This article is aimed at Outlook Ventures' portfolio companies and other startups focused on growing sales and marketing activities. The article has been authored by Lynley Sides, a member of the extended Outlook Ventures family and founder and principal of Sides & Associates, which provides strategic marketing, product development and organizational effectiveness consulting to growing ventures.

Are early stage companies skilled at making decisions? If innovation is a part of a company's mission or if it invests heavily in new product development, decision making is one of its top drivers of financial performance. Excellence in decision making could make the difference that places it in a market leadership position. If decision making is not a top priority of the CEO, it should be.

Profitable innovation requires decision making discipline. From early stage enterprise software startup Reconnex to the $52 billion Merck, innovation is a part of the company mission. Companies like eBay, Yahoo!, and Salesforce.com have demonstrated that it is possible to innovate profitably. Each of these companies exhibited decision making best practice characteristics early on.

Today, business success is driven, to a far greater extent, by management capabilities rather than structural advantages, which were formerly their most valued assets. Decision making effectiveness is a source of competitive advantage for the companies that have consciously developed and managed the set of capabilities described in this article.

However, for a growing company to be good at decision making is challenging. Executives struggle with conflicting needs such as faster decisions versus more data and middle-management trust versus senior executive control. Failing to kill a bad project soon enough can be a mistake with untold opportunity costs, while under-funding a high-potential product could sacrifice the next blockbuster.

Today entrepreneurs and other leaders of young companies can take basic steps to incorporate effective decision making as they grow. The first step is understanding the critical drivers of decision making success.

Drivers of Success in Decision Making

Through extensive research including studies covering tens of thousands of decisions at thousands of companies across countries and industries, Sides & Associates has identified 6 drivers for success in decision making. While all 6 drivers are important to ensuring that decisions are consistently well-made and improve over time at any company, their relative importance varies significantly with the size of company.

Figure 1: Drivers of Success in Decision Making

Strategic Context

Without clear company goals, strategy, priorities and risk profile, decisions are unlikely to be made consistently and cannot be effectively distributed below the top executives in the company. Strategic context provides a compass for decision makers throughout a company and enables decisions to be made based on consistent criteria, regardless of who is making the decisions.

Decisions delegated without adequate strategic context may answer the wrong question, be too risk averse, prioritize the wrong factor, or else simply float back up to the top. Strategic context includes objectives for the decision, how it relates to the company's strategy, who will be held accountable, key stakeholders, priorities, constraints and evaluation criteria. Clarifying strategic context is the responsibility of both the delegator and the delegate of the decision.

The larger a company grows, the more critical this driver becomes. For smaller startups, it is possible either for centralized decision making to be effective or for everyone in the company to be so aware of the way decisions are made by the executive team that others are able to effectively replicate their decision making. However, for companies with 3 or more layers of management below the C-level, clear strategic context becomes the cornerstone of an efficient, effective decision making system.

Leadership

The behavior of a company's senior executives set the tone for decision making at all levels. If the CEO makes responsibility for decisions clear, trusts his executive team, supports their decisions and then evaluates their effectiveness transparently using consistent, appropriate criteria, managers at all levels are likely to follow suit.

Commonly, senior executives' intentions are good, but they don't know what role they should play in decision making. According to Winning Decisions by J. Edward Russo and Paul Shoemaker, "The best executives don't make very many decisions. They concentrate on what's important and delegate the rest." The best leaders focus on creating strategy, developing the "decision making system," and making only the critical decisions or resolving exceptions. Micromanagement by executives is often driven by fear, not superior ability.

The consequences of senior leaders too involved in decision making include delayed decisions, lost productivity, under-utilization of middle management resources, employee frustration and inadequate leadership focus on their most critical responsibilities.

Michael Shutzler was brought in as President & CEO of Classmates when the company had 45 employees and was bleeding money at a rate that would have resulted in empty coffers within 4 months. When he arrived, all decisions went through the CEO. Recognizing that a scalable structure and decentralized decision making were required for the company to become profitable, he put in place a logical structure and highly capable leaders, completely delegated decision making authority, and allowed them to fail. He bit his tongue on many occasions; but as a result, the leaders took risks and developed their decision making capabilities which became even more important when the company quadrupled its revenues in 2 years, becoming the only profitable internet company at the time. Classmates remains cash flow positive to this day.

Roles

Decision making roles and boundaries must be clear for decision making to be effective. Without single-point accountability for decisions, decision makers will be reluctant and executives will be unable to hold anyone accountable for results. Roles should also include who will participate in the decision making process, provide input, be informed, not be involved, and be responsible for implementation.

For larger companies, the role of committees is often unclear and cross-functional teams may not be structured for success. Complete committee and team charters are essential to the effectiveness of these groups. The most critical role of all is an executive "owner" of decision making who is accountable for building the decision making system, measuring its success and improving it over time.

For smaller companies, the individual decision making abilities of the executive team are typically the most critical driver. However, as these companies grow, establishing clear roles is required for decision making to become less centralized. Establishing a decision making owner early in the company's development can help to ensure that the system grows as appropriate along with the company.

Oliver Muoto, co-founder of Epicentric, a leader in the enterprise portal software industry recently acquired by Vignette, says issues with roles and management ability were some of the most difficult faced by Epicentric. When it became apparent that middle managers needed to be more empowered, the company took several steps. More responsibility was distributed along with accountability and performance rewards, roles were clarified, and managers were trained at all levels. "Smart people and good leaders are not necessarily good managers," said Muoto. Finding time for training while in rapid-growth mode is difficult and managers often don't perceive that they need it; but Epicentric made the time.

Process

Generally speaking, there are 2 kinds of companies - ones that make decisions according to a stated process, openly (in meetings) and ones that make them "offline" (in the hallways). The offline process often evolves due to a culture of reluctance to air controversy openly and to make unpopular decisions in groups. Recognition that conflicting views should be thoroughly heard and considered but that consensus is not necessary to the best decisions is critical to the success of any decision making process. In the absence of process, decisions are often framed incorrectly, time is wasted, communication is inconsistent, and decisions do not improve over time.

The most commonly neglected but critical steps in the decision making process are the activities at the very beginning and the very end. Before any work is done on a decision, it must be clearly framed and an approach selected. What boundaries are being imposed on the decision and its surrounding situation? How strategic is the decision? How routine? Is it more people or capital-oriented? How much support is required? These characteristics and a few others should drive the level at which the decision is made, the others involved, the process and criteria used, the timeline, and communication plans.

To objectively evaluate and learn from a decision-making experience requires taking time away from job pressures to look backward. Depending on the decision's outcome, this step may seem both needless or painful. However, failing to do it results in inappropriate performance management and robs the company of valuable learning. According to Winning Decisions, "Experience is knowing what happened. Learning is knowing why it happened. Experience is inevitable; learning is not."

Finally, if communication requirements are not explicit at every stage, input will be sought inappropriately and/or inconsistently, critical personnel will be informed sporadically and/or incompletely and, as a result, decisions will later be revisited or overturned causing needless delays in business productivity.

Tools & Technology

Tools to support decision making range from highly technical solutions to simple guidelines. Technology solutions include collaboration, project management and information sharing tools that are helpful particularly for larger companies that do a great deal of work in cross-functional teams. More sophisticated technology solutions to support decision making include modeling and institutional learning systems. For smaller companies, tools provided to decision makers may simply include a set of decision making principles set forth by the executive team.

Management & Controls

A common assertion among CEOs is that "results are all that matter" and therefore managers should be judged and rewarded accordingly. While, clearly, results rule at the end of the day, the way management decisions are evaluated and rewarded should not directly result from a single positive or negative outcome.

A decision's outcome is a result of 3 things: decision making, execution, and chance. The more risky the industry, the stronger the role of chance and therefore the greater the chance of a bad outcome. However, evaluating and boldly rewarding or penalizing managers swiftly and consistently is critical to business effectiveness. So, how should managers be evaluated?

Best practice is to explore all causes for good and bad outcomes and to evaluate people based on the process followed, trends in outcomes, and success criteria established at the time the decision is made. While single-point accountability is essential, those whose input is critical to the decision should be held accountable for the quality of their participation in the process.

In reality, time pressures result in decisions evaluated swiftly and informally. This often results in lucky managers basking in the glory of positive outcomes from poorly made decisions while others have their career options limited as a result of well-made decisions with bad outcomes.

Decision Making Improvement in Growing Companies

It is easy to assume that a company is good at decision making because it has enjoyed a couple of fortuitous outcomes. However, building lasting decision making discipline requires far more than the characteristics responsible for a company's early successes. Business leaders that recognize the shifts in decision making practices that need to take place as they grow and make them before their competition will increase their chances of innovating profitably and winning in their market.

For leaders of companies beyond the earliest stages of growth, one of the most difficult lessons can be that the best leaders are good delegators, not necessarily good decision makers. Another is that clear priorities enable leaders to focus on what's important. As Oliver Muoto of Epicentric put it, "A good leader knows when to panic. A bad leader panics all the time." Successful entrepreneurs interviewed agree that the size at which decision making needs to become a decentralized "system" is roughly 100 employees.

So what is a well-made decision? It is timely, clear, made at the lowest possible level, supported, implemented, evaluated appropriately, and made utilizing lessons from previous decisions. Well-made decisions are essential to achieving a market leadership position. Improved decision making practices have enabled companies to improve productivity in product development, reduce time to market, and increase market share, revenue and customer satisfaction.

The first step is developing a personal decision making process and style consciously rather than subconsciously. The next should be ensuring good individual decision making skills are propagated through the company through education and stated principles. Before beginning decision making improvements, it is important to conduct an unbiased evaluation of decision making at all levels of management across functions. Finally, as the company grows larger, put in place the processes, roles, technologies and control systems required to enable and continually reinforce good decision making behaviors.