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 / Spring 2006 / Issue 42(originally published by Booz & Company)


Why Managing by Facts Works

Few companies employ vidence-based management — the notion that real knowledge in the form of empirical analysis of results is the shortest path to sound decisions.

John Lilly, formerly the CEO and founder of a Web-design firm and corporate incubator called Reactivity, recently recalled what it took to sell an idea to venture capitalists during the dot-com boom of the late 1990s. In a period of 30 weeks, his team generated 30 PowerPoint presentations as “prototypes” for a diverse group of Internet-based startups. Out of these, a combination e-mail and Web browser was chosen as the most promising. Its PowerPoint presentation was fine-tuned and then shown to potential backers. Based primarily on this slide show — there was very little else for the venture capitalists to go on — Reactivity raised more than $100 million for a new company (now defunct) called Zaplet.

“That approach wouldn’t work now,” said Mr. Lilly, currently vice president of business development and operations at Mozilla Corporation. “By and large, venture capitalists only fund Web-based companies that already have proven the ability to attract customer traffic.”

Chalk one up for evidence-based management — the notion that real knowledge in the form of empirical analysis of results is the shortest path to the best business decisions. That may seem obvious, yet few companies follow that precept. Many executives make pivotal strategic choices based on nothing more than business fads or the dubious recommendations of advisors who are afraid to challenge the preconceived judgments of their bosses or the organizational status quo. Quantitative or qualitative data that measures how well the strategy is working is often the last concern. As a result, critical company decision making, relating to acquisitions, restructuring, new product launches, brand marketing, and the like, often takes place in the dark.

A classic case is Hewlett-Packard’s acquisition of Compaq for $25 billion in 2001, a transaction that is, in part, to blame for HP’s less-than-stellar record during the last few years. HP insiders told us that the company had conducted no research on how consumers viewed Compaq products until months after then-CEO Carly Fiorina publicly announced the deal and privately warned her top management team that she didn’t want to hear any dissent pertaining to the acquisition. Ms. Fiorina was dismayed to learn, when it was too late to do anything about it, that consumers considered Compaq products to be subpar, the opposite of what they felt about HP equipment.

If you look at the top-performing companies, there are strong hints that evidence-based management is fundamental to their high ranking. A few examples: Yahoo runs many experiments a day in which its Web site design is subtly varied to see which approach attracts the most visitors and purchases; QVC’s television shopping channel analyzes real-time data to determine the presentation and pitch for specific products; and Enterprise Rent-A-Car, the largest U.S. automobile rental company, sends out more than 100,000 surveys per month to monitor customer service at its outlets.

From our research, we are convinced that when companies base decisions on evidence, they enjoy a competitive advantage. And even when little or no data is available, there are things executives can do that allow them to rely more on evidence and logic and less on guesswork, fear, faith, or hope. For example, qualitative data, such as that gathered on field trips to retail sites for the purpose of testing existing assumptions, can be an extremely powerful form of useful evidence for quick analysis.

By emphasizing the importance of evidence and knowledge, we do not mean to dismiss the value of intuition and innovation. But even hunches, fresh ideas, and inventions should be measured against logical and empirical benchmarks to determine whether they are efficacious ideas or just momentarily exciting thoughts better off abandoned.

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