Driving to Yes or No; How to Reach More Rationale Business Investment Decisions

February 23, 2009

Business investment decisions and strategy choices get so complicated. At least we like to make them that way. It justifies the large salaries and tremendous amount of time that goes into PowerPoint slides and Excel models. I’m not really that cynical, but when you’ve sat through as many PowerPoint death marches that end with a recommendation to invest and you’re not sure what you’re investing in, you get a little jaded.

 

In my prior life working on corporate and business unit level strategy at 3M several of us got turned on to the work of Rita Gunther McGrath as well as some excellent work from the Corporate Strategy Board in this area, primarily a 2003-4 report entitled “Strategic Assumptions Prioritization” that focused on Air Products corporation. McGrath is well known for her work on entrepreneurialism and growth. Her 1995 Harvard Business Review article “Discovery Driven Planning” proposed a useful (to those of us who bought in) and compelling model for how to think about prioritizing and shepherding a portfolio of growth opportunities to kill/launch decisions.

 

Often, internal capital allocation decisions and “bake-offs” between ideas can lead to PowerPoint template hell. Lots of disconnected slide or excel workbook templates that only apply to certain opportunities, not to others and the resulting desultory compliance in generating useless “analysis”. We asked ourselves: “how do I make the process genuinely useful and also more ‘fair’ as we looked at unlike opportunities (i.e.: a product vs. a service)?”

 

Based on our research and own internal needs, we devised a process based on several key steps. The first was defining a “reverse P&L/income statement”, the second was documenting the most important assumptions that drove economic success in the reverse income statement and third was conducting research to better understand the accuracy of the key assumptions and refining them as you better understood them. McGrath’s article in HBR nicely describes this and I’ll summarize in a minute.

 

The major shift for the business I was in was institutionalizing this at a business unit level and better preparing executives to challenge teams’ assumptions and also be more equipped to evaluate unlike opportunities fairly in a common process.

 

I’ll summarize the challenges, basic principles and then offer a quick summary of my experience with this at both a business unit strategy level as well as

 

Challenges and rationale

1.      Most business evaluations are set to get you to an ROI or NPV type assessment early on. For truly innovative programs, this is almost impossible. You don’t know what you don’t know. The result is that better understood opportunities (i.e.: “easier” ones) always float to the top.  Air Products (the subject of the CSB report) developed a new method for evaluating these more challenging opportunities.

2.      Many losing propositions get launched and fail for what I think of as “knowable unknowns”. You could have found out cheaply if you had really tried.

3.      Knowing what to focus on can be hard. Everything seems important at first.

 

Principles

1.      Define success as specifically as you can up front. This can mean revenue, profit margin, market share etc. Make it tangible.

2.      Write down all the significant assumptions and then rank their importance and “known-ness” (i.e.: certainty vs. uncertainty) to achieve a loose prioritization.

3.      Build a plan and timeline around the most important assumptions.

4.      Focus research and efforts on cheaply and effectively validating and invalidating these assumptions.

5.      Be creative in finding “proxies” for your assumptions.

6.      Pilot/test ideas quickly to learn about assumptions that can’t simply be “researched”, but do it efficiently.

7.      Never, never, never forget that a good plan with a bad team won’t succeed. Planning is no substitute for talent.

 

Benefits

1.      It much more clearly surfaces the key assumptions for everyone involved. Some programs get killed almost immediately once you agree on a key assumption and it doesn’t pass the “laugh test”. Other “far out” ideas become reasonable when you see the assumptions and say “we could do that!”

2.      This process is good at allowing flexibility across opportunities. Assumptions can be very different and get you to “apples to apples” comparisons.

3.      It forces you to more clearly articulate a “thesis” for the opportunity.

4.      It clearly aligns with gate-based decision processes. If you think generically in three phases (idea, pilot and launch) this gets you through them. An initial list of assumptions w/ a reverse P&L for $100 million may need a brief discussion to get $50K in seed funding to increase confidence that yields $1 million in pilot funding and the pilot will give you clarity on the potential $15 million investment required to scale. The process should be systematically reducing doubt as you move through the process.

 

My next post will be on my experience both at the BU strategy level and as an internal entrepreneur going through the process with a growth venture.

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Edward Tufte and the Visual Display of Information

February 19, 2009

For those of you interested in deeper exploration of how to more effectively display ideas, particularly relating to data, I highly recommend the work of Edward Tufte. Tufte is an award winning author and emeritus professor at Yale where he taught courses on data analysis and display. His books and teaching are challenging and force you to move beyond powerpoint and overly simplified forms of information display.

I often teach principles of simplicity in message and communication. Tufte is very effective at pointing out and teaching how to make “simple” powerful without being “simplistic”. There are very data rich and complex ways to show information that are also intuitive and easy to understand. His writings are rich with examples and are beautifully built. The books themselves are works of art.

His site has multiple commentary threads that are worth reading. In addition, I recommend checking out his essay on the tyranny of powerpoint.


Structure is Important (Duh!)

February 14, 2009

One of my students just observed (paraphrased) that “sometimes you just need to remember the basics”. The comment came after a class in which we had speakers from McKinsey & Co. present and discuss their approach to structured problem solving.

 

I have this session annually and it mirrors much of the course content we present in the enterprise, but I still always take something new away from the talk. The simplicity of the basic approach is valuable, but also easy to ignore because it seems so obvious. From a teaching perspective I always need to remember that just because we talked about it awhile ago, doesn’t mean people remember it if you haven’t been re-enforcing a concept or tool.

 

The high level outline of the method is to 1) define the problem, 2) structure the problem, 3) prioritize issues, 4) conduct analysis, 5) synthesize findings and 6) develop recommendations. Every firm has their version of these steps. I teach similar steps in my class. It’s not rocket science.

 

Despite this I remain amazed at the extent to which we don’t take all the steps we know we should, finding rationalizations to avoid them “we don’t have time”, “we already know the question” etc.

 

So how do we avoid the pitfalls of lazy, sloppy or incoherent thinking? Here are a few steps that should help.

 

First principle: Bring your client & team along for the ride. They have to have a tangible role in each of these steps if you want the highest probability of a useful outcome.

 

1.      Write the problem or question down. This seems so obvious, but how often do you really commit it to print and get agreement from everyone on what it is.

2.      Determine who the client or audience is and what their interests are.

3.      Work out a clear framework for solving problem or answering the question. I have an earlier post on issue trees you can reference.

4.      Build a plan. Everyone needs to know what they’re working on. Not everything is equally important, so be prioritizing or de-prioritizing as you go based on your judgment.

5.      Then of course, you have to actually do the research.

6.      Develop recommendations that can actually be accepted and used by your client. There are some subtleties in this step.

·        A recommendation your client hasn’t had a part in building reduce the likelihood of success. ”Success” here is defined as they actually do something. Merely liking your work doesn’t meet this standard. The client has to “own” it enough to implement it.

·        Be practical about what is achievable. Don’t tell them about “best practices” they need to implement that they realistically can’t.

·        Don’t just tell them “what”, tell the “how”. A plan with nice ideas, but no implementation insight is mostly useless.

 

Each can be handled at varying degrees of detail. A six month process improvement project targeting $7 million in savings requires more thought and planning than a one week quick assessment you might summarize the thinking for on a napkin. Use your judgment.

 

Following good process through the project greatly increases the probability of success. It also reduces stress and increases client satisfaction because they can see where you are.


Book Recommendation: The Adventures of Johnny Bunko

February 7, 2009

Daniel Pink (A Whole New Mind) was recently recommended to me by a friend and former classmate. He feels Pink hits on an emerging trend towards different kinds of work and skills emerging. Then I put it together. Pink had also written The Adventures of Johnny Bunko, a manga style graphic novel on career management that I had seen reviewed in a few places. I decided to pick it up.

 

It’s great.

 

Pink lays out an entertaining, sometimes funny and most importantly brief overview of some core career management concepts.

 

Pink uses Diana, a magical career coach/sprite, to deliver the key themes in a step by step process. While torturing Johnny as he bumbles through trying to advance his career, six key themes are revealed as summary lessons learned from each “chapter” of the book.

 

1.      There is no plan

2.      Think strengths, not weaknesses

3.      It’s not about you

4.      Persistence trumps talent

5.      Make excellent mistakes

6.      Leave an imprint

 

For those who have read some of my posts or know me you can probably guess why I appreciate this piece. The positive, engaging, “find yourself” message that Pink delivers while also encouraging activity and progress lines up with my world view.

 

I have given a copy to all of my students and they all have said it was a fun and quick read. I recommend it to those who have grown up reading comics or who groan at the thought of reading hundreds of pages to understand a few key principles.


The End of the Financial World as We Know It

February 4, 2009

This Michael Lewis piece from the New York Times Several weeks ago was interesting. It did a better job than most of what I’ve seen of laying out how we got where we are and challenging the thinking about where to go from here.

The financial service industry will certainly be going through massive change in the coming years. This is a starting point for those with and interest in financial services as a career.

http://www.nytimes.com/2009/01/04/opinion/04lewiseinhorn.html?partner=permalink&exprod=permalink