Errors in decision making are costly and are growing costlier. Perhaps one needs only look at the Detroit automakers to conclude the time has come to focus attention on the search for strategies that will improve poor judgment of business leaders.

In a new report from The McKinsey Quarterly report, based on a survey of 2,327 executives across the full range of industries, regions and function, only 30 percent of major organizational decisions occurred during the company's annual planning process. More decisions were made outside an annual planning process than within one.

The results highlight the hard business benefits — such as increased profits and rapid implementation — of several decision-making disciplines. These disciplines include ensuring that people with the right skills and experience are included in decision making as well as making decisions based on transparent criteria and a robust fact base.

In our current economic and working environment, people are busier, have more on their minds and face tighter time constraints. In short, we are required to do more with less in shorter periods of time, which increases the occurrence of mistakes. We often lack information crucial to making a quick but sound decision, or we fail to notice available information, or the time and cost constraints simply become too much and we make snap judgments.

Among the key findings of McKinsey's How Companies Make Good Decisions report is that, at a corporate level, operations input is critical.

"Operations executives had significant influence on only about a third of the most financially unsuccessful decisions, reinforcing findings from other surveys that companies frequently overlook execution when making decisions," the authors of the report note.

McKinsey points to other "basic mistakes" to avoid:

• Decisions initiated and approved by the same person generate the worst financial results. Good discussion among the team results in generally better decisions.
• Decisions should be discussed with others based on their skills and experience, and decision criteria should be transparent to participants in the discussion. The person responsible for implementing a decision should be clearly identified and involved in the decision itself.
• Decisions that pay particular attention to risk lead to greater success. Use of detailed financial models, sensitivity analysis and other tools to analyze risk on average lead to better outcomes.
• Decisions should be strongly linked to financial success. When there is a strong focus on the bottom-line impact, decisions are more likely to be good ones.
• Decisions should be discussed in relation to the organization's other strategic decisions; organizational goals go ahead of business unit goals, and consensus across business units should be encouraged.

"Today it's clear that the vagaries of individual and group psychology can cause irrational decision making by both individuals and organizations, resulting in less than ideal outcomes," according to another new McKinsey report. "Even the best-designed strategic-planning processes don't always lead to optimal decisions."

While no organization will be 100 percent perfect at making the right decision immediately, McKinsey has determined that decisions made in companies without formal strategic planning processes are much more likely to fail.

"Decisions made at companies without any strategic planning process are twice as likely to have generated extremely poor results as extremely good ones — more than a fifth of them generated revenue 75 percent or more below expectations," the research firm says based on the survey's findings.

So, what does an organization focus on when creating formal and well-understood decision processes and structure?

Based on the responses of 2,207 executives across a global range of industries, regions and functional specialties, the second McKinsey report uncovered three themes that go into a good strategic decision-making process:

Assessment — Organizations with satisfactory decision-making outcomes have high marks for forecasting demand and competitor reaction in their processes, assessing their own capabilities and tailoring their evaluation approach to the specific decision.

Process — Organizations with satisfactory decision-making outcomes have high marks when it comes to seeking contrary evidence and ensuring that decision makers have all the critical information, giving dissenting voices the floor, reviewing the business case thoroughly even though senior executives were strongly in favor and ensuring that truly innovative ideas reached senior managers.

Targets — Respondents satisfied with the outcomes of their decisions were found to have assigned high ratings to aligning incentives and basing the decision on a mix of financial and strategic targets as well as on a mix of short- and long-term targets.

Perhaps the only thing worse than panic-driven decisions is fear-based indecision. Not making decisions may mean fewer mistakes are made, but nothing risked means nothing gained.

What suggestions do you have for making better business decisions? Or for establishing a formal decision making process? Let us know in the Comments below.

Resources

How Can Decision Making Be Improved?
by Dolly Chugh, Katherine Milkman and Max Bazerman
Harvard Business School, Aug. 28, 2008

How Companies Make Good Decisions
by Massimo Garbuio, Dan Lovallo and Patrick Viguerie
The McKinsey Quarterly, January 2009

Flaws in Strategic Decision Making
by Renee Dye, Olivier Sibony and Vincent Truong
The McKinsey Quarterly, January 2009

Detroit's 6 Mistakes and How Not to Make Them
by Umair Haque
Edge Economy (Harvard Business blog), Nov. 18, 2008