Burden of Proof

A long-established business I know is being mauled by its competitors. To get out of an apparently terminal decline, this year it threw millions into consulting fees. Following the consultants’ advice, it plans to throw hundreds of millions into systems and other investments. Management admits that the business case following the advice was built on hard-to-test, unresearched assumptions that could turn out to be very inaccurate. However, the Board made a decision to go ahead and agreed on an implementation plan.

Shortly after, my company was asked to look at the business case for expanding a currently small existing scheme that captures customer information for use in more effective marketing, range development and profitability analysis. The business case for this is a slam dunk: the existing smaller scheme is already highly profitable, investment is miniscule, roll out can be tested with a low cost pilot, payback is less than a year, the scheme adds hundreds of millions to shareholder value, and all the high growth competitors run similar schemes. Without the scheme, the company has no idea about customer profitability or marketing effectiveness, and is at a material disadvantage to competitors who already use the same kind of information from their own schemes to steal its loyal customers.

Management is going to reject the project. Why? Because they may be able to get "almost-as-good" additional customer information as a result of the plan they’ve already decided on (the one that costs hundreds of millions and is based on self-confessed shakey data). And, if that plan turns out well, they may be able to capture many of the same benefits from the scheme we tested. If the company captures these benefits, then the remaining incremental benefits of our scheme are just too small.

So management is going to make a terrible decision. This isn’t because of bad economics – I don’t disagree with the marginal benefit argument. They’re going to make a bad decision because of where they place the burden of proof. They’ve taken as read the shakey assumptions from the decision they’ve already made, and put the burden of proof on how another scheme can improve on that.

The lesson for us in all of this? We tend to place the burden of proof on the uncomfortable choice: the new, the unfamiliar, the thing that may cause us to change our ways. We won’t make good decisions unless we put the same burden of proof on all of our options, including what might happen if we don’t change our ways.

If we’re the frogs floating in the slowly-heating pan of water, when are we going to look at the risk of staying in the pan as hard as we look at the risk of jumping out?

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