Good and bad data: How really bad things happen in business

During a lecture on industrial management to a senior college class, I was asked how big bad events that appear self-inflicted happen in big corporations with a long history of excellent management. Specifically, the student was asking about the recent disasters at the Boeing Corporation with the 737 Max plane or the misleading diesel engine emission data at VW. Such developments can easily destroy a business. As future entrepreneurs and managers, what should the students think about that would avoid such disasters?

Such events become public ones because of the enormous impact to the public-at-large. Many other events with much less public impact don’t make headline news yet severely damage businesses and careers. One indicator of the fragility of big business is that the time public companies remain listed on the S&P 500 has declined from a rolling seven year average of 35 years in 1975 to an average of 25 years in 2018.

Companies drop from the list or disappear for many reasons such as mergers, going private, severe decline in earnings or bankruptcy. In all cases, however, it is likely that decisions made at the CEO level played a big part in the fate of businesses. Given that sophisticated information technology is so prevalent, a lack of business data is unlikely to be the core problem in bad decision making. So the issue is likely to be how relevant data is collected, transmitted and used as a basis of executive-level decision-making.

Deluged with data, the challenge of corporate management is how to use big data as a basis for good decisions. Effective leadership at the CEO level requires a deep understanding of the data needed to make business decisions and the ability to weigh conflicting sources of advice on the basis of independent thinking. No CEO can be an expert in all areas that will require his decision-making so he must depend on the best possible information. Here is where major failings become evident – the decision reached might have been a bad one because of misreading of the data collected. Alternatively, the data provided was selected to cover bad performance or general incompetence.  The ability to get it right is what defines good CEOs.

Increased profitability

Here is an instructive example, from my personal experience, of misused data at a large ($700 million in annual revenues) software company that invested heavily in next-generation products. While sales were ramping, operating losses were mounting. Under pressure to increase profitability, the CEO used extensive internal customer and project data to make a recommendation regarding the future of the investment. On the basis of the data, he recommended to the board of directors that the new product business be shut down and that an acquisition be made to fill the product need. The project was continued pending such an acquisition – which never happened because a suitable candidate at a price that made sense could not be found.   Losing confidence in his management, the board replaced him.

The new CEO was not an engineer but believed that the data on product development was not adequate. He decided to spend time with customers and potential customers to form his own opinions. He concluded that the problem with the company’s new products was the poor service support in implementation and bundling, as well as poor marketing that left potential customers unsure of the product features. He replaced the project management team and within 18 months the new business unit was near cash breakeven. The company was later merged with a big international company and the new next-generation product set was a key attractive element that made the merger possible. Without these new products, the company’s value would have been much lower.

This story illustrates an important point about the need for care in risk assessment and information flow to senior management. Incompetent managers can shape the information flow to protect themselves.

So here was my advice to the students. As you rise in management responsibility, focus on corporate integrity.  It starts at the top with a CEO capable of assessing different viewpoints based on personal judgment and willingness to solicit contradictory advice. And, incidentally, it is not by claiming an open door policy where folks are free to come and present their dissenting views. I am not aware of businesses where such a policy bears fruit.