For years, making decisions has been ruled by gut instinct. Managers and executives frequently justify their decisions by saying, “I have a feel for the market” or “I know what the market will do.” Yet when asked for a concrete example of how they knew this, they usually have no answer.

Smooth economic times are behind us and while their return is inevitable, today we must navigate challenging waters. Instincts and gut feel will not keep the boat, or your business, afloat. To successfully navigate these treacherous times, organisations must embrace more intelligent decision processes. Decisions based on verifiable data that guide and support the decision will sustain businesses in the short term and grow in the long term.

The last couple of year have been very volatile and have exposed the fact that a great deal of organisations large and small thought they understood what where their markets were headed – until they didn’t.

I’d like to share a story of a organisation which has fallen victim to such thinking.

This organisation is in the financial sphere and had experienced rapid growth (like many other finance companies) in the last five years.  The company had management reporting in place that tracked gross revenue but nothing else.  Decisions were made based on industry experience of the executive team and from market perception with customers (which is extremely important in any business).

Based on what appeared to be good business, this company decided that expansion was needed, both domestically and internationally.  New offices were built, employees hired, new product offerings developed.  The management was confident that business would boom and they were on track to experience “more of the same”.

However, within the data that is organisation captured during daily business operations, were indication that maybe not all was well in the near future.

If management had validated their assumptions with what they felt was going to happen then perhaps things may have turned out differently.

Business Decision: Business will continue to grow.  Revenue will most likely grow by 50% or more.

“Gut” Rational: The last couple of years have been very good. This will continue.

Internal data: The rate of revenue growth has slowed markedly and was indicating a strong reversal in sales growth in the near future.  Redemption requests were trending up with large increases with key customers and markets

External / Market data: Macro economic indicators were suggesting that interest rate volatility (which this business was sensitive to) were likely.

Business Decision: Expansion into the UK will be a growing market

“Gut” Rational: UK is experiencing rapid growth and which the business should capitalise on.

Internal data: A very small amount of business comes from the UK.  The cost per investment dollar would very high and may actually impact profitability negatively

External / Market data: The UK economy was indicating that it would experience issues, particularly in the financial sphere.  Anecdotal evidence indicated that the UK would experience tough times if a slowdown occurred

Business Decision: New product development to allow multi-currency business to attract overseas business

“Gut” Rational: Overseas expansion into Asia and UK to grow

Internal data: New business process and transactional costs minimise the margin within this product.  This product cannibalised current products and introduced new investments based on currency hedging.  This new investment were high churn (which attracted more business costs).

External / Market data: Overseas markets were likely to experience contraction that could potentially limit new business

Business Decision: Employee more staff and launch more international sales offices

“Gut” Rational: Business will explode soon, we need to be ready.

Internal data: Revenue per employee had been dropping. Staff numbers were growing and only contributing to business costs.  All growth indicators are pointing towards business contraction in the near future.

Business Decision: Establish a $200 million line of credit.

“Gut” Rational: Business is slowing!  That is a surprise – it must be a minor slowdown.  This cash will help smooth over the rough patch and assist our expansion plans.

Internal data: Forecast and trend data is pointing to a severe and extended decline in business.  Average redemptions have increased as have the number.

External / Market data: Significant financial problems are growing world wide – originating in the mortgage / finance sphere.  The impacts of this will be widespread

As a result from what management “felt” was going to happen and what the data was indicating, this business within 12 months shrunk in size by over 50% and shed 35% of it’s workforce.  It continues to struggle under excess debt loads and in my opinion has become and unviable business.

Perhaps if management had validated & challenged assumptions with both internal and external data they may have been able to capitalise on the changing conditions, rather than being swept away with them.

Evolving from instinct-driven decision making to a data-driven business is not easy. It demands intentional leadership, collective buy-in, and ongoing change management. But in these rough economic times, making decisions based on solid data, not gut, will make the difference between sinking and sailing.