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
- 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)
- 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.