Decision Making
Centralize, decentralize, and everything in-between
How does an organization consistently make good decisions?
An organization will ultimately exhibit good or bad decision making based on the collective set of decisions it has managed to act upon. At any point in time, individuals may create decisions that simply offset an entirely different group of decisions made by other individuals. Organizations, therefore, are not concerned necessarily with a specific individual’s decision making, but rather how decisions are generated across the entire system.
To discern if an organization is capable of good decision making, the most telling marker is assessing if decisions are properly decentralized or centralized. An organization capable of good decision making will properly allocate decisions to the appropriate layer; an organization incapable of good decision making will manage this allocation incorrectly, resulting in severe instability.
The dynamics of decision making
Proper allocation of decisions to the right layer is important because of the actual dynamics of how a good decision is made. Most good decisions are made not due to some genius, but rather because the decision maker in question is deeply informed.
The best way to solve a problem is to first understand it.
Good decisions are easy when you have a proper understanding of the problem. The person who is closest to that problem is going to have a rich source of information to base a decision on. A person who is far from the problem will lack such sources and at best receive diluted, biased information.
Organizations that exhibit sound decision making therefore consciously ensure a consistent allocation process:
decisions are decentralized to a layer where true understanding of the problem can reside in a single person
decisions that cannot reside in a single person are centralized to the lowest common layer where the collective problem understanding can be utilized by a judicious weigher of the probabilities
The heuristic here is to push as much down the hierarchy as reasonable. This is because information lies closer to the ground. It becomes filtered, diluted, and manipulated the more distance it has to travel.
Failure modes
Centralizing when you should decentralize
Centralizing when you should decentralize is a very common failure mode of organizations. There is a natural proclivity to want to centralize everything to an omniscient leader.
So why is this a failure?
At a certain scale, no person is omniscient enough to make all the decisions that need to happen. That limit happens very quickly. In fact, the more things change, the sooner that limit occurs.
A good leader should recognize their natural limitations and build a decentralization process that allow for decision making appropriately. Leaders who do not recognize this limitation assume that they are always best equipped to make the decision when in fact their understanding of a given problem can be completely off-base.
Those lower in the hierarchy will feel this failure as either micro-management or confusing decisions that don’t seem to match the reality they are seeing on the ground. To be clear, negative feelings about changes are not indicative of poor decision making. Humans are generally against change and some strategies take time to play out. The specific signal you want to watch out for is if the decision is irrational when compared to the front line’s notion of reality.
Let’s take an example. There’s Suzie, a sales manager overseeing a competitive region. She’s getting a lot of pressure to meet her numbers and she’s seeing competition come in and clean up. She listens to the feedback from her team and hits the pavement herself. She’s convinced that the way to win is to build up better support functions around her sellers rather than having more sellers so that each seller will be more effective. Suzie’s boss, Victoria, is feeling executive pressure to make this region perform. Victoria spends all day in executive oversight meetings where she has to represent sales. She finds the constant competitive pressures to be problematic and has argued for more sales people to really show up against the competition.
Who do you think is more likely to have the superior decision making in this situation? Suzie is. And why? Because this kind of problem requires closer contact with the ground. Decentralization will beat centralization.
Decentralizing when you should centralize
Some decisions should not be decentralized. This often happens when the consequences of a decision are far-ranging and are not localized to a specific area. In this scenario, a decentralized decision maker is not capable of assessing the risk of a decision appropriately. This has no bearing on their capabilities; it has to do with what information and authority they are able to acquire based on their position in the organization.
As a heuristic, most high risk, high impact decisions should be aggressively centralized to the lowest common layer. The higher the impact and the greater the risk, the higher up that lowest common layer will be. Most problems that fit this categorization require judicious weighing of probabilities. For such decisions, decentralization is unlikely to produce positive outcomes as the decentralized decision makers will likely improperly assess the risk and they may feel no ownership over righting any issues that arise.
Let’s take an example. A company is trying to decide on how to enter a new market on which it is betting a significant portion of its future growth. There’s a small and capable team staffed up to go figure it out. The team wants to test the waters with a variety of bets, arguing that investing too much in any given direction is risky. The executive overseeing this general area knows that success in this market either makes or breaks the company.
Who do you think is more likely to have the superior decision making in this situation? Unlike in the previous example, this is a case where the executive is likely to have the superior perspective. This is because unlike the team, the executive can understand that more hangs in the balance of the decision than the team’s immediate success. It is the success of the company that is more important. The executive has the ability to weigh those probabilities better than the localized team. This doesn’t mean the executive shouldn’t take ideas from the team (they absolutely must), but rather that the ultimate balance of decision making is going to be superior when weighed across the actual dimensions of risk and reward.
Governance roles
Everyone has a role in proper decision making governance. Those at decentralized layers must accept willingness and responsibility to make decisions at their layer and not prematurely push decisions up the chain. Those at centralized layers must push down decisions that meet the criteria to do so and provide the requisite authority down to allow decisions to stick. Decentralized layers must provide feedback upwards and centralized layers must provide feedback downwards. Proper governance is not a one-time optimization but a continuous competency that organizations need to develop over time.