Friday, January 09, 2009

Decisions, risks and Chief Executives

McKinsey have just published the results of a survey of over 2000 executives into decision-making - and what practices are associated with good results.

The survey conformed the value of:

1) Performing sensitivity analysis and creating financial-risk models
2) Including comparable situations from one’s own or the firm’s experience
3) Examining the risks of a project combined with the risks of other projects in the firm’s portfolio
4) Creating a detailed financial model of the decision

This accords with my experience. Far too often I have seen risk analyses that look at each risk in isolation or are hurriedly undertaken as little more than a ritual. (I also think that exit strategies and other contingency planning is even more neglected.)

Interestingly it appears that Chief Executives play a large role in instigating both the most and the least successful decisions. The report suggests that Chief Execs may be more likely than others to gamble on bets with big upsides and downsides - or may be better able to secure approval for such bets. It certainly demonstrates the need for boards to act as an effective challenge to Chief Execs.

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