Leaders earn their keep by making smart decisions. But sometimes the smartest decision is to delegate that decision to someone else, according to an article from the Kellogg School of Management.
Approach decisions by first considering the riskiness of a decision and allowing that assessment to determine:
- Who is involved in making the decision?
- How much time should be spent?
- How much certainty is required?
- What is your tolerance for error?
Who Gets Involved in Making the Decision?
A well-run company has the right people focused on the right risks. Ideally, the CEO and board of directors should only make decisions at the extremely high end of a risk continuum, leaving mid- and low-risk decisions to those further down the corporate ladder.
Unfortunately, this does not always happen. Too often, low-risk decisions get escalated up to the leadership team. This can happen for a couple of reasons. Sometimes CEOs act like vacuum cleaners, “hoovering” even the smallest decisions upwards. Other times, though, the problem is that the people below the CEO are unwilling to be accountable for mid-risk decisions and push them up to the top.
Decisions that are escalated also tend to be more error-prone, as the people making the decision are further away from the data required to make the call. Moreover, when the most senior leaders make every decision, they fail to empower people at the lower rungs of the organization and fail to develop their team’s decision-making skills. By pushing decisions down instead escalating them, leaders can build the decision-making muscles of their employees while making people feel more valued and trusted in their roles.
The reality is that every individual, including the CEO, has limited cognitive resources — resources that should be reserved for addressing the most fundamental issues facing the company at any given time. The biggest mistakes often occur when those at the top are using their mental energy on decisions that are not that critical.
How Much Time Should Be Devoted to the Decision?
In my experience, many organizations spend a disproportionate amount of time making low-risk decisions. I call this “inverting the risk continuum.” Inverting the risk continuum can lead a company to lose focus of core business questions.
How Much Certainty Do We Need in Order to Make the Call?
Some leaders by nature tend to be more cautious than others — and there is nothing inherently wrong with caution. But it is easy to overanalyze mid-risk and low-risk decisions. To avoid paralysis by analysis, the level of risk should drive how much certainty is required: When is 70% enough? When is 50% sufficient? When should we just make the call based on our gut because the risk is so low that it would be better to revise the decision if needed later than to analyze it upfront? You want to save your analytic rigor for the important stuff.
It is critical to consider the level of certainty required because there is a cost to the analysis. There is the cost of completing the analysis and the cost of postponing the decision. Postponing a decision is a decision in itself. Most people tend to overestimate the risk of making a bad decision and underestimate the risk of inaction, and this can have real consequences in a competitive business environment. Postponing a certain decision might be the right call for a company, but it is never completely risk-free; there is always a risk to not acting, and sometimes the consequences are as dramatic as making the wrong decision.
What Is the Company’s Tolerance for Error?
Most companies today claim to value innovation. We can find it in their mission statements or posted in large letters in their corporate lobbies. But innovation is only possible when you are willing to take risks. And in order to take risks, you have to be willing to get things wrong.
Instead of being universally cautious, leaders should focus on “de-risking” decisions by actively working to push decisions down the risk continuum. There are many ways of doing this. If a company wants to de-risk the launching of a new product, for instance, it can launch it in a smaller market, where its bugs will be less visible. Many startups live by the mantra “fail often, fail fast,” which makes perfect sense when dealing with low- and mid-risk decisions. But it may be less applicable to the higher end of the risk continuum. You do not want to fail often or fast at the core of your business.
What you do want is a company that encourages innovation and empowers its people to make decisions appropriate to their position. No amount of analysis will ever completely eliminate risk. But when leaders learn to assess that risk and focus on what really matters, they are far more likely to succeed.
