Financial decision making in the downturn

Financial
decisionmaking
in the
downturn


Foreword
Dear reader,
It gives me great pleasure to present you with Financial decision-making in the downturn, a report summarising the
findings of a survey commissioned by ING Commercial Banking and conducted by the Economist Intelligence Unit.
As we all know, difficult economic times call for difficult decisions. In light of this we were interested in finding out
how financial executives in Europe arrive at these decisions, but also hoped there were lessons to be learned for
the future.
We are currently coming through some unprecedented economic times. The downturn of 2008 persisted in 2009
as key indicators continued to slide and business and consumer spending shrank. With capital becoming more
expensive and harder to obtain, many companies found their futures were in the balance. Stakes were high and
financial decision-makers were forced to make tough choices to guide their company through the turmoil.
Often they found themselves having to perform a dangerous balancing act. On the one hand, to survive you have to
look at the near term and ways to navigate the liquidity crisis. On the other, while emergency measures may help
weather the storm, they do not always chime with the company’s long-term performance and strategic objectives.
These were my own observations in dealing with clients and they were borne out by the findings of the
­Economist Intelligence Unit research study. Financial decision-making in the downturn reflects on the thoughts
and experiences of senior financial executives and academic experts. What were the challenges and how did
decision-makers come about resolving short-term issues without jeopardising the company’s long-term future?
Or, conversely, did the downturn perhaps make it easier to make difficult long-term strategic decisions?
Tough times call for a focused strategy and clear direction. That means keeping an eye on the long-term ­picture
while facing short-term challenges in a well-considered manner. And taking advantage of the situation to make
positive changes for the future beyond the turmoil. Working together and sharing information is vital if we are to
meet the challenges head on.
It is all too easy to look back and chastise ourselves for the choices we made, especially in difficult times
when ­mistakes and failures are magnified. And of course there is no guarantee that we will get it right second time

around. We hope nonetheless that the experiences and views documented in this report provide valuable insights
to help you negotiate future hurdles and benefit your company in the long term.
At ING we know first-hand how an unstable market can affect your finances and how important it is to optimise your
balance sheet. That’s why we work with you to devise an ambitious and proactive approach to tackle your ­financial
issues, whether they relate to working capital, de-risking, shortening your balance sheet or financing future growth.
In both tough times and when things are picking up, the key is to realize balance sheet optimization in close
cooperation with our clients by resolving short-term issues with taking the company’s long term future into account.
Should you have any questions or comments after reading the report or wish to find out more about what ING can
do for your business, please feel free to contact me or visit www.ingcommercialbanking.com/bso.
Kind regards,

Annerie Vreugdenhil
General Manager Corporate Clients
ING Commercial Banking


Financial
decisionmaking
in the
downturn

In co-operation with the Economist Intelligence Unit



5

Financial decision-making in the downturn

Table of contents

6

About the survey

7

Executive summary

9

The long-term view – a key measure of decision quality

12

Cool under pressure

17

Sidebar: Investing in IT at ABB

18

The hazards of hindsight

21

Sidebar: The pre-mortem: Imagining the worst

22

Conclusion – lessons for the next time


6

Financial decision-making in the downturn

About the survey
ING commissioned the Economist Intelligence Unit to survey 327 UK- and Europebased senior finance executives in October 2009 and write this white paper based
on the results. More than half of respondents were chief financial officer level or above.
Half of respondents came from companies with more than €500 million in annual
revenues,­and 19% of respondents­came from companies with more than €10 billion
in annual revenues. All major industries were represented. In addition, the Economist
Intelligence Unit interviewed 15 senior finance executives and academic experts on
decision-making­and the results of these interviews appear throughout the report.


7

Financial decision-making in the downturn

Executive summary
The UK and Europe, like much of the rest of the world, experienced a steep and
sustained­economic shock throughout 2008 and most of 2009, from which the region is
only now beginning­to recover. According to the European Commission, GDP growth
for­ the European Union dropped year on year from 2.9% in 2007 to .8% in 2008, and
was  projected­to fall 4.1% in 2009, before seeing a modest rise in 2010. Productivity,
consumer confidence, industrial production and trade all experienced similar
precipitous declines during the same period.
There were devastating consequences inside European companies. First, revenues fell

well beyond previous worst-case scenarios, as business and consumer spending shrank
significantly. Second, the ongoing credit crunch that touched off the crisis made capital
more expensive and harder to obtain. These twin conundrums put chief financial officers
(CFOs) in the eye of the storm, as companies looked to them to cut costs, hastily revise
growth forecasts­and renegotiate loans. In many cases, as this report demonstrates, the
decisions they made determined whether their companies would survive the crisis.
This paper, based on a survey of 327 senior finance executives and 15 in-depth interviews with CFOs and academic experts, provides a history of the economic downturn
from the CFO’s  perspective. How did they respond to the high stakes and high pressure
of decision-­making­during the crisis, and what lessons can be learned? The research
uncovers­the biggest decisions they faced, examines the strengths and weaknesses of
the processes and tools they relied on, and asks how successful they were in making
short-term, crisis-­driven decisions without sacrificing long-term performance.
Here are the key findings:
The most important decisions revolved around short-term plans to raise cascost cutting, shedding staff and selling assets at the expense of long-term goals
CFOs pinpointed their most important decisions in open-ended responses that included
“dealing with sudden customer bankruptcies”, “stopping all capital investments”, and
“selling assets in Asia and Switzerland”. Two-thirds of respondents agreed that important decisions in the midst of the crisis were necessarily focused on the short term at the
expense of the long term. Asked to compare decision-making with other periods when
the economy was growing, 68% said decisions in the recession were primarily focused
on immediate­or short-term outcomes, compared with 49% during better times.
A wise minority took advantage of the turmoil to make positive,
long-term changes
One-third of respondents claimed to have made their most important decisions with
the long­term in mind. Examples included “transforming the IT business”, “introducing­
a planning tool for more efficiency and speed” and “streamlining the lead-to-order
process”.­Half agreed with the statement, “The downturn gave us the ability to make
difficult­ strategic decisions­more easily.”
High stakes led to collaboration, a coordinated response and bolder action
Two-thirds of respondents said a collaborative process with other senior leaders within
their company was the most important factor in making good decisions. Forty-two

percent­agreed that “contrary views were aired and discussed openly without a culture­


8

Financial decision-making in the downturn

of blame”. Respondents said the crisis situation “helped to get buy in”, and drove
“bolder action” among management teams.
Under pressure, CFOs took more time to reflect
The majority of respondents agreed that there was more pressure to get decisions right
during the downturn, compared with other periods when the economy was growing.
Two-thirds agreed that the consequences of bad decisions were magnified. Rather than
letting the pressure rush them into rash action, however, 60% of respondents said they
took more time to analyse the options and examine the possible consequences.
Financial tools performed well but CFOs seek improvement
Respondents were in agreement that the tools of their trade such as financial planning,
scenario­planning and forecasting were more effective during the downturn. For the
large majority of respondents, financial IT systems performed the same or better
under the added strain. Yet when asked what they would most like to improve, many
highlighted­the need for better data and modelling.
Experience breeds confidence, rather than a specific plan
Fifty-eight percent of respondents had a senior decision-making role in a previous
downturn, and 42% of those with such experience said it was “very useful”. The reasons
cited were psychological – “diminished tendency to panic”, “to keep calm and not be
pessimistic”, and “the ability to cope with pressure and the nervousness of employees”.
Do the review before the decision
Relatively few respondents see any use in a formal process to review decisions after
they are taken. Experts say this is because of the dangers of hindsight and political­
blame games. But they agree that CFOs should persevere with the right kinds of

decision­reviews­– which, paradoxically, take place before the decision is made. The
“pre-mortem”, for example, asks a group of executives collectively to imagine how
a decision could go wrong in order to improve­the chances of success.


9

Financial decision-making in the downturn

The long-term view – a key measure
of decision quality
The costs of missteps have risen sharply amid the high volatility and poor visibility that
have characterised the global financial crisis since it escalated in 2008. In good times,
CFOs face important decisions every day, but they are more often choices related to
growth and the strategies to achieve it – where to invest, which companies to acquire
and where in the world to expand. During the downturn the biggest decisions often
related to whether the business would survive at all. The low point for Roularta Media
Group, a Belgian media company, came when it was at risk of breaching several debt
covenants. “Banks would have taken over the company,” says Jan Staelens, the CFO. As a
result, most CFOs focused on short-term outcomes, and their most important decisions
involved raising­­cash.

Please identify the top
three areas in which
you made your most
important decisions
during the last 12-18
months?
(Respondents were
allowed to choose their

top three answers.)

Cost control (excluding personnel decisions)

46%

Cost control (personnel decisions only)

45%

Forecasting and budgeting

43%

Working capital management

33%

Payments and cash management

31%

Restructuring

22%

Risk management

21%

Refinancing (revising existing agreements)

13%
0

10

20

30

40

50

60

70

80

90

100 %

Striking the balance between short-term outcomes and the long-term strategy is far
from easy, of course, especially in turbulent economic conditions, but it is a key yardstick
for decision quality, according to Daniel Kahneman, Nobel Prize-winning professor of
psychology and public affairs emeritus at Princeton University in the US, and one of the
experts interviewed for this report. Even short-term decisions, he says, can “maintain

some long-term perspective in the corner of the eye,” to view, for example, “a decision
about restructuring as an opportunity. There are many ways of cutting costs and some
are more detrimental to the long term than others. The interesting question would be,
when they were cutting costs, how conscious were they of the long-term implications?”
How well then did CFOs perform in this critical area? Sixty-eight per cent of executives
say their most important decisions in the last 12-18 months were focused on immediate­
or short-term outcomes, compared with 49% in better economic times. And 65% say
that short-term decisions were made at the expense of the long term. Seventy-six
percent say their ability to focus on long-term targets was somewhat or significantly
affected­by the pressure of the downturn.


10

Financial decision-making in the downturn

“We have unfortunately prioritised short-term goals over longer-term goals,” says one
CFO. “There are some capex investments, which we did not make, which will hurt the
business in the medium to long term.”
Many business leaders are in a similar situation, notes Neil Bearden, assistant professor
of decision sciences at INSEAD business school in France. Executives in crisis, he points
out, exhibit similar behaviour to investors in a bear market. “They respond to minor
losses at the expense of long-term planning,” he says. “They see something is going
wrong and they cut costs to keep earnings going. Many who did that are now seeing
where they took short-term decisions that they have to unwind.”

Please indicate which
of the following best
describes­your important
decisions for the last

12-18 months and for
other periods when the
economy was growing?

Last 12 - 18 months

33%

Other periods when the
economy was growing

53%

51%
0

10

20

30

15%

40%
40

50

60

70

9%
80

90

100 %

Important decisions primarily strategic: (focused on long-term outcomes)
Important decisions primarily tactical: (focused on short-term outcomes)
Important decisions primarily “in the moment”: (focused on immediate outcomes)

How did the pressure of
the downturn affect the
following processes you
took to reach important
decisions?

Ability to focus on
long-term targets

24%

0

10

46%

20

30

40

50

30%

60

70

80

90

100 %

Didn’t affect at all
Somewhat affected
Significantly affected

Opportunity in crisis
The survey and interviews reveal that most CFOs felt that they had no choice but to
focus on immediate outcomes. But for about one-third of respondents, the turbulent
environment opened up opportunities – to make acquisitions, strengthen relationships
with vulnerable suppliers or customers, or to make the most of the low-growth environment to invest in enterprise-wide IT systems that may secure longer-term operating

efficiencies. Half of respondents, presumably even some who were primarily focused
on the short term, agreed with the statement, “The downturn gave us the ability to make
difficult strategic decisions more easily.”


11

In reflecting on your
most important decisions
during the last 12-18
months, to what extent
do you agree or
disagree with the
following statements?

Financial decision-making in the downturn

Because of the nature of the threat facing the
business, important decisions necessarily focused
on the short term at the expense of the long term

22%

The consequences of incorrect decisions were
magnified in the downturn

25%

The downturn meant there was less time
for reflection on important decisions

13%

Mistaken decisions were tolerated less at
all levels of the organisation

12%

The elements that go into good decisions are well
understood but under the circumstances they
were difficult to apply effectively

3%

Important decisions were hampered by
over-confidence and a tendency to
“hope for the best”

40%

10

20

30

7%

3%

39%

13%

5%

18%

24%

13%

28%
50

2%

16%

23%

40

7%

16%

30%

34%

8%

38%

25%

28%

16%
0

23%

30%

21%

13%

25%

40%

12%

The downturn gave us the ability to make
difficult strategic decisions more easily

15%

40%

6%

There was hesitation in taking big decisions
because of the high stakes involved

43%

60

16%
70

80

90

6%
100

%

strongly agree
slightly agree
neither agree nor disagree
slightly disagree
strongly disagree

A case in point is Millicom International Cellular. The Luxembourg-based mobile
telephony operator last year analysed its operations in Asia, Africa and Latin America,
including market position, return on capital and expected investment requirements.
Subsequently, managers chose to dispose of the Asian operations. “One thing that
played a key role in our decision was: Where do we believe that we can better use and
deploy our limited resources?” says François-Xavier Roger, the CFO. “The single most
important factor to make the sale was most certainly our capacity to create shareholder
value over the long term.”
Another case in point is provided by a finance executive at a large chemicals company
who asked to remain anonymous. He said his most important decision involved creating
a plan to avoid breaching loan covenants. “We aimed to solve the short-term issue, but
we also built a new financing structure, including new covenants, in order to cope with
what we see as a recovery in the economy, which will hopefully allow us to ‘live quietly’
(without negotiations with banks), until 2012.”
An important lesson, says Theodoros Evgeniou, associate professor of decision sciences
and technology management at INSEAD, is to take a “positive view of crisis and turbulence”, as difficult as that sounds. “Let’s do fire-fighting,” he says, “but also look for the
best opportunities in history.”


12

Financial decision-making in the downturn

Cool under pressure
A majority of CFOs say that the pressure to get decisions right increased during the
crisis, and respondents are forthright about many of the reasons: “not enough time
and data”, “the need to get board approvals and address differing views”, “it affected
personal emotions­”, or “answers needed more quickly”. Moreover, they agree that the
consequences of bad decisions were magnified in the crisis. Far from crumbling under
the strain, however, CFOs seem to have been, broadly speaking, invigorated by the

crisis. This may reflect executives’­perception that the top finance role is a high-pressure
job even in the best of times. After all, a surprising 46% say they felt no added pressure
at all on their decisions over the last 18 months.
Mr Staelens of Roularta says he joined precisely because he welcomed the challenge of
attempting­to extricate the company from its covenant problems. “I was attracted to the
company to get it right,” he says. Others echoed his enthusiasm, and the response to
admittedly­higher pressure seems to have manifested itself in better collaboration, more
effective­IT tools and an emphasis on the value of experience gained in past recessions.

Did you feel more
pressure to get important
decisions right during
the past 12-18 months,
when compared with
other periods when the
economy was growing?

No, there was about the same
amount of pressure to get important
decisions right

46%

Yes, there was a little more pressure
to get important decisions right

27%

Yes, there was a lot more pressure
to get important decisions right

26%

10

20

30

40

50

60

70

80

90

100

%

Fighting a common enemy
This research shows that when the going got tough, it helped focus the enterprise. Nearly
70% of executives surveyed say that collaborative processes with other senior leaders
are the single most important factor in making financial decisions. Viquar Haquani, CFO
of Radiomóvel Telecomunicações, a Portuguese mobile telephony operator, is one of

those executives. “We have a small, collegial team. We are very open with each other,
and we speak freely,” he says. “At times, that can be a little bit heated – but we find it very
useful.” Michel Allé, CFO of Belgian National Rail, concurs: “The most important lesson is
to tell the truth as soon as possible, even if it’s bad news. When I was open with the board
and with shareholders, they responded well.”
A collegial environment is conducive to frank discussion. Finance executives generally say that their decision-making processes worked well when it came to contrary
views. This may reflect the fact that options were limited. Forty-two per cent say “contrary views were aired and discussed openly without a culture of blame” and 35% say
there was a “clear, formal process to gather and decide among contrary views”. Only a
minority say it was dangerous to air contrary views, or that such views were overruled.
Toby Wilson, Microsoft’s UK finance director, points out: “The most difficult part was
not making the decision itself, but agreeing the process for implementing the decision.
Once this had been put in place, the rest was fairly straightforward.”


13

Financial decision-making in the downturn

CFOs also called on external advisers to complement analysis carried out internally.
One example is Carmeuse, a Belgian limestone producer. To help the firm plan its
response to the developing crisis, Yves Schoonejans, the CFO, directed an external adviser­to analyse the impact of tougher economic conditions on the firm’s main
customers such as the steel industry, and the steel industry’s main customers such as
automotive manufacturers and construction firms.
Some CFOs say they had formed a view internally, but given the higher stakes and
greater scrutiny from stakeholders, sought external opinions to validate their position.
Millicom, for example, sought outside advice before pushing ahead with the sale of its
Asian operations. “We made the decision ourselves, but it’s always good to listen to the
opinion of various people in the market, who have a different view or a different expertise than we may have,” says Mr Roger.
CFOs’ appetite for reflection went up too. Sixty per cent of those surveyed say they
took more time to make important decisions than in more normal times. The reasons?

Respondents say they used the extra time to conduct more rigorous analysis, have
deeper discussions with board colleagues, consult more widely than usual and
scrutinise­every available option far more closely.

When you made
important­decisions
during­the last 12-18
months, which of the
following­factors helped
you the most?
(Respondents were
allowed­to choose their
top three answers.)

Collaborative process with other senior leaders

68%

Clear lines of command in the organisation

42%

Deep, applicable experience

39%

Good intuition

30%

Hearing contrary views

24%

Personal networks

22%

IT systems

20%
10

Which of the following
statements apply to your
ability to gather contrary views and stimulate
internal­debate before
an important decision?

There was often no time to gather contrary
views before a big decision was taken

20

It was politically dangerous to air contrary views

40

50

60

70

80

90

100

%

50

60

70

80

90

100

%

21%

There was a clear, formal process to gather
and decide among contrary views

Contrary views tended to be overruled

30

35%
17%
13%

Contrary views were aired and discussed
openly and without a culture of blame

42%
10

20

30

40


14

Which of the following
best describes the
amount of time you
needed or were required
to take to make your
most important decisions
during­the past 12-18

months, compared with
other periods when the
economy was growing?

Financial decision-making in the downturn

I took a lot more time to make important
decisions compared with other periods when
the economy was growing

29%

I took a little more time to make important
decisions compared with other periods when
the economy was growing

31%

I took about the same amount of time to
make important decisions compared with
other periods when the economy was growing

28%

I took a little less time to make important
decisions compared with other periods when
the economy was growing

9%

I took a lot less time to make important
decisions compared with other periods when
the economy was growing

3%

0

10

20

30

40

50

60

70

80

90

100

%

Investments in IT pay off
Most CFOs say they were happy with the performance of their in-house enterprise software systems during the downturn. In particular, they pointed to the added agility that
these systems offer executives when making decisions. Michel Demaré, CFO of ABB,
a Swiss power and automation firm, says that the efficiency of his firm’s management
information system freed up time for executives to plan, forecast and act. (See sidebar,
this section.)
Fifty-two per cent of respondents agree that their scenario planning has been more
effective in the last 12-18 months than in previous periods of growth; 48% found financial
planning more effective, and 48% found sensitivity analysis more effective. Forecasting
received a high positive score, with 44% of executives reporting that it has been more
effective in the last 12-18 months. However, forecasting also received the greatest
negative rating among finance executives, with 27% saying that it was less effective,
reflecting, perhaps, the difficulty of forecasting accurately in times of turbulence. Even
though financial IT systems were under added pressures, most respondents say they
performed similarly to other periods when the economy was growing, and 28% say they
performed better. Overall, it is evident that previous investment in financial information
systems paid dividends during the depth of the downturn.

How would you rate
the quality (in terms of
time­liness, accuracy and
relevance)­of information­
you received from
financial IT systems
(spreadsheets, performance management
programmes, etc) during
the last 12-18 months,
compared with other
periods when the
economy was growing?

A lot higher quality

6%

Some what higher quality

22%

About the same
Some what lower quality
A lot lower quality

62%
8%
2%
10

20

30

40

50

60

70

80

90

100

%


15

How effective or
ineffective were the
following tools during
the last 12-18 months,
when compared with
other periods when the
economy was growing?

Financial decision-making in the downturn

Financial planning (ie, quantifying the
impact of a business decision on the
balance sheet and income statement)

14%

34%

Forecasting

14%

30%

Process mapping
Data mining

5%

9% 5% 1%

37%

28%

20%

18%

52%

6% 2% 15%

4% 18%

50%

7% 4% 17%

Simulation models

7%

33%

14% 5% 16%

Risk and variance models

9%

25%

31%

Scenario planning

13%

Sensitivity analysis

14%
10

32%

10% 4% 14%

39%

32%

34%
20

30

35%
40

50

A lot more effective
Somewhat more effective
About the same
Somewhat less effective
A lot less effective
Don’t know/not applicable

2%

9%

60

70

80

7% 2%

8%

8% 1%

9%

90

100

%


16

Financial decision-making in the downturn

A psychological boost
Nearly 60% of respondents had experience of previous downturns in a management
role, and of those 51% said the experience was somewhat useful and 42% said it was
very useful. The benefit of the experience is psychological as well as practical. Typically,
CFOs say that their experience helped maintain calm among colleagues, and inspire
confidence in themselves and their colleagues. “Knowing that the world had not come
to an end despite what the newspapers said,” cited one CFO. “I took decisions earlier
by forecasting scenarios that other people couldn’t believe were possible,” said another.
Hand in hand with experience comes intuition. While many finance executive say they
relied heavily on data from internal and external sources, and on other facts, some say
that the financial crisis was an opportune time to question the conclusions to which

the facts seemed to point. “There is a bit more room to look behind figures, and to
say ‘OK, this is what the figures tell us, but what is [really] happening around us?’”
comments­Werner De Laet, CFO of Mobistar, a Belgian mobile telephony operator.­
However, facts remain the most important element on which executives base their
decision,­ as Boudewijn Beerkens, CFO of Wolters Kluwer, a Netherlands-based media­
and information company, points out. “Intuition is nothing more than an undefined
culmination­of tough experiences,” he says.
John Deverell, head of global security at Invensys, a UK technology group, and a 33-year
veteran of the British Army, says that in both military and business situations intuition is
supported by repeatable processes that can be employed in a crisis. “When you come
up against the enemy, there’s a sequence of very straightforward questions you ask in
order to come to a simple, templated decision of attack,” he explains. “The training is
about being confident with the process, and repeating it, with variations to suit the exact
situation. Intuition is an accumulation of experiences from previous decision-making.”

How effective or
ineffective were the
following tools during
the last 12-18 months,
when compared with
other periods when the
economy was growing?

Yes, and my experience of
previous downturns was very useful
Yes, and my experience of
previous downturns was somewhat useful
Yes, and my experience of
previous downturns was little or no use

25%
30%
4%

No, I didn’t have experience of
prior downturns

42%
10

In thinking about the
one to three most
important decisions you
took during the last 1218 months, which
statement best characterises the way you
ultimately decided?

20

30

Gut feel played a role,
but decided based on facts

50

60

70

80

90

100

%

50

60

70

80

90

100

%

45%

Fact-based, but decided
on ‘gut feel’

32%

Mainly based on facts

Mainly based on ‘gut feel’

40

20%
3%
10

20

30

40


17

Financial decision-making in the downturn

Investing in IT at ABB
In 2002 ABB, a Swiss power and automation technologies firm, was close to the
abyss. Burdened by the prospect of huge payouts to settle asbestos claims, and
under a mountain of short-term debt, the firm was weeks from bankruptcy. Against
the odds, ABB came back from the brink. This time round, as the financial and
economic crisis deepened in the course of 2008, ABB’s prior experience helped
management to act decisively.
First, as part of a strategy to set the firm on a stronger footing after 2002,
management­had made substantial investments in enterprise resource planning
(ERP). “We had all these decentralised units working on different systems that
didn’t talk to each other,” says Michel Demaré, the CFO. “Five years ago, I think it

would have taken us much more time to collect data, clean it up, and stop arguing
about the quality. Thanks to that we have more time to plan, to forecast and to take
measures, rather than just collect data.”
Second, ABB management did not hesitate to turn processes on their head.
“There are a lot of processes that you have to really simplify to gain agility,”
explains­Mr Demaré. For example, the firm’s lengthy bottom-up budgeting
process­had started in the summer of 2008 – with hundreds of business units
putting their budgets together. But during that time, the financial crisis deepened.
Given the rapidly changing environment, ABB management scrapped the bottomup­budget in favour of a top-down approach. “We decided that the world was
changing so fast that we needed to switch,” Mr Demaré recalls.


18

Financial decision-making in the downturn

The hazards of hindsight
Exactly one-half of those polled for this report agree that the decisions they made
would have had better outcomes if they had been made sooner. But many executives,
understandably, say they acted with the best information they had at the time, and that in
practical terms they could not have acted any earlier. Mr Roger of Millicom says of his
firm’s divestment: “Maybe it would have been better six months ago, but maybe it would
have been better in a year.” As he points out, though, “there was no evidence at the time
that the sky would be blue in two years.”
When asked how they could have made better financial decisions during the downturn,
some executives responded wistfully, “with a crystal ball.” In a more realistic vein, others
wished they had understood the severity earlier and acted accordingly. “One barrier
to learning is that all of a sudden in hindsight it was clear what they should have done,”
says Dr Bearden of INSEAD. “Because it’s so clear, they think it would be reasonably
transparent the next time.”

“When thinking about
your most important
decisions during the
past 12-18 months,
which of the
following applies?”

The outcome would have been better if
the decisions had been taken earlier
The outcome would have been better
if the decisions had been taken later

50%
6%

The outcome would have been better if the decisions
had been deferred indefinitely (ie, no action taken)

2%

The timing led to the best
possible outcome
Don’t know

31%
11%

0

10

20

30

40

50

60

70

80

90

100

%

Some firms have a framework for evaluating decisions when they revolve around a
specific­programme such as a new marketing initiative or product line. “We tend to
look at the most critical ones,” says Mr De Laet of Mobistar. “After we have launched
a product,­it’s done mainly from a financial and marketing point of view, to check if the
financial, business and market assumptions were the right ones.” Mr De Laet adds that
he feels the process is not done often enough, and that the structure could improve.
But companies that formally gauge the effectiveness of decisions are in the minority.
Just 34% of executives say their firms had a formal process in place to review the quality­

of decision-making in the past 12-18 months. Some CFOs say, simply, that the stock
price is an accurate reflection of the outcome of management decision-making.
Mr Roger of Millicom points out that after divesting its Asian business, the firm has
several options for measuring the effectiveness of the decision. “One is to look at what
the new owners will do with the assets,” he says, “and compare its performance with
the performance we had expected internally.” On the other hand, however, Mr Roger
questions whether there’s value in such an exercise. “The decision has been made,
the deal has been executed,” he says, “so there is little point in looking [back].”


19

Financial decision-making in the downturn

Professor Kahneman of Princeton University explains why that approach often prevails in
organisations. “Any formal review process threatens the decision-makers, threatens them
with possible hindsight,” he says. For his part, Dr Evgeniou of INSEAD also stresses the
need to review financial decisions. “Stick with learning processes and review processes,”­
he says. “Stick with them even though you may think there is nothing to learn. You get
tricked by the hindsight bias. That is a mistake. Executives should understand that you
have quality control on the process, not necessarily on the outcome. As long as the
decisions­they took are the result of a solid decision process, it’s good.”

Which of the following
best describes the
process in place for
evaluating the quality of
decisions taken during
the last 12-18 months
and for other periods

when the economy
was growing?

Last 12 - 18 months

31%

Other periods when the
economy was growing

34%

36%

10

20

34%

31%

30

40

50

33%

60

70

80

90

100 %

No decision quality review process in place
We have a formal process to review the quality of decision-making
Decision quality is reviewed indirectly (ie, on an ad hoc basis and
according to whether targets are reached)


20

Financial decision-making in the downturn

Maintaining momentum
Whether or not firms track the effectiveness of decisions, CFOs hope to keep building
on successes. Carmeuse, for instance, plans to keep in place the work that it has done in
the past two years to sharpen up its forecasting and planning processes. “We went into
a significantly greater level of detail than we normally do, and we have improved the
process quite significantly,” says Mr Schoonejans, the CFO. “One positive aspect of that
is that we can keep the same level of detail, moving forward. It is something that we will
capitalise on for the future.”
Finance executives are crystallising what they have learned in other ways. While many
CFOs have pointed out the benefits of sophisticated IT systems during the downturn,

our survey and interview programme suggest that the downturn has also strengthened many executives’ resolve to invest in their information systems. Thirty-eight per
cent plan to improve financial planning, while 39% plan to improve forecasting. Moresophisticated­data tools, for example, may help executives anticipate trends sooner,
and act more decisively.
And what about those finance executives that have made decisions that will turn out –
with hindsight – to have been wrong? Taking further, tough decisions may be needed.
Cees van Rijn, CFO of Nutreco, a Netherlands-based producer of animal feed, has
admiration for executives who have the mettle to divest businesses they themselves
have acquired, but which have proven a poor choice. “Everybody will have, in their
career, made a wrong acquisition that will need to be divested after a couple of years,”
he says. “That’s life.”

Have you made improvements or do you plan
improvements in any of
the following areas?

Financial planning (ie, quantifying the
impact of a business decision on the
balance sheet and income statement)

17%

42%

38%

2% 2%

Forecasting

17%

41%

39%

1% 2%

Process mapping

25%

22%

Data mining

26%

19%

Monte Carlo simulation
(ie, injecting random data into a model to measure the
impact of uncertainty on the outcome of a project)

36%

Scenario planning

23%

Sensitivity analysis

23%
10

32%

33%

7% 11% 4%

29%

30

40

18%

3%

18%

42%

33%

36%
20

3%

25%
50

60

70

2% 14%

2% 13%
80

90

No improvements planned
Improvements already made
Improvements planned
Will eliminate or severely downgrade their role in
future decision-making
Don’t know/not applicable

100 %


21

Financial decision-making in the downturn

The pre-mortem: Imagining the worst

It may come as little surprise that, among CFOs surveyed for this report, many say
hindsight would have come in handy as they grappled with the dilemmas posed by
the financial and economic crisis.
That’s a tall order, of course. The next best thing, perhaps, is prospective hindsight
– imagining that an event has already happened. Gary Klein, a US-based decisionmaking research psychologist, has built on the potential of prospective hindsight
with his so-called Investing in IT at ABB process for decision-makers.
Many new projects, investments and decisions are destined from the outset to fail.
In part, this is down to the fact that colleagues are sometimes reluctant to voice
doubts about a project. By creating a formal framework for expressing any concerns during the project planning phase, management may improve the chances
of  a project succeeding.
The pre-mortem creates exactly this framework. It is scheduled during the planning stages of the project, investment or decision. A team of colleagues is briefed
on the planned project – and finally asked to imagine that, after implementation, the
project has turned out to be a spectacular disaster for the company. Those present
are asked to write down a short history of that disaster. The imagined scenarios
that result are then collated.
The pre-mortem’s prospective hindsight has a number of benefits. For one thing,
the approach helps managers to spot potential obstacles early on, before the plan
is implemented. For another, it acts as a counter-balance to the emotional investment that management often has in a project. And finally, the pre-mortem sensitises
colleagues to any early signs of trouble if they emerge later on.
According to one US academic study, prospective hindsight increases the probability of correctly identifying the reasons for a future outcome by 30%. For those
making financial decisions, conducting a pre-mortem may do away with the need
to carry out a post-mortem later.


22

Financial decision-making in the downturn

Conclusion – lessons for the next time
Recessions have come and gone since capitalism began, but this one was different in

two respects, according to the executives and experts we interviewed: its global scope
and the speed at which the business environment almost everywhere deteriorated.­
“The size of the crisis made it harder than any of the other previous ones in my
professional­experience,” said one CFO. “There was much more systemic risk, adds
Dr Evgeniou of INSEAD.
“You had to have a systemic view of things, not only on your industry but on others such
as the real estate industry and the banking industry.”
His colleague at INSEAD, Dr Bearden, agrees, but cautions: “Treating this crisis as new
might make us forget principles that go back to the Greeks.” Certainly CFOs will be
reviewing their risk management strategy, capital structure and approaches to cash and
working capital, and all of that will be beneficial. But what about the quality of decisionmaking itself? What lessons has this research taught us that could be applied to the next
crisis, whenever it may happen?
• Take the long view even when it is difficult: Some two-thirds of executives in this

research admitted they made decisions with short-term outcomes in mind, even if
they were aware that these would turn out to be detrimental in the future. Sometimes
pressure­from shareholders demands action. But about one-third of respondents
said they did not sacrifice the long term. They chose actions that cut costs and made
strategic­sense, such as letting go of a chronically underperforming unit. They took
more time to reflect, even under severe pressure for action, and reserved some part
of the eventual decision to reset the company strategy over the long haul.

• Strengthen personal ties within the management team and rally around a cause:

Collaboration was the most important factor for good decision-making. The
consequences of potentially going out of business or making redundancies led to
more focus and agreement on objectives. Executives should try to maintain that
common­sense of purpose as the recovery begins.

• Invest in a ‘crystal ball’: A near-death experience a decade ago forced ABB in

Switzerland­to invest in a new financial IT system that gave managers the data they
needed to navigate through this downturn. Respondents overwhelmingly said if they
could change one thing it would be the quality of their data. The challenge of course
is proving­that more spending is needed—just at a time when cost cuts are in fashion
and new capital investment is viewed with a more sceptical eye than ever.

• Review the process, not only the outcome: Reviewing only outcomes can be counter-

productive if managers feel threatened with perfect hindsight. Preferably decision
reviews­will focus on whether decision processes were right. These can even take
place before the decision is made, through innovative ideas such as the “pre-mortem”.
Such reviews, says Dr Evgeniou of INSEAD, can’t guarantee great decisions every
time, “but they will work better than just focusing on outcomes.”



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