgment failed him. In the 1980s, he hired John Sculley to succeed him as CEO of Apple, and Sculley presided over a period of slow growth and product missteps in the ensuing years. Jobs later commented, "What can I say? I hired the wrong guy. He destroyed everything I spent 10 years working for, starting with me."[5] Jobs sold all of his Apple stock when Sculley pushed him out, which cost him billions. Few would call Next Computer, the startup he founded during his hiatus from Apple, a success. And when he came back as CEO, he allowed the backdating of stock options. Jobs certainly redeemed himself with a string of fantastically successful products from Apple-and as one of the company's founders, he got a bit of slack for a bad call now and then-but he was hardly immune to faulty judgment. One factor that Jobs attributes his good decisions to was greater reliance upon others. In a summary of a 1997 interview, an article in The New York Times published after he resigned for health reasons in 2011 noted:

In his early years at Apple, before he was forced out in 1985, Mr. Jobs was notoriously hands-on, meddling with details and berating colleagues. But later, first at Pixar, the computer-animation studio he co-founded, and in his second stint at Apple, he relied more on others, listening more and trusting members of his design and business teams.[6]

Why the Fixation on Great Men?

Human judgment, it appears, is frail and fettered no matter which humans the judgment comes from. Even the greatest of leaders can't get out of the way of their own egos. Neuroscience and behavioral economics now tell us that all humans fall into a common set of decision traps or cognitive biases-from, for example, anchoring (overreliance on familiar but irrelevant information for a decision) to the zero-risk bias (a penchant to reduce a minor risk to nothing, but missing the opportunity to reduce proportionately instead a much bigger risk).[7] A recent article suggests that while leaders may be able to identify the cognitive biases in others' decisions and recommendations, they have virtually no chance of seeing their own.[8]

Yet no matter how many mistakes are made by individuals, the single leader and decision maker prevails as a paradigm. History still puts the "great man" (or, less common, the "great woman") on a prominent pedestal. Management theorists still praise the solitary, heroic leader. Indeed, there's a long philosophical tradition behind the "great man" theory.

In a society that depends on its members' taking initiative and suffers when they indulge in free riding, it helps to hold up role models and dangle the incentive of fame and fortune for individual achievement. As David Ogilvy was fond of saying, "Search your parks in all your cities/You'll find no statues of committees." There is no denying, too, that most would rather listen to a good yarn about a maverick taking on the world and beating the odds. As much as we might revere a studiously deliberative body-such as the Supreme Court-there tends to be little romance in its triumphs.

In the corporate realm, boards of directors, desperate to boost bottom lines, seize upon those few candidates whose track records suggest they are in possession of some fairy dust to sprinkle, and the ensuing bidding war pushes chief executives' salaries sky high. In 2010, the average CEO in the S&P 500 made $11.4 million in total compensation-343 times the median income for workers in all occupations.[9] Modern-day CEO perks often exceed Frederick the Great's-they have airplanes, limousines, security forces, massive expense accounts, and large retinues at their disposal. This despite the fact that, in many cases, the fairy dust never materializes.

And in government, while we don't pay our Great Men so much, we continue to believe-despite much evidence to the contrary-that they are the solution to all the world's (or at least the country's) problems. We devote an increasing amount of attention to them in presidential campaigns. We ascribe (at least if they represent our party and political beliefs) heroic traits to them. We hold them accountable for realizing all our dreams and aspirations, for finding us jobs and making our house prices increase.

The Antidote to the Great Man Theory

We view no individual man or woman as uniquely and solely responsible for wonderful outcomes; CEOs, political leaders, visionary thinkers, like all of us, too, are living examples of at least occasional human frailty in thought and deed. Even the best leaders sometimes make bad decisions; the worst make them frequently, and perhaps one or more that can bring down previously massive and hugely successful organizations.

Instead of Great Men, we argue for the virtues of Great Organizations-organizations that build the ongoing capability to make great decisions again and again, reflecting the judgment to more consistently than not make "great calls" in difficult situations. Great Organizations expand the number of people involved in important decisions, because they know that while individual humans are fallible, in the aggregate they are usually more effective. They tap into their employees' (and customers' and partners') broad range of expertise, and they ask for their opinions; they deliberate and problem-solve toward a better answer, instead of "going with the gut."

They also employ data and analysis to make decisions, because they know that on the whole, the scientific method is the single best guide to decisions and actions the world has ever known. They employ sound decision-making processes, including investigating multiple alternatives, seeking out dissent, and fostering a decision culture of inquiry rather than advocacy. In short, they become effective decision machines in which Great Men aren't necessary or desired, at least in the sense of dictating an answer "just because s/he's the boss."

When such organizations employ these approaches on an ongoing basis, we call it good organizational judgment.

Of course, leaders are still important (though perhaps not 343 times more important as the average worker, as today's salary scales imply). Good leaders create the agenda of decisions to be made. They set the tone for culture and decision processes. They encourage the diverse members of their organizations to step up and participate in deliberations and decisions. We are not dismissive of leadership and leaders, but we think they have a new set of roles to play. The Great Man (or Woman) of the future knows the role of the great leader is not to decide important questions alone-but rather to ensure that all the right things happen across their organizations so that the best thinking and the best problem solving results in a better answer.

Patterns of Change in Today's Organizations

A sea change is under way in many organizations today, as we observe where and from whom judgment is valued, and how it gets exercised in contemporary decision making. The changes--decision making more among frontline workers, more distributed, more team based, and so forth--are consistent with the decline of the Great Man and the rise of the Great Organization and good organizational judgment. At least four major trends are beginning to shape a new pattern that we think will define good decision making in the future:

First is the recognition that "none of us is as smart as all of us." Social media, prediction markets, involving customers in product development-all of these are evidence that leading organizations want to tap the wisdom of the crowd, as Jim Surowiecki put it in his seminal book.[10] While involving multiple people in decisions can be unwieldy and doesn't always yield a better outcome, it is often both possible and likely to yield a better result.

The second trend is tapping not just the wisdom of the crowd, but the leadership of the crowd. While hierarchy and leadership from CEOs and presidents are not going away, there are increasing settings in which "collective leadership" is being employed. Of course, we are all familiar with the familiar "open innovation" technologies of Linux and Firefox, but that is only one model. As Mehrdad Baghai and Jim Quigley, the former CEO of Deloitte, have noted in a recent book, there are a variety of collective leadership "archetypes" based on whether the work structure is emergent (as in, for example, community organizing with volunteers) or directive (as in the relationship between a general and soldiers), and whether the work itself is scripted (as in an orchestra) or creative (as in an improv play).[11] These dimensions open up multiple ways for many to work as one, and for organizations to benefit from leadership and decision making by multiple contributors. This means, of course, that the organization also would benefit from efforts to improve the decision-making capabilities of its collective leaders.

The third trend involves the use of data and analytics to support-and sometimes actually make-decisions. Intuition will never vanish-nor should it-but there is plenty of evidence that when data or scientific evidence is available, they lead to better decisions than intuition alone. Some organizations are "competing on analytics," while others are simply using them as an occasional aid to better decisions.[12] It might be romantic to believe that we can "thin-slice" our way to better decisions, as Malcolm Gladwell argues in Blink, but the fact is that good decisions typically require systematic analysis. Even some of Gladwell's examples of supposed thin-slicing actually used detailed analysis-such as the marriage scientist John Gottman.[13] He can tell you in a few minutes of observation whether you are likely to stay married to your spouse, but he can only do so after decades of behavior and speech coding, and deep statistical analysis of it.

The fourth relatively new factor is one that has continued to alter so many aspects of business and life more generally: information technology. It doesn't create better organizational judgment directly, but it's definitely an enabler of the other changes we have mentioned. While early applications of IT have primarily been about better transactions, during the last decade or so they have firmly entered the realms of knowledge, insight, and judgment. Technology makes possible the changes above of increased participation and analytical decision support. It also allows for the capture and distribution of many forms of explicit and even implicit knowledge. While judgment has historically been a subject that addressed human rather than technological capabilities, no current account of the nature of judgment would be complete without significant mention of the latter's role.

All of these changes come at a time when external conditions in the world have made getting decisions right more important than ever. Businesses face ever-higher levels of competition, and in a climate of increasing economic uncertainty and volatility, markets and customers move faster than ever before. Further, the same technologies that make it easier to tap collective wisdom within organizations also create more transparency into them; the punishment for getting big decisions wrong is swift and stern.

Of course, many things haven't changed in the world of organizational judgment. As we hope our stories will demonstrate, good judgment and consistently good decision making require such eternal verities as good leadership, strong culture and values, accountability, and good decision processes.

That said, there are some common themes that we think define the new paradigm for organizational judgment. They are:

Decision making as a participative problem-solving process

Organizational judgment at its core depends on a disciplined (if not always highly structured) process. In its various steps, the process will include, at the outset, framing the problem to be solved; pursuing the problem through iterative steps that progressively refine the questions that must be answered; engaging diversity of opinion; using fact-based analysis to weigh benefits and risks, and generate and test hypotheses; and pursuing all appropriate options based on continuous deliberation and learning until the best answer emerges.

Equally important as the process per se is the need for it to be (albeit in varying degrees in different situations) participative. When organizations with good judgment make important decisions, they routinely engage a broader group than just a few top executives, if not "the crowd"; they seek multiple points of view, including contrarian ones; they work especially to include people with the best knowledge and experience, regardless of status or hierarchy; they embrace the perspective of the "front- line" or key stakeholders (including partners, suppliers, customers, as well) who must implement and live with the decisions.

The opportunities of new technology and analytics

As more companies recognize the power and value of technology-enabled analysis and analytics for defining their strategy, marketing, or making other key decisions, a new standard is emerging about the integration of data analysis into the "front office" of every business. No longer the rarified provenance of "the geeks downstairs," technology is becoming integral to decision making, and the overall judgment exercised by the organization, whatever the industry or sector. 

The power of culture

Organizations that practice great judgment inevitably have many of the key attributes and values mentioned embedded in their operating culture (respect for the problem-solving process, inclusiveness, leaders as facilitators of decisions, not "monarchs," etc.). Some organizations come by the new kind of values and behaviors more naturally than others; in some cases, as the need for better decision making and new patterns begins to emerge, cultural change evolves hand in hand with more "democratic" and analytical approaches.

Leaders doing the right thing and establishing the right context

The role of the leader in creating organizational judgment is often first about reframing decisions as indeed not their own exclusively. But great leaders also work to ensure that the processes and mind-sets of more distributed, problem-solving approaches key to judgment are in place and part of the norms of doing business in their enterprise. In many cases, they can be seen instituting cultural change to migrate their organizations toward overall better judgment.

Of course, as an evolving paradigm, organizational judgment can be found in various, often incomplete forms. It would be foolish to expect any single organization to have all of these ideas complete, perfect, and implemented at a 100 percent level.

 References

      1. For a comprehensive discussion of Digital’s problems, see Edgar Schein, DEC Is Dead, Long Live DEC (San Francisco: Berrett-Koehler, 2003). 
 
      2. “Digital Equipment Corporation: A Case Study,” Venture Navigator, online at http://www.venturenavigator.co.uk/content/158 
      3.  Oral history interview with Ken Olsen, September 1988, online at http://americanhistory.si.edu/collections/comphist/olsen.html#tc20 
      4. Fordlandia: The Rise and Fall of Henry Ford’s Forgotten Jungle City, Metropolitan Books, 2009.
 

      6.  Steve Lohr, “Without Its Master of Design, Apple Will Face Many Challenges,” The New York Times, August 24, 2011, online at http://www.nytimes.com/2011/08/25/technology/without-its-master-of-design-apple-will-face-challenges.html
 
      7.  There is an a-to-z list of cognitive biases under that term in Wikipedia. For more detail on the major biases that affect human decisions, see Wray Herbert, On Second Thought: Outsmarting Your Mind’s Hard-Wired Habits (New York: Crown Publishers, 2010).
      8.  Daniel Kahneman, Dan Lovallo, and Olivier Sibony, “Before You Make That Big Decision,” Harvard Business Review, June 2011.

      9.  Data from an AFL-CIO survey of 299 CEOs, and the U.S. Bureau of Labor Statistics, May 2009 Occupational Employment and Wage Estimates, national cross-industry estimate of median annual compensation for all occupations.

      10.  James Surowiecki, The Wisdom of Crowds: Why the Many Are Smarter Than the Few and How Collective Wisdom Shapes Business, Economies, Societies and Nations (New York: Little, Brown, 2004).

      11.  Mehrdad Baghai and James Quigley, As One: Individual Action, Collective Power (New York: Portfolio, 2011).
      12.  Thomas H. Davenport and Jeanne G. Harris, Competing on Analytics: The New Science of Winning (Boston: Harvard Business School Press, 2007).

      13.  The Gottman story is described in Malcolm Gladwell, Blink (New York: Little, Brown, 2005), 18–27.
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Davenport and Manville are co-authors of Judgment Calls: Twelve Stories of Big Decisions and the Teams That Got Them Right (Harvard Business Press 2012), from which this article was excerpted.