About fifteen years ago I had lunch with an individual who had recently left one of the “Big Three” domestic auto companies where she worked as a financial analyst for about five years. During our conversation, I half-jokingly asked the question, “While you were working as a financial analyst, how much of your ‘financial analyzing’ was done before a decision was made and how much was done afterwards?”
Her answer surprised me. In her estimate, only about 25% of her work was done before a decision was made and 75% after it had already been made. Her task was usually to justify a decision that had already been made; not to provide input for the decision making process.
Inspired by her answer, I began an unscientific, undocumented, informal survey that I continue to conduct today. Whenever I get a chance, I’ll ask someone the same question I asked her fifteen years ago. The only difference is that I carefully define what I mean by “before.” “Before” means that the analysis takes place while alternative courses of action are being considered or, in the case of decisions that must be approved by ‘higher-ups,’ before it is decided to submit the decision for approval. For example, forecasts and plans that are constructed to arrive at a target result are not done before. Cost estimates that are “tweaked” to arrive at a predetermined cost are not done before. Similarly, analyses done to justify a capital expenditure are not done before unless they were done before it was decided to submit the request for approval. A “before” answer requires that it be performed as part of the initial decision making process.
I’ve asked somewhere between 25-30 financial executives and managers this question since that lunch fifteen years ago and the answers almost always follow the same pattern. Somewhere between 25%-40% of the analyses come before a decision and 60%-75% afterwards. I recall only once instance where the interviewee’s answer was as good as 50% before and 50% after. In other words, it appears that financial analyses are usually performed to justify a decision that has already been made, not to arrive at the decision itself.
How about the analyses you perform? Do they usually support the decision making process, or do they justify decision that have already been made? If they usually justify already-made decisions, why do you suppose the decision makers didn’t ask for the analyses before making their decisions? I’d be interested in hearing both your experiences and your take on the subject.
Thanks to Doug Hicks for writing this blog.