The human brain is a powerful but flawed instrument. We are all prone to numerous decision biases that most days might go unnoticed. But when millions of dollars or the future of a business are on the line, we are more likely to ask ourselves: Is this really the best route forward?
Through it's ongoing conversations with finance executives, the Corporate Executive Board has found that the theme of management biases is coming up more and more frequently. Just as the resilience of current operating plans is questioned for whichever economic scenario emerges next, so too are the management beliefs and assumptions on which these plans rest.
During any kind of organizational turmoil, one particular type of bias seems most prevalent among senior managers. It is what one CFO referred to as "recency bias"—management maintains a "business as usual" stance even in the face of clear contradictory information about the business or the broader economy. In other words, next month's sales target predominates the performance dialogue, and the relevance of the current plan is not up for debate.
The fallout of this bias is clear. First, the business may suffer under a different economic scenario than the one specified in the plan. Second, reacting to a different scenario may take much longer because management's belief that the current course and speed are correct is deeply entrenched.
Identifying the beliefs on which biases are premised is less important than addressing the biases themselves, but it can help you to anticipate biases or spot them as they emerge. CEB has outlined three types of common decision errors that are thematically related to recency bias; they all come from Jonathan Baron's book, Thinking and Deciding, and a McKinsey article on management biases called Hidden Flaws in Strategy (by Charles Roxburgh, published in 2003):
Status Quo Flaw—The belief that the way things are is optimal. Anchoring Flaw—A tendency to stay in the comfort zone of your belief system. Sunk Cost Flaw—A belief that because you have already expended precious time, effort, and resources on something, continuing to do is wise.
Organizations that tackle managerial biases effectively do three things better than their peers: 1. Recognize the Existence and Effect of Managerial Biases on Decision Making2. Catalogue and Discuss the Assumptions Underpinning the Plan3. They Use Structure Performance and Planning Reviews to Encourage Contrarianism
To help minimize the affect of management bias during the decision making process, CEB has identified three steps can help facilitate an effective planning system. Implement collaborative planning techniques. CEB research finds that some of the most effective performance and planning review techniques are collaborative. Rather than having an agenda that pits the C-Suite against the business unit, leading organizations invite multiple business unit managers to the same sessions.
Incorporate a competitive dynamic to the planning process. Competitive dynamics can also be used positively to generate constructive criticism of current plans among peers. The CFO takes on the role of "facilitator" and sets the agenda ahead of the sessions.
Take a qualitative approach and abandon some of the quantitative planning techniques. Another technique companies use to guide them when hard data is difficult to come by is using soft data to fill in the gaps. For example, one company reverted back to a quarterly forecast from a monthly cycle and replaced monthly forecast reviews with an almost entirely qualitative "risk and opportunity update." Business managers are expected to present on the prevailing risks and opportunities in their markets and to articulate clear plans for responding to the most likely outcomes. In any type of economic environment, corporate bias can play a role in the decision making and planning process of an organization. However, by following the steps outlined above, it will will help executives can enhance the outcomes of their decision making process.