Decision Quality: Improving Value from Capital Allocation

Without well-developed decision systems and processes to address the complexities of capital allocation, organizations often resort to long, drawn-out debates; politicking and gaming the system; the gut instincts of a brave executive and staff; or deferring to quantitative analysis alone. With large amounts at stake, the opportunities for improved decision quality can be considerable.

Charles Alsdorf, Igor Heinzer, Elayne Ko

Decision framing is often minimized or overlooked. In developing capital project business cases, people tend to start gathering inputs right away and to fill out spreadsheets too soon. When we start building a financial model and collecting data without first framing the decision, we run the risk of falling prey to collecting the wrong data and the common cognitive biases.

Charles Alsdorf, Igor Heinzer, Elayne Ko

Asking the right, sometimes difficult, questions is a key ingredient of framing. When structuring a large strategic investment decision, it is crucial to understand how risks and uncertainties may affect the investment decision. One useful question to ask stakeholders is: “How could we be wrong?” This requires participants to analyze or otherwise consider the assumptions underlying the decision and explore how the investment might turn … [ Read more ]