Whether it originates with individuals, groups or a corporate culture, human bias is a challenge (54.5 percent) in cash deployment decision-making, according to a recent Deloitte Financial Advisory Services poll. Despite bias headwinds, 53.9 percent of respondents say their companies plan to deploy cash in the next 12 months.
"Humans aren't perfect. We bring personal biases to our decisions, create imperfect organizations and change our minds frequently," said Charles Alsdorf, director and Capital Efficiency national leader, Deloitte Transactions and Business Analytics LLP. "Boards are increasingly recognizing the impact that human bias can have on capital deployment decisions and are therefore asking for more robust research into success rates of capital spends in particular sectors and other new metrics when deciding whether to make investments."
Performance improvement (35.2 percent), M&A (19.8 percent) and restructuring (11.2 percent) are expected to drive capital deployments in the next 12 months.
"Crises often come as a surprise and create conditions where human bias can play an even more pronounced role," said Cooper Crouse, director, Deloitte CRG, Deloitte Transactions and Business Analytics LLP. "In volatile situations, it becomes even more critical for leaders to apply the same decision-making and project prioritization approaches. No matter what the pressures, the leaders who often make the best capital allocation decisions are able to objectively evaluate data, while effectively identifying--and stepping beyond--their own assumptions."
Suggestions to counter human bias in capital deployment decisions include:
Executive champion—Centralized project management is key, particularly in large organizations with multiple business units and executives. Executive-led discussions can manage, improve and focus decision quality with multiple stakeholders and a logical framework.
Portfolio trade-off model—Developing a framework to capture financial and strategic benefits in a way that stakeholders in any area of an organization can understand may better inform and streamline prioritization of limited resources.
Metrics driving behavior—Specific management metrics can effectively drive behavior by helping to guide leaders toward creating more innovative proposals that are better aligned with strategy.
Iterative decision quality process—Don't forget that capital deployment decisions are not one-time efforts. Leaders should continuously evolve their thinking, getting better understandings of project risks and returns through repeated discussions.
Address complexity—For large, complex organizations, the traditional decision and implementation approaches are not sufficient to predict outcomes and manage risks for capital deployment project decisions. Be ready to develop a more dynamic approach to managing complex projects, or to say no if projects become overly complex and risky.
