The power of compound decision making: Part 2
Pushing high-velocity decision making deeper into your organization
By Viraj Parikh, Managing Partner of TechCXO
On a recent 20VC podcast episode, Steve Blank, an early serial tech entrepreneur and academic who helped launch the lean startup movement, listed three things within any company leadership’s control that ultimately determines their survival:
- The speed at which one can assess their situation
- The actions you take once you make that assessment
- The speed of execution
“Speed” is the operative word — growth companies, borne out of the necessity to scale quickly, tend to operate in the fast lane. In Part 1, we introduced a mental framework for growth company CEOs that argued why high-velocity, high-magnitude decision-making is essential to building value.
Here in Part 2, we delve further into the relationship between decision-making and value creation. We start by re-introducing the graph below presented in Part 1 as a risk-reward trade-off for growth-oriented managers with a bias towards fast decision-making (right side of the y-axis), on the theory that “failing fast” is more desirable than taking too long to make consequential decisions.
We add to the illustration in Part 1 by layering in a sliding scale of qualities that increase the odds of landing in the desirable upper-right quadrant. Merging high-velocity decision-making with the compounding nature of growth can lead to what I have termed the power of compound decision-making.
Excellent judgment increases the odds of being in the top-right quadrant, which means having strong decision-making qualities and skills. Some foundational elements of decision-making, in rough order from weakest to strongest, are:
- Bandwidth (i.e. time to execute)
- Experience (i.e. points of reference — correlated to confidence)
- Information (i.e., clear communication of data)
- Analysis (i.e., interpretation of data)
- Negotiation (i.e. a market-driven decision-based on analysis by both sides)
Those who exhibit strong decision-making characteristics are more equipped to have great judgment, which is among the chief qualities CEOs must seek when building out their leadership teams.
THE VIRTUES OF BEING DECISIVE
The power of a fast decision is that you create an invaluable commodity: time. Breaking it down further, there are two aspects of time that are created: (1) time for the team to execute the strategy — or pivot as necessary — within the period that milestones have been committed, and (2) time for the balance sheet to withstand the pain of failing fast.
However, it would be neither desirable nor effective for all decision-making to be centralized in the C-suite, so the most important leadership decision is around hiring and compensation. To achieve 100-200% annual growth, it is critical for the CEO to hire trustworthy leaders and empower them based on a sound mission and strategy, so that high-velocity decision-making can be unleashed deeper in the organization.
Once those leaders are in place, each SG&A department head has a multitude of choices and constant decision-making. Engineers and Product Managers must balance between getting products out fast and figuring how to scale them efficiently. Sales and Marketing must decide how to spend budgets efficiently, figure out what channels to pursue, and set quotas and commissions. HR must decide whether to insource or outsource recruiting, figure out employee benefits, and address employee morale issues. Finance must decide what form of capital — debt or equity, and on what terms — is required to fuel growth. And on down the line – Operations, Customer Success, Legal — every leader must constantly move the ball down the field or risk their department being an albatross around the Company’s neck that stops growth in its tracks.
The virtues of sound, fast decision-making are potentially exponential, since each decision is often a gating factor to many subsequent decisions deeper in the organization, which are the catalysts to growth. In the leadership org chart illustration below, think of each role not as a person but as a gate, or a series of gates, that is open or closed based on upstream decisions.
Deep in the organization, on the right side of the chart, are many, many gates. The beauty, and risk, of a single decision made on the left side are the many decisions it unleashes on the right. The flipside is the cost of indecision: gates remain closed, people stagnate, and morale suffers.
In Amazon’s annual shareholder letter, Jeff Bezos never fails to emphasize that customers are always front and center; in fact, each year he attaches his first shareholder letter from 1997, where he outlined nine management and decision-making approaches, the first of which is, “We will continue to focus relentlessly on our customers.” That core principle permeated the company, helping set up programs like Prime that led to tremendous flywheel benefits and consistently high net promoter scores (NPS). But the real point is that Bezos did not wait several years to figure out and articulate this core principle. If he did, Amazon likely would have floundered and not become the company it is today.
Without question, the decision to be a customer-centric company was the right one, but perhaps equally important was that the decision was made in the earliest days of Amazon’s existence. Employee paralysis never had time to calcify in the culture, as clarity guided future decision-making. Every employee in the org chart above either marched toward this goal or marched out of the company.
To refresh both Parts 1 & 2:
- High-velocity decision-making is essential for private growth-oriented companies. If the goal is to double revenues every 1–2 years, there will inevitably be a trade-off between fast decisions and high-quality ones. Err on the side of speed and accept that failing fast is better than taking too long to act.
- Never lose sight of the fact that only high-magnitude decisions that are value accretive, not the small but unavoidable decisions that must be continuously made. Do not be lulled into thinking that value is being created just because decisions are being made, and do not beat yourself up if you make a string of bad decisions. Most can be overcome, as long as you don’t make a really stupid financial decision. Remember, any company that has ever gone bankrupt does so for one reason and one reason only — it runs out of money — so get yourself a good CFO!
- Whether realized or not, indecision in a growth company is implicitly a decision also. If a leader finds that time is passing without much progress, there better be a really good reason, since the opportunity cost of dwelling on important decisions can not only be high, but deadly.
- Making fast decisions is relatively easy, but exhibiting great judgment is much harder. There is a muscle-memory that comes with experience, but short of that, work on the qualities that increase your odds of making better, faster decisions.
- The power of fast decision-making is that you create the one commodity that is always in short supply for high growth companies — time. Not only do you give yourself more time to successfully execute, but since your balance sheet is likely a melting ice cube, you are financially stronger the earlier you make the hard, needle-moving decisions.
- Make one of the criteria for hiring your management team the ability to make good, fast decisions, as well as further down the organization. The more you can decentralize the day-to-day decision-making, the more time you have to focus on the higher value-added strategic ones.
- Do not underestimate the power you unleash within your company when high-level decisions are made and communicated throughout the organization. Employees at high growth companies are like pent-up thoroughbreds that need and want their gates opened up so that they can get out onto the race track and show off their stuff. The earlier you make
important decisions, the more time the company can focus on moving forward. Not to say there won’t be pitfalls and pivots, but forward progress should be the mantra.
Obviously not every decision should be subject to speed. Complicated strategies or negotiations will invariably slow down the most rational-minded leaders. Recognizing the right reasons to make slow decisions — as opposed to the wrong reasons, such as fear or anxiety — are part of being a well-run growth company. Sound execution, checks, balances, controls — the province of a capable COO and CFO — are all necessary to ensure that bad decisions do not spin out of control. But if growth is the objective, the bias should always be towards being decisive.
Ahead of Facebook’s 2012 IPO, Zuckerberg elaborated on his famous “move fast and break things” phrase:
“As most companies grow, they slow down too much because they’re more afraid of making mistakes than they are of losing opportunities by moving too slowly.”
Conquering indecision — the fear of making bad decisions — is a trademark of successful companies and essential for young growth companies to achieve escape velocity.
Viraj Parikh is the Managing Partner of TechCXO’s Nashville practice, and a CFO consultant to early-stage, venture-backed growth companies. email@example.com