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Monday, August 15, 2005
Antonio: Allocating decision rights
By Kiko Antonio
Night Manager
PROFOUND. How a company decides who is authorized to make what types of decisions can have a profound effect on its business, both in terms of everyday effectiveness and the bottom line. Allocating decision rights in ways that maximize organizational performance is an extraordinarily difficult and controversial management task.
And therein lies a big problem, because how effective an organization is at making high-quality decisions consistent with its mission and objectives is a prime determinant of its ability to compete in the marketplace.
There are two types of costs that must be considered in allocating decision rights. In their 1990 paper, “Specific and General Knowledge, and Organizational Structure” (Journal of Applied Corporate Finance, Summer 1995), Michael Jensen and the late William H. Meckling note these issues:
- The cost of delegating decision rights to those who have the relevant information but whose motivations and goals don’t align with those of the company.
- The cost of accurately transferring the relevant information from the source to the decision maker.
Placing decision rights where these combined costs are minimal should lead to optimal decision-making efficiency and, therefore, better performance.
But finding the organizational spot where decision costs are minimal is only part of the battle. You still must deal with the fact that those imbued with decision authority are invariably motivated by their own sets of personal and professional goals—some of which inevitably are inconsistent with those of the organization.
It is best to routinely review and update how decision authority is distributed because organizations, what they do and the environment in which they operate continually change. Decision-rights updates must become routine.
BIGGEST ERROR. Overcentralizing decision making is the biggest error companies make.
Often as a leader, you think you can make better calls, but decision rights must be collocated with the relevant information, and raising the level of decision-making authority thus requires transferring information upward as well. And companies often forget to do the latter or simply don’t because the cost is too high.
COMMON PROBLEM. Ambiguity about who has decision rights is a common problem. Misunderstandings about which individuals or groups have the right to make which decisions frequently carries a high cost for the organization, whether through duplicated or counterproductive efforts, or through the failure of the parties to act.
Good decisions occasionally produce bad outcomes.
Management is sometimes too quick to blame the decision makers or the process itself when results are not as expected. If decision rights are well allocated, then reallocating them because of a bad outcome will only make matters worse.
(kiko_antonio@yahoo.com)
(August 15, 2005 issue)
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