The Evidence & Intuition.
In a recent blog post I outlined the 5 aspects that make our intuition unreliable and inconsistent. We need to consider the alternative to purely relying on human intuition in business. There are numerous factors in play in business from the various market forces to the various customer, direct customer base to internal team issues, government issues, economical issues etc. Even the simplest business has a number of factors at play and relying only on human intuition means that some flawed decisions are being made.
I must reiterate that I’m not saying that we must never use human intuition. My point is that leading & managing only by intuition is a problem.
As I have asked in recent days “how do you know”. We must look at data and understand what pattern is in the data. But it is not just any old data. Just because it is easy to get it does not necessarily mean that it is important.
The first step is to understand what is driving the business and then determine what we need to measure.
There are a raft of statistical techniques designed to find patterns and I don’t wish to complicate the management of small business in referring to statistically techniques however a number of these are very simple to utilise in a small business but can be extremely useful.
The use of statistically techniques can be applied to any setting including wine evaluation. Princeton economist Orley Ashenfleter predicts Bordeaux wine quality and hence eventual price using a model he developed that takes into account winter and harvest rainfall and growing season temperature. Massively influential wine critic Robert Parker has called Ashenfleter an absolute total sham and his approach is so absurd as to be laughable. But Ashenfleter was correct and Parker wrong about the 86 vintage. Also his way out on a limb predictions about the sublime quality of the 89 & 90 wines turned out to be spot on.
It’s not just wine that we can analyse the data to determine a more accurate prediction or to make a more informed decision.
But we need to measure what is important to the success of the business. This success factor will be found in the operations of the business not the financials.
To illustrate the power of looking at the evidence a paper in 2000 surveyed 136 studies in which human judgement was compared to algorithmic predictions. 65 of the studies found no real difference between the two and 63 found the equation performed significantly better than the person. Only 8 of the studies found that the people were significantly better predictors of the task at hand. If you are keeping score that’s just under 6% win rate for the people and their intuition and a 46% rate of clear losses.
So why is it that we continue to place so much stock in intuition and expert judgement. Overall it is clear we get inferior decisions and outcomes in critical situations when we rely on human judgement and intuition instead of hard cold boring data and measurement. This may be an uncomfortable conclusion but it’s the fact. We need to make better judgements thus we need to have those boring data and numbers.
Again I’m not proposing that we remove or dispense with the human expert or the human business owner but rather we couple the humans in the middle of an evidence based process. This has been the situation with medicine where the evidence conducted from numerous studies of techniques and processes and drugs pave the way for doctors to provide the correct diagnosis but it hasn’t removed the need for intuition of the expert specialist to make a judgement call. They are just being able to make it with the cold hard facts and the knowledge of the studies undertaken previously.
In a business if we have the information if we have the right numbers, if we have the right measurement then the management will be able to have this as their starting point for making decisions and determining the future of the business. Surely these decisions will be better informed as a result.
How do you know?
Recently Joseph Michelli gave an excellent podcast and also the transcription was up on his blog, asking the question “How do you know?”
In his podcast Joseph talked about in his experience of dealing with some business clients, that they’ll state a particular situation is the case and Joseph will then ask the question “How do you know?” What data is being collected to verify this stated fact?
I would like to also endorse the comments of Joseph Michelli. It is critically important in business to have the facts at hand to make informed and correct decisions.
Too often assumptions are made about how the customer is behaving, how the staff are behaving, that are not actually based on fact. They may be generally held belief within the business or organisation, but nobody has undertaken the task to collect some data to verify the reality. Yet it is only with this data that you have a starting point to determine how to improve the business, or a part of the business.
Data does not to be collected using the most complex IT system, collecting everything. There are many simple tracking and analyst tools for collecting useful data of a business. The key thing is actually to determine what area is important that we need to focus on.
What is the engine of the business? What has the potential to drive future value in the business. Often there is one key area that the whole business needs to focus on for a period of time, or it may be one area per division of the business. But it is important to have the data as the starting point.
Don’t make assumptions. Don’t accept generally held beliefs without some verification. The data allows informed decisions, and the application of intuition to the development of the business. Constantly ask yourself an your team “How do you know?”
Photo :- LauraKGibbs
5 Aspects That Make Our Intuition Unreliable and Inconsistent
5 Aspects That Make Our Intuition Unreliable And Inconsistent
Human Intuition or gut feeling is perceived to be reliable, accurate and that we should rely on this more to make our decisions predictions and run our businesses. I believe that in leading and managing in business it must be a synthesis of evidence and intuition. Not everything is in the data but nor can a business be completely lead or managed by intuition.
How our intuition works and it’s limitations have been researched at length. The research clearly shows some limitation that we need to be aware in leading and managing our businesses.
1. We apply intuiton inconsistently.
Even experts have been found to be inconsistent. It has been found that Doctors in determining how they diagnose patients those with a clearly defined model did a better job of diagnosing the new cases than humans whose knowledge was used rather than the evidence based models. In other words their intuition varied. Models though don’t have intuition. So the Doctors armed with models and being able to use their intuition within that framework had a better clinical outcome. The same is the principal in business that having the evidence or the model or framework allows us to operate business more efficiently and then applying the intuition within that framework.
2. It’s easier to make bad judgements quickly.
Our biases that we have affect us when we make decisions. There are plenty examples of this but to use an example that was in a recent Blog post on Harvard Business Review:- if you were to ask a group of people “is the average cost of German cars more or less than $100,000″ and then ask them to estimate the average price of German cars, they would anchor around BMW’s and other high end makes when estimating. If ask another group the same two questions but say is the average cost of German cars more or less than $30,000 instead they will anchor around VW and give a much lower estimate. How much lower? Well when this study was performed it turned out around $35,000 lower on average or half the difference between the two anchor prices. How information is presented affects what we think. This is powerful in that it shows the short coming of our intuition but it also shows the ability that if we present our information properly to our team then we can determine the decisions that assist in determining the decision that they will make.
3. Intuition only works well in specific environments ones that provide a person with good ques and rapid feedback.
A good que is a rapid indications on what is going to happen next. Feedback from the environment is information about what worked and what didn’t. So if the environment is perfectly suited up with these rapid ques and accurate feedback then intuition can work. Unfortunately the environments where this is the case are few and far between.
4 It takes a long time to build intuition.
Malcolm Gladwell talks of 10,000 hours rule. This is that it takes 10000 hours of application to become expert at a particular area. It is understood that chess players need approximately 10 years of studying competition to assemble a mental repertoire of patterns to allow them to compete at the upper level. It is only after many years that intuition can be fine-tuned to be consistently accurate subject to the correct environment as discussed above.
5. We don’t know where our ideas come from.
There is no way for even an experienced person to know if a spontaneous idea is the result of expert intuition or of a pernicious bias. In other words we have lousy intuition about our intuition.
These 5 reasons show the shortfall in relying on our intuition. What are your thoughts?
How does a brand become trusted?
Many advertising agencies and the old media sales representatives will talk about the importance of brand advertising. They will produce a spiel that goes along that ‘it is necessary for a business to establish it’s brand in the market place. They will state that brand advertising is more important than direct response marketing.
Recently there has been a survey in Australia of the most trusted brands. The top brand was Australia Post. The second was Toyota with third going to Cadbury.
To my knowledge Australia Post and Toyota do not undertake brand advertising. They are always advertising and marketing a product or service. Toyota are always marketing a car; Australia Post are always advertising and marketing one of their services.
This seems to highlight the ploy that brand advertising is actually a waste of money and small business in particular need to be careful not to get caught in the trap of doing any marketing that would just purely be focussed on brand only.
The next important aspect of this is that these brands deliver on their promise.They inform their customers what they will be getting and then deliver it, consistently. It is this delivering on what they promise is the reason why these brands are the most trusted in Australia.
Obviously the big 4 banks do a lot of TV marketing, but because the belief is because they are not delivering on their promise, they do not make it into the top 10 most trusted brands in Australia.
This survey highlights the fact that a business must be focussed :-
- on delivering on its promise, delivering on its service and product in an exceptional consistent way
- if it does any marketing and advertising at all it must always be promoting a product or service, the brand development will follow from that.
Your brand will be trust not because of advertising but because you deliver on your promise.
My School Website - Measuring Output vs Input.
Here in Australia the Federal Government has recently started a new website called My School This website provides profile information about all of the schools in Australia (government and private).
The information detailed is various educational results from National testing that all students undertake in Years 3, 5, 7, & 9. Also the final year results are also included. The results for each school are compared to the national average and to statically similar schools.
The website has created some considerable controversy. The teachers unions are unhappy. A number of the school Principal’s are also unhappy. Their arguments is that these results are not reflective of the schools performance.
I am not an expert in assessing the educational results of a school, I am just a parent with a keen interest in measurement.
The metrics may not be perfect but they are better than what we had prior : - nothing. One measure that I would like to see is to track the results of a cohort of students through the schools. This would show the impact of the school. Given we are testing each student and then compiling them, it would relatively easy to track the students results throughout their time at the school.
The focus in the pass in education has been measuring the input. The politicians, teachers union, and schools themselves would talk about :-
- how many new teachers are employed
- class sizes
- dollars being spent nationally, state and school level.
The output though is a much more accurate reflection whether the money has been well spent. The My School website had least is moving towards measuring the output ie the educational results. So why the objections. Could it be that this start to reveal where the money is being wasted. Could it be that finally the focus on output will mean that people will be shown up.
This lesson is just as applicable to business. Be careful of measures that focus on the input. It is the output that is important. In business the output is measured by looking at what our customers think and do. Our measures must focus on what is important to the customer.
Stop trying to find new customers.
Sales & Marketing focus on obtaining a new customers
To often in business we focus on garnering a new client or customer. Even to the exclusion of retaining an existing customer.
The marketing and advertising dollars are focused significantly on the new customer market.
Countless studies (in Australia and internationally) show that the cost of a new customer vs. retaining an existing customer is somewhere between 6 and 20 times more expensive. Retention of our existing customers needs to be given a much higher priority that often it is in business.
The sales people are excited by the thrill of the chase, so they want to always deal with new customers. Probably a lot of businesses incentive systems for their sales people focus on new business also. Whilst in business we need to grow there needs to be a balance also in the focus on retaining new customers.
Customer retention affects business profitability.
In the insurance industry it was determined that if insurance clients could be retained one more year, that it would increase the profit by 75%. I am sure that this is the case in a lot businesses, that if customer retention can be increased, then the bottom line impact will be extremely positive.
The example that we could look at for this is the motor vehicle industry. Lexus put a extraordinary amount of effort in to retaining their current customers and internationally they have by far the highest repurchase rate of any vehicle. This is superior to any of the European marquees; Mercedes Benz, BMW, etc and also to the other brands within the Toyota stable as well. It is through the focus of the after sales service that Lexus has been able to have such a high retention rate.
This means that Lexus gets greater revenue during the lifetime of that relationship with the customer and also gains greater new sales from the customer.
The Rate of Customer Churn must be reduced.
So how do we address the churn rate; and that is firstly focussing on the after sales service. It is also focussing on how to constantly maintain contact and impress the customer to ensure that they keep coming back.
Lexus know exactly what a customer is worth to them during the lifetime and what it costs to obtain a new customer vs. selling another product to their existing customer base.
- Do you know in your business what the churn is costing you?
- Do you know what the lifetime value of a customer is?
- Do you know what is the average length of time a customer deals with you?
These are important numbers because a small improvement will lead to a large improvement in the bottom line.
Stop Chasing Profits
In business we are always told to focus on the bottom line. For instance - ‘the bottom line is all that matters’ etc
I believe that this focus is wrong.
The persistent focus on the bottom line can lead to poor decisions being made. Activity for the sake of activity could be happening, inefficiencies could be allowed to continue, unprofitable services/products/or customers could still be provided, but the bottom line still be healthy. Focusing on profit does not tell us the story about what is happening to cashflow, customers, or employees.
It is not uncommon to hear “We have been profitable, but I don’t know where the cash is.” All of these comments and issues are symptoms on the focus being purely on the profit. Obviously we can’t ignore profit, but we need to stop being primarily focused on the bottom line.
At the end of the day the profit and loss statement is a history statement, it is a statement of decisions made by the business and by its customers in the past. There is a story to be told, the numbers do talk. But it is a story of what has gone on in the past.
Also connected to this is what period and how soon after the end of the period are we looking at, when we are looking at profit? That is if the profit and loss statement is for the year ended 31 Dec and we are looking at in February then it is late and the somewhat irrelevant.
The profit and loss statement is only of use if we are looking at it very soon after the end of the period. It will soon become ancient data and decisions made on the basis of the profit could well be wrong based on where the customer has moved to.
We need to be collecting information that informs us as to where the future of the business is going. This is through the use of ‘lead indicators’ or ‘metrics’, indicators that illustrate the value being built or that is driving the current performance of the business.
Chasing profits can lead to poor decisions. Stop chasing profits.
How are you keeping the score?
In Brisbane we have enjoyed the Brisbane International Tennis Tournament. It is part of the world tennis circuit and is one of the lead up tournaments to the Australian Open held in Melbourne this week.
We went to the tennis arena to watch some of the matches which was most enjoyable. The thing that is quite obvious though (in watching any sporting match, but lets just for the minute focus on the tennis) is the use of a scoreboard. The tennis scoring system dates back to when the date when the game was founded and has some little quirks, but anybody new to the game after a short explanation will understand how each game is scored; from 15, to 30, to 40, potentially ‘deuce’, to ‘game’. Then the first to 6 games (subject to tiebreak situation) wins a set. The matches are best of 3 or 5 sets. (Obviously there are many nuances in the scoring of tennis which I wont go into.
My point is that the scoreboard clearly shows the progress of the match. It is very clear to all, the players, the spectators what the score is and what has happened.
Is this the case in your business?
Do you have a scorecard that is simple to understand? A scoreboard that after a short explanation everybody can understand? Can everybody understand how the business makes money?
There would not be many variables that the scoreboard would measure. It must be easily understood and relevant. There may be separate scoreboards for separate divisions or areas of the business.
FedEx use a system whereby they have what they call a ‘Hierarchy of Horrors’. These are all the things that could go wrong in dealing with their customers. All parcels are tracked to determine how their service ranked against this hierarchy of horrors and an index which they call a ‘Service Quality Index’ is kept. Every morning this service quality index is emailed out to every office. Everybody knows from this index how FedEx is going.
Yes, they have quite a sophisticated IT solution and for any small business, they could not hope to emulate the same sort of scoreboard, but the point is that they have considered what actually matters to the customer and developed a scoreboard around that. It is something that everybody in the business has input into and I believe that a system of a scoreboard that everybody understands is important to manage the business.
There are other things to lead the business, but from the management view point, we need to (like the tennis) have a scoreboard that is simple and relevant for all.
Picture - Richard Fisher
The Mysteries of Business
Malcolm Gladwell wrote a piece called Open Secrets for the New Yorker. In this amongst other things he talks about how a lot of the demise of Enron could have been read from the publicly available data and that some analysts did. Malcolm goes onto talk about Gregory Trevertons work of the distinction between puzzles and mysteries. With a puzzle there is information missing and to solve the puzzle the missing piece is needed. Mysteries though the information is all there the answer just needs to be found.
Roger Martin writes in his great book “The Design of Business” about ‘the knowledge funnel’ where things start as a mystery and then move to heuristic and finally to an algorithm.
It is my belief that too many people in business rely on false heuristics to lead and manage. As a result they do not get the full efficiency gains that can be obtained from measuring what matters.
Additionally there is the biases and assumptions that we all have which can lead us down the wrong path. Too often information is being collected from clients that really is only vanity information. It is not useful information to truly understand the customer.
True understanding of a customer is not done by a view dorothy dix questions on a survey but rather by observation of their behaviour.
Firstly it is necessary to start with the strategic objectives. We can not be all things to all people. What is the direction of the business? Armed with this we need to understand our customers and prospective customers. With this we will know what is success in the eyes of the customer. The information is there the business needs to have a culture of not making assumptions, removing biases and looking at the information. From all this we can then design a set of metrics that can direct the business. There will be mysteries to solve both inside and outside the business but this process will direct the value creation.
In this blog this year I will be exploring further the mysteries of business. Mysteries of the customer, of the team, of management, of leadership etc. Let the data tell the story.
Don’t allow anyone to sit-down at your next meeting.
An experiment at the University of Missouri compared decision making in 56 groups where the members stood during short meetings to 55 groups where members sat during meetings.
Where people stood they took 34 percent less time to make the assigned decision, and there were no significant differences in the quality of the decision. This seems to be a trivial item but wait a minute.
How many employees is in your firm? How many short (up to 30min) meetings do you have? Also there may be meetings that are taking longer than this but if the people attending were made to stand would be a short quality meeting. Sometimes it is necessary to sit down but often this is not the case.
If your firm has say 5000 employees and if during a year each employee replaced a sit down meeting with a standing meeting then this would mean 35,000 minutes - just over 583 hours per year.
So be careful before you sit down at a short meeting - ask the question “can we stand and get on to other tasks?”
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