I often tell companies and other organizations that they should treat decisions and decision making as assets. In Smart (Enough) Systems, the book I wrote with Neil Raden, we said
Operational Decision Making as a Corporate Asset
If operational decisions must be made well for your organization to deliver on its strategy, they can’t be made randomly. They have to be made systematically. You have to turn operational decision making into a corporate asset you can measure, control, and improve. After all, when [customers] interact with you, they consider every decision you make to be a “corporate” one—that is, a deliberate one.
But is it reasonable to consider decisions, decision making, as an asset? After all an asset provides future value to an organization – tangible or intangible (goodwill and trademarks for example add intangible value while a factory adds more tangible value). Fundamentally an asset “contributes to future cash flow”. How does this work for operational decision making?
Operational decisions, those taken in a transactional context, include decisions like next best offer, pricing or discounts, product eligibility, claims approval, credit or fraud risk. Clearly each such decision has an impact on cash flow and profitability – good decisions having a more positive impact, bad ones a more negative one. The thing about operational decisions, though, is how often very similar decisions are made.
Consider claims – even a relatively small insurer (like Infinity Insurance discussed here) might receive 10,000 claims or more a month. Each claim must be considered and approved or rejected and making the right decision in each case adds to the bottom line. As a result the insurer needs a defined decision making process for claims – each one cannot be considered as a special case if 500 or more are to be handled efficiently every day. If the insurer has a good decision making process then each decision will be more likely to be a good one. If they don’t, less likely.
If we apply our definition then an effective operational decision making process is a form of asset – it contributes to future value by ensuring that better operational decisions are made. If we define the business rules, the analytics that make up this decision making process then we are investing in an asset. If we embed those rules, those analytics, into our operational systems and processes then we can ensure this asset is fully exploited.
In the book we went on to identify some characteristics typical of other corporate assets. Each of these can be applied to decisions and decision making:
- They are strategic
Planning exercises and budgets should consider decisions – ensuring that plans that rely on changed to decision making, for instance, include the definitions of the changes needed. Executives don’t care about individual decisions but they should care about the decision process. - They are managed
The company invests in decision management and governance so that the quality of decision making doesn’t degrade over time - They are visible
The cumulative value of an operational decision should be known (multiply the difference between a good and a bad decision by the number of times such a decision is made) and the investment made in improving decision making should show up on balance sheets and be visible to management - They are reusable
Companies, well run ones at least, don’t duplicate assets or leave them idle. So with decision making. - They are improved constantly
Companies should invest in analytics and experimentation to constantly improve decision making – this is the equivalent of preventative maintenance and upgrades for machine tools.
High volume operational decisions drive your business every day, playing a role in every transaction. Investing in operational decision making will ensure that these decisions add, rather than destroy, value.
For more on decision making check out Thinking different with decision analysis by Ted Cuzzillo, Tom Davenport’s article Make Better Decision, this piece on Micro decisions for macro impact (references another Tom Davenport article), Prepare for Impact (Teradata magazine) and of course Smart (Enough) Systems.
