When In Doubt Count Something and Divide It By Something Else
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.
