When you get down to it, most of business is about placing bets—allocating resources—and making them pay off. A McKinsey Quarterly survey1 paints a picture of this process from the vantage points of senior corporate executives, business unit heads, and frontline managers and highlights how frequently and why a company’s plans can go awry.
A significant number of executives, for example, describe allocating funds to projects that were mistakes and should be terminated, making decisions to forgo promising investments, and making overly optimistic forecasts of sales and project completion times. Respondents also say that risk aversion is common and that companies tend to look at investments independently, as opposed to thinking about the portfolio of opportunities before them and making more coordinated decisions.
At first, the resource allocation approaches described by respondents seem promising. Many report that in divvying up funds, their companies focus both on core financial criteria and on factors such as a business unit’s prior performance and a project’s potential to create value and contribute to strategic goals. What’s more, there is plenty of involvement in resource allocation by senior executives and business unit heads.
Even so, the less-than-ideal combination of optimism, risk aversion, and one-off decision making is perhaps exacerbated by the prominence of corporate politics. Respondents say that behind-the-scenes lobbying and logrolling—and sometimes outright deception—are fairly frequent and seem to inhibit constructive debate and dissent throughout the resource allocation process.
Notes