Double Your Money In 7 Days Or Less!

Powerful pressures lure the most sincere project teams into over-valuing the projects they have been working on a long time. A simple question can alert leaders the numbers are unreliable.

You are the leader of a large organization and in front of you lies a proposal for a new IT project. You normally hate IT projects. They are usually are laden with incomprehensible acronyms & jargon and it is difficult enough trying to understand the problem they are describing let alone the solution. In this case, however, the team has done a smashing job: They have used plain English, all the right experts were involved, and the team achieved consensus for this recommendation. Best of all, the financials projected a credible and respectable 20% Return On Investment.

The Bad News
Now let me tap you on the shoulder and burst your bubble: That 20% return reported in the proposal was tampered with. Only a week ago, the calculations projected a 10% return. When faced with that disappointing valuation, the project leader rallied the troops to “go find more benefits.” Okay boss, what confidence do you have in the 20% ROI now?

The team members are all good folks of high integrity. In their minds, they showed an admirable “can do” spirit by not giving up and finding a way through. Each honestly believes this is a good investment. To an outside observer, however, the current valuation is clearly a one-sided effort to justify the months of planning and dollars sunk into preparing their proposal. All recent energy went into conjuring up new benefits of their plan with little time to scrutinize the true value of them. No one checked whether these benefits apply to other potential solutions, making one of those more attractive. No one revisited the costs and risks with equal vigor. The evaluation is biased. No longer objective, no longer reliable.

The project team in our story felt intense pressure to make the numbers support their earlier, albeit premature, conclusion. Simple pride of ownership this late in the game makes it very hard to let go of preconceptions and be objective. It is harder still if a team has spent significant funds on their solution in the weeks leading up to the presentation.

In the real world, the decision maker rarely hears when a valuation has a checkered past and the recommendation is presented with confidence and enthusiasm. Without a disciplined structure for project evaluation, decision makers are left without the candid and unbiased information crucial for making sound investment decisions.

Self-Defense
So what can a decision-maker do to detect this bias? To put it simply: Ask. In every approval meeting, ask the team to describe how the financial analysis evolved. If you hear that the first numbers came in low but then steadily improved, that’s a red flag to be probed further. By itself, this red flag is not proof of bias, it should trigger a discussion to determine whether the valuation is reliable.

Bad information is worse than no information because of the unfounded confidence it promotes. There are even more rigorous techniques that your financial analyst can use during the evaluation to resolve problems early, but simply asking for a quick history of how the numbers evolved is a remarkably powerful defense for decision-makers. At the end of the day, you can have more confidence in the quality of the estimates as you grant approval… or call a time-out.

© 2011 Verax Point Consulting, LLC

About Dave Wittenberg

I am all about equipping business teams to enjoy greater payoffs on their biggest bets. I bring a unique combination of evaluation expertise and behavioral insights developed over the course of more than 300 major strategic initiatives. Applying a highly effective, disciplined framework, teams unleash their full capabilities to generate better solutions, wring out hidden waste, and deliver superior returns. Specialties: Investment Evaluation, Decision Excellence, Strategic Analysis, Mergers and Acquisitions, Investor Relations, Leadership Development, Education & Training
This entry was posted in Leadership & Decision-Making, Valuations. Bookmark the permalink.

2 Responses to Double Your Money In 7 Days Or Less!

  1. Pingback: The Delay That Pays | The CapEx Compass™

  2. Pingback: No App For That | The CapEx Compass™

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