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When In Doubt Count Something and Divide It By Something Else

Workgroup Report: How do you quantify cost/benefit?

Yes, intuition and judgement are keys to big decisions, but are you using informed intuition and making informed judgements?  Quantitative analysis keeps you from making a bold decision stupidly.

3 big ideas

  • Every participant had a keen memory of quantitative analysis saving their bacon
  • The key analytical question is, “What will happen to our margins?”
  • Quantitative analysis doesn’t automate decisions, but it reveals root causes

Participants

  • Nathan Bares
  • Keith Berry
  • Susan Dineen
  • Kevin Hickman
  • Bryon Johnson
  • Tony Lawson
  • Steve Johanssen
  • Mike Markiewicz
  • Bill Mitchell
  • Tim Stewart
  • Carolyn Tretina
  • Pete Vogel
  • Derrick Van Mell (Facilitator)

Discussion questions

  • When did looking at the number cause you to reverse course?
  • What role does quantification play in your own decision-making?
  • How do you get non-finance people to look at the numbers?

Question 1:  When did looking at the numbers cause you to reverse course?

  • Quantitative analyses can be of non-financial data
  • Finding a vendor had over-promised the output of a $1M piece of equipment
  • Finding that only some services ultimately provided a positive margin
  • Verifying recruitment costs paid back much more than thought—in some cases
  • Learning a promotions program eliminated margins
  • Tracking average order size led to sales refocus
  • Running an 80/20 analysis racially changed marketing and sales priorities
  • Digging into unallocated overhead, realizing that project margins were overstated
  • That said, sometimes a decision is still right, even if the numbers don’t tie out

Question 2:  What role does quantification play in your own decision-making?

  • If you can’t answer just one financial question from the board, your idea is dead
  • Mentor said, “When in doubt, count something and divide it by something else.”
  • Beware false precision:  Make sure data is accurate and analysis is relevant
  • Learn to balance subjective and objective factors in decisions: good managers do both well

Question 3:  How do you get non-finance people to look at the numbers?

  • Make the numbers you present relevant to them.  Start with positive stories
  • Get everyone to understand how the organization makes money.  See funny video
  • People resist financial analysis because they don’t want to face the truth
  • Resistance can also arise because people don’t want basic assumptions to change
  • Make them analyze projects, but start with simple ones
  • Be clear a project needs a cost/benefit analysis even if it’s in the budget
  • Link raises to numbers, e.g., profit-sharing, in ESOPs
  • Promote financial literacy and communicate performance often
  • Learn to use graphics the right way.  But bad charts lead to bad decisions.

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The Center for Management Terms & Practices is the standards body for general management.  Our task: Create and support management development and succession programs. Our mission: Help people achieve great things together. See The GMs Index and The GMs Toolkit for the standard terms, tools and best practices.

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