A decision is required – a management story with a lesson

Imagine that by a strange incident the following notes have been found. They express the hidden thoughts of a CEO that he’d never dare to reveal in public.

Man jumping over precipice between two rocky mountains at sun li

I bet everyone believes I’m in deep thoughts about the Fedora Russia Contract. Dale is still talking about the potential threat if Fedora would use its relationships with us to copy our technology and design to sell imitated products throughout Asia. Dale speaks with a lot of self-conviction, which should cause Martha and Gideon to have second thoughts about the contract they are passionately promoting. Dale brings a real example where something similar has happened: collaboration between British and Chinese companies ended badly for the British and great for the Chinese – a typical win-lose.

I think about my little daughter. Well, she is not exactly “little”, we have celebrated her 22nd birthday last week, together with her graduation with distinction from Stanford. She is my youngest child and she is determined to take an eye operation, using laser, to get rid of her glasses after failing to get used to contact lenses.

Martha is trying to argue that the probability of Fedora doing something outrageous against us is low. The main current markets of Fedora are all in Western Europe. She further claims that the Russian oligarch Ilia Mushkin, the owner of Fedora, recognizes the potential in collaborating with us exactly because he prefers doing business in Europe rather than in Asia. Dale says that this policy can easily evaporate in one day. Technically he is right. It is possible, but highly unlikely. Fedora certainly realizes that as long as they continue to export to Europe we have enough legal options that could hurt them. What Dale does stress is that if the worst scenario materializes then the damage would be huge. We have invested $15M in opening our export channel to India, Malaysia and Indonesia. However, even if all the investment would be lost, which in itself is unlikely, the corporation will still be able to sustain the loss. And the business potential of the collaboration is much higher – for us as well as for Fedora.

The situation with my daughter is different. The damage of a failed eye operation is very high and would reduce her overall quality of life. I try not to think about it – but refraining from thinking about potential consequences does not solve any problem. On the other hand, a successful operation would improve her quality of life and the probability of success is very high. Actually she tells me the eye surgeon has, so far, one hundred percent success rate. That does not reduce my fear of the “black swan”. I don’t know how to consider such a critical decision when I have no idea what is the probability of such a failure. Actually I have no real say in the matter. My daughter is an adult and she does not ask my advice – she simply tells me what she is going to do.

I notice that Dale and Martha are looking at me, expecting me to make the decision. Gideon seems to be in deep thoughts. He probably thinks about the personal impact on him if the Fedora Contract is cancelled. The last project he was deeply involved with had been cancelled as well.

Is the decision regarding Fedora truly straightforward? It has big potential along a certain not-too-large risk of real flop, and even then it is not a real disaster, unlike what might happen to my daughter. The only other consideration is that if the Russian Project, as the directors in the board call it, would fail then all the fingers would point to me. I think some more caution is required here.

“Let’s see what Claire could add to the contract that will protect us from hostile moves by Fedora.” I say. Claire is our legal adviser. I can see the light in the eyes of Martha fades out. Gideon continues to look down. I’m not sure what Dale real position is. Everybody is aware that I have just killed the Russian Project.


I would love to hear your opinion and have a discussion about the following 3 questions:

1.

2.

3.

Is there a generic inherent problem in making decisions on behalf of an organization that is expressed in the story? If so, what can we do about it?

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Published by

Eli Schragenheim

My love for challenges makes my life interesting. I'm concerned when I see organizations ignore uncertainty and I cannot understand people blindly following their leader.

18 thoughts on “A decision is required – a management story with a lesson”

  1. It would be good to use the TOC tools to figure out how to overcome the UDE’s and negative branches and especially help the company to make a decision that is supported by all people involved and not only decided by the CEO.
    The daughter should do a lot of research on the dangers of the surgery and know exactly what is going to happen and make her choice from there. If he surgeon has a 100% success, you would like to know how many people he did do the surgery on. One or 100?

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    1. Dear Petra, you are right that the number of people the surgeon has made makes a difference. I assume it is more than one, otherwise the claim of 100% is a cheat. Suppose the surgeon made 65 operations, or maybe 210 ones. Would this knowledge lead to a different decision?

      My point is that even if the daughter is making a research and validates that the surgeon is considered excellent and made a lot of surgeries – something might go wrong with very grave results. People are making such decisions and, many times, knowingly decide to take the risk. May main question is whether the CEO of an organization is taking his decisions in a very different way, and if so – why?

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  2. Agency cost at its best… It seems that the right choice for the company is taking the project, but it is not the right choice for the decision makers… Regarding the daughter choice.. I would go for it 😉

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  3. Hadas – I agree that the case is about agency cost, in other words the cost for the organization that the decision maker has his own interests, and those are not necessarily in line with the organization.
    Question is how organizations are treating this particular cause for the over conservative approach? Is the effect of ultra care unknown?

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  4. It is interesting to contrast the situation you describe to that of many large public corporations. Whereas the CEO in your case is allowing himself to become more conservative than it appears he would if he owned 100% of the company, many public company CEOs take more risk on behalf of their shareholders than they would on their own. However in both cases it is the mis-alignment of the interests of shareholders and decision makers that leads to the problem. Ultimately the more complex the corporate governance structure the more disconnect there will be between shareholders and decision makers. “Skin in the game” is the basic answer but care must be taken to structure this appropriately. Options often do a poor job of this by offering management too much upside and not enough downside. There is no “silver bullet” but the careful structuring of management incentives is the critical step.

    The daughter’s situation is a much simpler version of the problem. The downside is very serious for the daughter and minimal for the surgeon. The daughter’s perception of the upside is probably skewed by where she is at in her life (the value she places on attractiveness). But good luck to the CEO in her understanding this!

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    1. Preston, you making excellent points. I like to write a a longer blog on the point when managers, not just the CEOs, make different decisions on behalf of their organizations than when the make decisions for themselves. I like to spend more on the core causes for such a behavior. I think that most CEOs are more conservative than what they should be, but you are right that in some cases the opposite is true. It all comes to my own daughter Hadas’ observation of the “agency cost” and to the way organizations compensate CEOs for their achievements.

      By the way. Preston, I do believe a “silver bullet” can be found. We can work on it.

      Can other people react to Preston’s points? This could be valuable to all of us.

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  5. Agency effect is a fact of life. Each participant believes that there is lack of complete overlap between one’s own interests and the global interest of the organisation. There is a belief and common experience of zero sum game. There is a probability of taking a wrong decision and real scenario of becoming a scape goat.

    The decision is so crucial as there is a possibility of a strategic partner turning rogue. Again there is a precedence of such thing happening. I guess rather focusing energies on making the contract legally fool-proof, it would help if this dilemma is translated into a cloud and shared with the partner to resolve in a WIN-WIN fashion. There is a fear of offending the business partner but at the same time there is no point in taking steps with distrust but not being transparent with the partner.

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    1. I fully agree that agency cost and effect are fact of life. Certainly you cannot resolve it by legal means. The key common flawed paradigm is that you can solve it just with money. Money is certainly part of the agreement, but there is much more in the whole global, but informal, contract.

      The point I wanted to make through the story is that when decision makers are judged after the fact, without truly analyze the situation prior to the decision, then ultra-conservatism is to be expected. This is the situation with decision-makers in the organization. The “solution” of offering options and bonuses on successes and relatively little punishment for failure causes too high risks taken, based on the greed of CEOs, eventually reducing the value for the shareholders.

      When a certain solution causes too severe negative branches then we should find another way to solve the main inherent conflict between “Investing all my time and energy on the organization I work for” and “Investing all my time doing what gives me pleasure.”
      Some people, certainly executives, go to work in order to create value for others and be appreciated in return. When what they think brings value is not appreciated by others then they are caught in another conflict:

      “Do the best for the organization” versus “Do for the organization what nobody can fault.”

      The CEO in the story certainly feels the above conflict and prefers to sacrifice doing the best for the organization. Is that what we look for in nominating a CEO?

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      1. Eli, a close friend of mine, who was a senior executive in a multi-billion sales organization, described his organization as “the pursuit of the blameless decision.”

        Have you experienced organizations that it is difficult to find the one(s) who represent the interests of the company? I have. So many outsiders complain about inertia, but I find that larger organizations use their size for survival and are almost slowly tearing the company apart from within over time. Death by a thousand cuts.

        You and I have spoken about the “me versus the company” cloud in the past.

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  6. Thinking about what Preston wrote regarding incentives and recalling the months I have put in on that subject makes me say, that can’t be it. Of course, like a forecast, if it were possible to get it right, it would be a killer app. But, incentives such as stock options, bonuses, quotas or commissions must be counter productive in the long run. They are all “push” incentives. Don’t we in the Throughput world believe in “pull?” Even commissions which rely on the person’s desire to earn more are eventually quenched at some level of comfort. Bribing becomes not enough, because it is a false pull.

    No incentive model ensures alignment with the company, because the model itself inevitably becomes the focus, distracting the person from providing value. A simple model leaves loopholes creating the opportunity to “game” the system to increase pay and any model that is complicated enough to consider all important factors becomes a distraction by its very nature. To the extent that a person can significantly affect their compensation, even a customized model crafted for each individual person, causes worse outcomes than just paying a simple felt-fair wage.

    Doesn’t it have to be the structure that we have wrong? An intentionally designed (perhaps tribal) culture that a desires to be a part of and contribute to seems to be the only way. Once a good culture exists and people want to be a part of it. There is no limit to what a person will do. After all, the soldiers who lie in honor in our cemeteries were not highly compensated.

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  7. Preston has actually moved the discussion from the point of how the system forces managers to become ultra-conservative to the question of how to align the personal interests with the organizational interests.
    Henry, you are aboslutely right that it cannot be done just by money and other financial means. When we do base the relationships of the organization and the individuals working for the organization on money lone we create very strong personal interests and those ALWAYS clash with the organizational interests. I like to write a special post on the generic problem of alignment of interests and what other factor than money play a role.

    Money is a necessary condition – it is certainly NOT sufficient.

    Consider the relationships between the state and the citizens and see that achieving law and order is not 100% in the hands of discipline forced by the police. There are definitely other elements that play a part here.

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  8. Michael, in the more successful organizations you do see the sincere efforts to improve the organization. Some organizations have lost this kind of relationships and I’ll try my best to come up with a post dedicated to the informal contract between the organization and their employees and then we’d be able to discuss the generic points in more depth.

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  9. A case, as a any model of a real situation, can’t provide enough background information around the company, the environment, their culture, risk adversion, decisions making practices, financial pressures, etc. Instead of just yes or not options, I would like a “not yet” in order to vote. Going to the inherent simplicity, with avaliable information, I think the position of the CEO would be determined by how much personal risk he is taking, based on his status, power, age, company culture, and the alignment that the team has around pros and cons of the decision to make.

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    1. Hugo, do we really need to all the unavailable information you mention?
      There are times where “not yet” is a valid decision, but then it has to state when the decision is going to be reconsidered and mainly what information is crucial for the decision and to make sure it is possible to bet that information in time to make the final decision.

      Part of the task of managers is to make decisions – even when not all the information is available. Actually we never have all the information we would like to have. This si the essence of making decisions under uncertainty (there are relevant parameters we don’t know).

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  10. Hi Eli,

    For me the 2 cases Are not similar from the decisor point of View.
    For me the key is TIME.

    If you start ah agreement you Will have many opportunities to check And modify the approach. Is not a situation of head or tails.

    When you operate with the eyes and you Are not seriuosly limited you Are playing a russian roulette.

    For me the black swan Concept should Be Integrated in TOC thinking, cause we use to understimate risk also in our life.

    I choose TO go with russian project and to stop the surgeon.

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    1. Antonio, I intentionally planned the potential threat in the Russian Project so that time would not give any signal that the potential threat is happening. The threat is that the Russians will imitate the design and technology and then suddenly, without any prior warning, will use their own imitations in Asian markets. I generally agree that a good decision process should inquire whether implementing the decision slowly would give early warning that the undesired result is developing.

      Regarding the Black Swan concept. Please, Antonio, tell me: should I stop to fly because it is possible that a crazy pilot will kill me? It never happened to me so far, but I’m aware that this is a remote possibility, and I cannot exactly estimate it.

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  11. The CEO is also facing an “innovator’s dilema” situation. I would say he should take the chance and introduce different versions of the product in Asian countries at lower price points and expand market usage like a disruptor, preempting any move by the Russians. Scaling up and expanding fast is a strategy successful tech start-ups are adept at. His current “success” and “market image” probably hold him back.

    For Hadas – If you have to, cover yourself with a plan B ready in the unlikely event of failure. Identify eye replacement possibility and keep on standby for eye transplant. BTW – my father-in-law did both eyes successfully last year, and my mother-in-law is going to do the first one this weekend.

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    1. Colin, I’m very fond of the “Innovator Dilemma” but I have hard time to see the relevancy. Actually the concern is that Russians might steal the existing technology and compete in Asia. Certainly it is possible to take various moves against it, but all have severe financial ramifications. The kernel of the discussion is how to estimate the uncertainty and how to make the decision.

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