Process Not Perfection - The foundation for better decisions
Updated: Jan 2
How boards and executive teams make the best decisions by focusing on the decision process.
Summary: After the author's welcome note, this article begins by providing a decision-making background. Next, we discuss typical company goals and the many questions necessary to resolve when preparing for the best decision. We then explore the benefits of a well-tuned decision process. Finally, we provide a board decision framework and resources to consistently make the best decisions.
Table of Contents:
Fast and Precise
Resolving the questions
A welcome note from Jeff Hulett:
As a decision scientist, choice architect, and lifelong decision policy executive, there is a common thread that runs through my experiences:
It is all about "process, not perfection."
Life is bumpy. This quote encourages us to overcome life's inevitable ups and downs.... and to confidently move forward. This is a memorable quote with many business and decision-making parallels.
My experience suggests “process, not perfection” is an approach for confidently handling life’s uncertainties. Achieving conviction in our confidence is necessary for moving along this bumpy road. This article’s premise is that uncertainty is best handled by decision processes that enable learning, improvement, and optimization. We provide examples for board-level decision-making, but it is relevant for almost all decisions. I hope this article is helpful for your decision journey.
Jeff Hulett is the Executive Vice President of the Definitive Companies, a decision sciences firm. Jeff's background includes data science and decision science. Jeff's experience includes leadership roles at consulting firms, including KPMG and IBM. Jeff also held leadership roles at financial services organizations such as Wells Fargo and Citibank. Jeff is a board member and rotating chair at James Madison University.
2. Decision-making background
In the decision sciences world, we seek both decision accuracy and precision. This occurs by minimizing decision process bias and noise in the service of optimally accurate and precise decision outcomes. First, let's discuss important decision process definition nuances.
Precision - as generally defined in the decision context, means the criteria and the alternatives available to a decision are fully specified and contain minimal errors. Given many alternatives are evaluated with future forecasts, by definition, there will be forecasting errors revealed in the future. Thus, the error should be acceptable and mean-reverting.*
[*"Acceptability" is a tolerance defined in proportion to the uncertain future. "Mean-reverting" means the errors should not persistently skew to either under- or over-confidence.]
Accuracy - as generally defined in the decision context, means the goal of the decision is well specified. Also, the chosen alternative optimizes the goal when compared to other alternatives. A less-than-accurate decision suggests the company may execute against someone else's strategy!
Next is a decision process graphical description, using a dartboard analogy. The desire is for both precise AND accurate decisions.
Precise outcomes are achieved by reducing noise in the process. When applied across multiple decision requirements, the outcome is more consistent. Below, higher precision is represented by the X's being closer together. Team S! and Team B are more precise than the other teams.
Accurate outcomes are achieved by reducing bias in the process. Below, higher accuracy is represented by the X's being focused on the bullseye. Team S! and Team N are more accurate than the other teams.
Source: Kahneman, Sibony, Sunstein, Noise: A Flaw in Human Judgment, 2021
"Team S!" is the most precise and accurate. This occurs by minimizing both the noise and bias found in the decision process. In the context of a successful business decision, "Team S!" achieved the "biggest bang for their buck."
3. Fast and Precise
In the decision-making context, executive teams and boards of directors desire speed. Each decision participant is expected to provide precise inputs to the decision process:
Companies want to move fast. Also, the business trend is for engaging "active boards." More so than traditional boards, an active board will be closely aligned with the executive team. Beyond typical governance responsibilities, some active board members may even play part-time executive roles. There is a natural tension between the need for speed and the expectation for business decision precision and/or accuracy. The challenge is to achieve speed, resolve the natural tension, and achieve the best decision outcome.
Companies tend to prioritize precision. Business people tend to prioritize the precision of the individual aspects of the decision. That is, people tend to focus on what they can control in the context of supporting a rapid decision. The challenge is to achieve speed and component precision while also achieving the most accurate decision. This precision prioritization runs the risk of a cognitive bias called "representativeness bias." We discuss how cognitive biases may negatively impact decisions in the article: Great decision-making and how confidence changes the game.
An M&A deal example: The deal team will typically dedicate significant resources to the financial evaluation of each alternative. Teams often use a "divide-and-conquer" strategy to perform financial due diligence. Some company employees will be utilized to lead the M&A project. These company resources are usually already fully committed to their "day job." Third-party experts may be engaged to manage aspects of the M&A process. Key decision success questions include:
How do you manage the criteria development process?
Have the criteria been approved by a governing body, like the board of directors?
How often does the board update its acquisition criteria perspective?
How is the judgment of the board members integrated into the criteria - especially harder-to-quantify strategic criteria?
Is the deal team in agreement with the board's criteria perspective? How do misaligned interests get managed?
How do you know that all the financial metrics (like ROI or Cash Flow) are defined the same across all the alternatives? Other reasonable questions include:
How do you know whether the forecasting assumptions are consistent?
Is there a sensitivity analysis to test the assumptions?
How do you know all the costs are being accounted for?
Do you have premortem alternatives as a credible counterfactual alternative representing what may go wrong?
How do you make sure "deal fever" does not infect the process?
Finally, what are the guard rails of the M&A decision process?
Is there credible independence between the board and the deal team? How do we establish independence in the active board context?
How do we move fast and still achieve organizational independence, accuracy, and precision?
What is the best way to integrate the board members' amazing judgment into the deal process?
How are the deal proceedings documented in case "second guessers" need to be satisfied?
Once the deal is done, how do you make sure the integration team is confident in the deal decision process so integration participants are fully engaged and "switched on?"
4. Resolving the questions
There are certainly other questions. The point is, these and other questions are resolved by a strong decision process. Ultimately, focusing more on the decision process will likely drive a better decision! A better decision looks like the "Team S!" decision that is both accurate and precise. Also, once the generalized decision process is implemented as a technical and cultural company-wide expectation, better decision outcomes will occur throughout the organization. Better decision outcomes include:
Trust: By collecting viewpoints across the impacted organization. Trust is also achieved via the transparency of process documentation.
Buy-in: Via facilitating consensus of all stakeholders.
Agility: By achieving accelerated time to decision.
Cost saves: By reliance on a consistent, reusable decision infrastructure.
The "Process, not perfection" intention is a matter of emphasis. If you have a certain budget for facilitating high-impact decisions, most organizations would be better served by strengthening their decision process first. The reasoning is that future forecasts, by definition, will contain errors. Our desire is to reduce the noise that may decrease precision. However, the uncertainty of the future suggests we can only do so much. We do not know what we do not know. Defining the "good enough" alternative forecast is the challenge. As such, beyond the need to create a forecast that is reasonably precise and mean-reverting, additional forecasting energy may not be marginally beneficial. Italian philosopher Voltaire's words are particularly well suited to describing the risk of financial forecast over-precision:
"Do not let 'perfect' be the enemy of the 'good.'
Finally, I am the first to admit, some people have a natural revulsion against a process. A process sometimes creates a cringe-worthy reaction reminding us of lemming-like inefficiency, mindlessness, and waste. Intuitive decision-making is considered the job of a successful CEO. I certainly understand such sentiment.
But, looking beyond the clichés, there are a few reasons why many decisions greatly benefit from the decision process:
Frequency: Some decisions do not happen enough or are too bespoke for people to develop useful intuition. M&A is certainly one of them. Former McKinsey management consulting leader Olivier Sibony said: "If we searched for a textbook example of conditions in which expert intuition cannot develop, we could not find a better one [than M&A.]"
Complexity: The cognitive sciences teach us that decisions with more than two criteria or alternatives are likely too complex. The human brain is very good at binary-based decisions. Our brain is notoriously poor when more than two decision inputs are available.
Judgment: Our teammates have amazing judgment. All people are subject to the draw of self-interested incentives. Properly integrating judgment, but leaving behind motives, is critical.
Collaboration: Buy-in is critical for decision uptake. Kenneth Svendsen has held CEO, President, and C-suite roles in the global entertainment, sports, and hospitality industries. Mr. Svendsen said: "People are down on what they are not up on." A strong decision process provides a collaborative environment and is critical for a confidence-inspired post-decision integration.
The biggest beneficiary of a strong decision process is the CEO, board, or other responsible decision-makers. A strong decision process increases accuracy, precision, and agility. It leverages decision costs and increases employee engagement. It makes the decision-maker more effective and frees up valuable executive time.
"Process, not perfection" is a reminder that consistently good decisions are the result of a good decision process. A good decision without a good decision process is the result of luck.
Definitive Pro achieves both accuracy and precision.
An M&A example
Decision acceleration – typical timing for the board decision process.
Definitive Pro: For corporate and larger organizations - This is an enterprise-level, cloud-based group decision-making platform. Confidence is certainly important in corporate or other professional environments. Most major decisions are done in teams. Group dynamics play a critical role in driving confidence-enabled outcomes for those making the decisions and those responsible for implementing the decisions.
Definitive Pro provides a well-structured and configurable choice architecture. This includes integrating and weighing key criteria, overlaying judgment, integrating objective business case and risk information, then providing a means to prioritize and optimize decision recommendations. There are virtually an endless number of uses, just like there are almost an endless number of important decisions. The most popular use cases include M&A, Supplier Risk Management, Technology and strategy portfolio management, and Capital planning.
Next are a few whitepapers and examples of how to make the best organizational decisions:
Third-Party Risk Management: Getting the Most of Limited Risk Management Budgets
Mergers & Acquisitions: Moving from Haphazard to Fact-Based Decision-Making
U.S. Treasury Case Study: Defining the Decision-Making Process