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The Case for Evidence-Based Management | The Discipline of Innovation

The Case for Evidence-Based Management

How can we be better managers?

I just finished reading Hard Facts, Dangerous Half-Truths And Total Nonsense: Profiting From Evidence-Based Managementby Jeffrey Pfeffer and Bob Sutton. It is a must-read book, and they have one simple recommendation for managing more effectively: make better use of the evidence that shows us how to be better managers.

They start by saying that most people probably think that managers already do this.

But if you thought any of that, you would be wrong. Business decisions, as many of our colleagues in business and your own experience can attest, are frequently based on hope or fear, what others seem to be doing, what senior leaders have done and believe has worked in the past, and their dearly held ideologies—in short, on lots of things other than the facts. Although evidence-based practice may be coming to the field of medicine and, with more difficulty and delay, the world of education, it has had little impact on management or on how most companies operate. If doctors practiced medicine the way many companies practice management, there would be far more sick and dead patients, and many more doctors would be in jail.

When the late Peter Drucker was asked why managers fall for bad advice and fail to use sound evidence, he didn’t mince words. “Thinking is very hard work. And management fashions are a wonderful substitute for thinking.” If you are willing to do the hard thinking required to practice evidence-based management, if you want to reap its benefits, you need to recognize your blind spots, biases, and your company’s problems and take responsibility for finding and following the best data and logic.

One of the reasons that we make poor use of evidence is that often we make mistakes interpreting the numbers. There are two common errors here.

The first is looking at the numbers for a particular action, and thinking that they don’t apply to you. I call this the lottery mistake. As the web-cartoon Saturday Morning Breakfast Cereal points out, you won’t win the lottery:

And yet, people still buy lottery tickets. There is evidence to suggest that there are possible psychological benefits from buying a lottery ticket, regardless of how bad the odds are. But a lot of people buy lottery tickets “because someone has to win, right?”

We see similar wishful thinking in innovation management. Executives announce a new commitment to innovation. And the hope for a big win (like hitting the lottery). But they fail to put into place any system that would actually make their firm better at innovating.

That’s the lottery mistake – someone has to win, right?

The second error is misunderstanding averages. Pfeffer and Sutton discuss studies that looked at mergers and acquisitions through the 1980s and 90s. Over 70% of those that took place in that time period either failed to create value, or actually destroyed value in the firms involved.

People make two mistakes with numbers like this. First, they will sometimes cite a counterexample, and then act as though that disproves the study. It doesn’t. The counterexample simply falls into the 30%. Statistics that show that something is true the majority of times don’t mean that they are true for everyone.

The second mistake is to believe that this means that all mergers and acquisitions are doomed. Again, these results don’t apply to every one.

In fact, we know a fair bit about what makes mergers and acquisitions successful. This excellent post from Accenture summarises the evidence well. They are more likely to succeed when:

  • One firm is bigger than the other: this reduces power struggles.
  • The two firms are geographically close to each other: M&A success decreases with distance.
  • There is a good cultural fit between the two firms: this is the key one. Mergers based on strategic or operational synergies tend to be less successful than those based on cultural fit.

If you use this evidence, you can beat the odds. Throughout the period most of that research covered, Cisco acquired 57 firms, and nearly all of these acquisitions were successful in terms of building value.

They didn’t do this by hoping that they would beat the odds. They did it by understanding them.

That’s evidence-based management. Pfeffer and Sutton do a great job of explaining why you should try it yourself (check out Greg Satell on how to do this).

The research shows that if you do, you’re more likely to succeed.

About Tim Kastelle

Student and teacher of innovation - University of Queensland Business School - links to academic papers, twitter, and so on can be found here.

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6 Responses to The Case for Evidence-Based Management

  1. Peter G. Klein 13 February 2012 at 4:47 pm #

    Tim, the problem is that “facts” don’t simply present themselves, ready for inspection. Data have to be interpreted, experience analyzed, some facts highlighted and others discounted, and so on. Saying managers should rely on “evidence” rather than intuition ingores the role of judgment, of interpretation, of assigning meaning to experiences. There’s often a fine line between “facts” and “intuition.” Ask any historian if the facts speak for themselves!

    The critical issue here is not reliance on “evidence” per se, but research design. How do you properly do a case study? An econometric analysis? Surveys and interviews? On these problems, Phil Rosenszweig’s book The Halo Effect is much better than Pfeffer and Sutton’s Hard Facts. See some discussion here: http://organizationsandmarkets.com/2007/09/08/the-best-business-book-ive-read-this-year/

  2. Tim 14 February 2012 at 11:56 am #

    Thanks for the comment Peter. I agree with all of it. In my experience good management strikes a balance between data and intuition. I’m mainly trying to argue against data-free management.

    Thanks also for the recommendation for The Halo Effect – that’s been on my to-read list for quite a while. I’ll move it up to the top.

  3. Greg Satell 15 February 2012 at 8:47 am #

    I read that book years ago and loved it. Thanks for reminding me of it!

    - Greg

  4. Jeff Jennings 16 February 2012 at 7:27 am #

    well yeah, evidence can have a lack of timing, or can be biased…etc. Understanding the evidence is crucial, then you can make some great solutions.

  5. Steve McGrady 16 February 2012 at 10:17 am #

    I really like “Hard Facts..” and I tend to agree with Peter’s comments as well as Tim’s piece. The fact that business shares the same challenges as the social sciences when it comes to research design and the interpretation of qualitative data isn’t an argument against trying to increase the reliance on evidence to support decisions. Arguments for rationality from these books and newer entrants such as Richard Rumelt’s “Good Strategy/Bad Strategy” are a welcome relief from the woo that is peddled by many of the so-called business gurus. My views are summarised here: http://wp.me/p2aJ6I-43

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