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Decision Making and Risk within the Performance Management Process

Originally published February 13, 2006

Humans are inherently risk averse. Supporting a business decision, however small or seemingly insignificant, involves both professional and personal risks. Supporting business initiatives in a highly political organization involves trading political capital, which is not easily spent or given. Though stakeholders in smaller organizations may not have the same political motivations, they are often risking their own capital. Obviously, this is a much bigger risk. Removing barriers within a decision-making process eliminates unnecessary time and expenses, and helps organizations remain competitive. Typical barriers within a decision-making process include:

  • Insufficient information
  • Insufficient time to review alternatives
  • Insufficient participation of key decision makers
  • Insufficient planning
  • Insufficient communication
  • Insufficient ongoing measurement and management of the decision’s implementation

In today’s compliance-driven world, the decision-making process poses a significant risk to establishing and maintaining adequate performance management processes and systems. It is often impossible to identify a consistent management framework to evaluate the effectiveness of these controls, making decision justification extremely difficult and creating unacceptable executive risks. The decision process should be rationalized so it can support a wide array of strategic initiatives and operational processes using integrated financial and operational data. The process should also support commentary, which provides important rationale for basing important decisions.
 
Effective group decision making within performance management has always been a challenge, but traditional decision-making approaches do not consider the speed and complexity of dynamic virtual work teams regularly employed at this time. They also neglect recent compliance regulations that have a direct impact on defining current business processes. Ten years ago, an organization could employ loose guidelines and/or project management techniques because group decision making was less complicated. Similarly, the ability to reverse-engineer a particular decision was useful, but not mandated by law. However, today’s diverse supply chains create complex relationships with suppliers, partners and customers. In-sourcing, outsourcing, off-shoring and home sourcing are now commonplace.  

As a result, two seemingly mutually exclusive needs exist. Organizations now need to include more stakeholders than ever in the decision-making process. At the same time, they must do more to rationalize this process. This must be done so each decision-making step can be more effectively managed and related responsibilities assigned. The decision-making process, like all processes resulting in the creation and communication of financial results, must be known, predictable and accurate. This is necessary because of increased regulation and an exponentially larger information audience. However, the decision-making process must often be disaggregated to accommodate modern business processes. These processes involve workflow rationalization tools and approaches that leverage cost-effective labor pools or access diverse geographic markets. 

Designing an effective decision-making process within performance management will have many hot spots. Two such considerations are the level of decision-making participation and performance metrics.

Once the decision-making process has been designed, necessary participation in it can be more accurately determined. It is important to ensure that this participation is role-based. Role-based participation helps to more accurately map the responsibility each participant assumes in the decision. This will help ensure that the right people are involved, leading to a more insightful overall decision. It increases the accuracy and utility of the Sarbanes-Oxley Act (SOX) documentation of the decision-making process as well. This participation must also be monitored over time. Such monitoring can ensure the commitment of participants and make certain responsibilities remain accurately assigned as business conditions change.
 
Problems may also exist when certain metrics mean different things to different decision-making participants. This is especially true when performance management participants come from different business functions, use disparate systems or when general information quality issues exist. Organizations typically address these types of problems through master data management efforts; however, if it is not possible to gain a common understanding of what each metric means in terms of the common objectives, the effectiveness of the overall decision-making process will suffer. It is also not enough to determine which information is important. It is critical to decide to whom this information should be presented. Intuitive graphics and commentary often complement one another because graphics can depict a complex combination of multiple information dimensions quickly. In contrast, commentary can describe specific details and conditions, or communicate information regarding the relevance of additional factors.

Designing and implementing an effective decision-making process is critical to ensuring that an organization’s performance management process permeates all necessary components of the organization and enjoys continuous improvement over time.  Fortunately, many of the tools that most businesses currently possess can be further leveraged. This can enable more effective decision making and make the most of an existing performance management investment. An organization with a rationalized, established decision-making process can expect to avoid a major pitfall on its way to best class performance management.

 

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