McKinsey Quarterly has carried out a study of how companies spend money. The survey of 2507 executives from around the world found that senior executives often make bad decisions about resource allocation.
Despite the good intentions and intense involvement of senior executives in resource allocation, the results appear mixed. For example, corporate-level executives responding to the survey with an opinion indicate that 17 percent of the capital invested by their companies went toward underperforming investments that should be terminated and that 16 percent of their investments were a mistake to have financed in the first place. Business unit heads and frontline managers say 21 percent of investments should not have been approved and indicate another 21 percent should be terminated.
The report notes that organisational politics is a significant factor in the decision making process.
In many organizations, corporate politics appear to play a significant role in resource allocation decisions, adding an additional layer of complexity to the other problems that interfere with a company’s initial sound financial approach to decision making.
For example, more than 60 percent of respondents say business unit and divisional heads form alliances with peers or lobby someone more senior in the organization at least “somewhat” frequently.
“Many organisations”? “Somewhat frequently”? C’mon folks, you’re being a bit coy here. Corporate politics is the single most important factor in any company’s decision making process.
What I find amusing about surveys like this is that anyone is surprised by these results. Perhaps no-one is really surprised, it’s just that they need to pretend to appear surprised.
There is a huge disconnect between what managers and management theorists say happens in organisations and what they know from day-to-day experience really happens.
Corporate executives go away to do MBAs and other management qualifications, during which they will write essays (sorry, they’re called ‘assignments’ now – sounds more business like, y’know) on subjects like organisational decision making. There, they will study any number of models that assume such decision making to be a rational process, or something close to a rational process.
Having passed their MBAs, they then go back to a real world which does not conform to any of the models they have been studying.
The only decision making model that ever struck a chord with me was J.G. March’s Garbage Can. He described companies as organised anarchies containing garbage cans, “into which various kinds of problems and solutions are dumped by participants as they are generated.” Inside the garbage cans, a range of human behaviours and interactions, some rational but most not, will eventually produce a decision. Some problems may be resolved but, argues March, oversight and flight are as likely to produce the final decision. Shake the garbage cans around and a decision will eventually come out. Reviewing March’s work, Derek Pugh wrote:
[W]hen people fight for the right to participate in decision making then do not exercise it, when they request information and then do not use it and when they struggle over a decision ad then take little interest in whether it is ever carried out, something curious must be going on.
The conclusion of the McKinsey report seems to support March’s view:
[T]he less-than-ideal combination of optimism, risk aversion, and one-off decision making is perhaps exacerbated by the prominence of corporate politics. Respondents say that behind-the-scenes lobbying and logrolling—and sometimes outright deception—are fairly frequent and seem to inhibit constructive debate and dissent throughout the resource allocation process.
So why, against all the evidence, do management theorists, business journalists and corporate executives still talk as if organisations are run on a rational basis? Because to say otherwise would call into question the whole basis of the executives’ power. If they admitted that they didn’t really know what they were doing and that many of their decisions were arrived at by shaking up a garbage can, people would start to wonder whether they really are worth the huge amounts of money they pay each other. If organisational decision making isn’t based on expertise but on a mess of hunches, politicking and finger-in-the-air guesses, would the economy really collapse if the people who run companies were forced into tax exile?
No, this is a cat that has to stay firmly in the bag if senior corporate executive pay is to continue its inexorable rise.
Hat Tip – Chris Dillow