REUTERS/ALBERT GEA 12/11/19 2:57 PM

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An exclusive look at decision-making inside decision-making inside look at An exclusive the world’s most pioneering digital company. most the world’s

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36 AMAZON STORY 1Q20.indd 26 he digital age demands high-velocity, high-quality decisions, yet decision-making in traditional companies is hindered by so many hierarchical layers, coordination committees and standing councils that their very survival is at stake. Without algorithms and data at the center of their decision-making, traditional companies cannot compete with today’s digital giants. In 1994, Amazon started creating the greatest revolution in decision-making with one of the oldest cornerstones of success in business: customer obsession. For his new book, The Amazon Management System, world-renowned business adviser, author and speaker Ram Charan drew on publicly available information and interviews with high-level former and current Amazon employees to crystalize some of the ideas and insights developed by and his team. This excerpt details how CEOs, managers and directors can increase the Tvelocity and quality of their decisions to gain an upper hand against their traditional competitors. Amazon’s Jeff Bezos focused on the oldest of old business principles—extraordinary customer obsession to the level that each customer is treated individually—and turned it into the ultimate business purpose of his company. As everyone knows, digitization was the engine that enabled the company to treat each one of its more than 100 million customers as if they were shopping at a corner store in a small town. But the true magic in how Amazon built this system isn’t just technological—it’s organizational. It’s all about making better decisions and making them fast. Here’s how they do it—and how you can, too.

HIGH-QUALITY, HIGH-VELOCITY DECISION-MAKING Five rules can guide you toward high-velocity decision-making:

1. Recognize there are two types of decisions. To achieve high velocity, Bezos empowers his organization and categorizes all decisions into two types. Type 1 decisions “are consequential and irreversible or nearly irreversible—one-way doors... If you walk through and don’t like what you see on the other side, you can’t get back to where you were before,” Bezos wrote in a 2016 shareholder letter. Such decisions should go through a “heavyweight” process—being made slowly and methodically with great deliberations and consultation—to ensure a high-quality decision. Taking type 1 decisions too lightly is a potentially fatal mistake. Type 2 decisions refer to those that “are changeable, reversible—they’re two-way doors. If you’ve made a suboptimal Type 2 decision, you don’t have to live with the consequences for that long. You can reopen the door and go back through,” wrote Bezos. These decisions “can and should be made quickly by high-judgment individuals or small groups.” CEOs should identify the Type 2 decisions and delegate. The distinction between two different types of decisions and, thus, two different types of decision- making mechanisms must be crystal clear. It beats bureaucracy, analysis paralysis and improves, over time, people’s judgement in decision-making.

2. Don’t make all decisions by yourself. No matter how hard-working your CEO and top team are, there are only 24 hours in a day. As a business continues to grow, if decision-making remains concentrated at the top, sooner or later, your top executives will become the biggest impediment to rapid growth.

3. Don’t wait for all the information. As Bezos wrote in his 2016 shareholder letter, “most decisions should probably be made with somewhere around 70 percent of the information you wish you had. If you wait for 90 percent, in most cases, you’re probably being slow. Plus, either way, you need to be good at quickly recognizing and correcting bad decisions. If you’re good at course-correcting, being wrong may be less costly than you think, whereas being slow is going to be expensive for sure.” REUTERS / RALPH FRESO

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AMAZON STORY 1Q20.indd 27 12/11/19 2:57 PM developed a new decisions, how do you make sure they’re idea in eight weeks, high-quality? and they changed the intensity of 1. Find the best truth. In traditional competition in companies, due to the inevitable delay, their industry. This distortion and manipulation as information methodology has is relayed through layers from bottom to done wonders the top, and the fact that data resides in for velocity and silos, many decisions are made far from shortening the the truth, the whole truth and nothing but Jeff Bezos with children from ‘Club for the Future’ cycle time of deci- the truth. REUTERS/CLODAGH KILCOYNE sion-making. , former Amazon CIO and ‘BEZOS PLACES HUGE Bezos’ right-hand man, has written that Bezos “tries to find the best truth all the EMPHASIS ON FIGHTING 5. Don’t wait for everyone to agree. Everyone has experienced postponed time.” This may sound self-evident, but CONFORMITY, AVOIDING decision-making due to one or a few it is a big challenge for traditional GROUP THINKING AND people’s objection or absence. In some organizations usually characterized by RESISTING THE CONVENTIONAL cases, in a drive to have consensus, strict hierarchy, managing by fear and a one person can exercise veto power. command-and-control modus operandi. THINKING THAT ACHIEVING Sometimes a decision is made and then As a devotee of customer service, he HARMONY IS DESIRABLE.’ reopened in the third meeting, which seems to have learned from Toyota’s is very frustrating, energy-draining and culture of seeking the root cause of any 4. Don’t require approvals that are time-consuming—and the quality of defect. He actually recruited a high-level lengthy and must go through large decision, by definition, is poor. guy who was an expert at Toyota in numbers of hierarchical layers. When To solve this deadlock, “disagree and making sure that everyone can detect multiple functions actually need to be commit.” Bezos did that when his team any defect and take action. involved in approving a Type 2 decision, wanted to greenlight an Amazon Original At Amazon, each metric is owned by you can transform the traditional show that he felt should be dropped, a human being. If the owner finds a sequential process into a simultaneous responding, “I disagree and commit and significant anomaly, even if it comes from dialogue for high-velocity, high-quality hope it becomes the most watched thing only one customer, the owner is required decision-making. For example, Amazon we’ve ever made.” Just imagine how long to search through to the root cause of project teams are free to choose between that call would have taken if the team that anomaly. That means looking all the internal services and external vendors. In had to educate, persuade and finally earn way back to the beginning of the process the traditional sequential selection and commitment from him. through to the actual customer experience. approval process described earlier, this After all the facts are considered and Bezos does this himself, personally could take two to three months and often all thoughts are expressed, as Bezos looking at data, seeking out any defects, result in poor quality because distortion wrote in a shareholder letter, “if you have then asking people to diagnose the root and information flow takes place. a conviction on a particular direction even cause, which could be a root cause across Amazon is a continuous invention though there’s no consensus, it’s helpful to a system in the company. For example, machine. It has developed the fastest say, ‘Look, I know we disagree on this but when the topic of lengthy hold times invention process. It involves a clear, will you gamble with me on it? Disagree for customer calls came up during an written definition of the product to be and commit?’ By the time you’re at this executive meeting, he picked up the developed in excruciating detail both in point, no one can know the answer for phone and called customer service himself terms of outputs and inputs. The senior sure, and you’ll probably get a quick yes.” to demonstrate the discrepancy between people select a leader, and the leader This is a two-way, rather than a one-way, what he was being told—that one-minute selects an integrated cross-functional approach. Leaders can use it for high-ve- hold times were typical—and the reality— team—they call it a separable, single- locity decision-making, and leaders should his hold time on that call was over four threaded team—whose full-time job is to also be prepared to practice this principle minutes. deliver the project. They do nothing else. themselves, as Bezos did in greenlighting They think and act on the project contin- that original program. 2. Imagine the possible change. In uously until it is delivered and operational. addition to the best truth in a static I have personally observed putting this CONTROLLING FOR QUALITY sense, Bezos takes it one step further, i.e., methodology in one, large company. They Now that you’re making high-velocity always using future-back perspective,

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AMAZON STORY 1Q20.indd 28 12/11/19 4:06 PM AMAZON’S DECISION- MAKING PRINCIPLES thinking about how things will change We will continue to focus relentlessly on going forward. For example, back in 2005, our customers.

most Amazon executives were against REUTERS/CARLOS JASSO We will continue to make investment Bezos regarding launching Prime, i.e., decisions in light of long-term market $79 membership per year to enjoy two- leadership considerations rather than day shipping for free. The objection was short-term profitability considerations or well-founded. Given an $8 logistics cost Amazon warehouse on the outskirts short-term Wall Street reactions. per order, assuming 20 orders a year on of Mexico City, Mexico We will continue to measure our programs average by each Prime member, shipping and the effectiveness of our investments would cost $160 a year more than the ‘EVEN WHEN YOU MAKE THE analytically, to jettison those that do not $79 membership fee. Diego Piacentini, a provide acceptable returns, and to step up former executive in Amazon’s international RIGHT DECISION IN THE our investment in those that work best. consumer business division, reported that BUSINESS SENSE, IF YOU PUT We will continue to learn from both our “…every single financial analysis said we THE WRONG PERSON IN successes and our failures. were completely crazy to give two-day We will make bold rather than timid shipping for free.” CHARGE, THE ENDEAVOR WILL investment decisions where we see a What gave Bezos the unwavering PROBABLY FAIL.’ sufficient probability of gaining market conviction despite the siege from all? leadership advantages. Some of these The key factor was his undying devotion Amazon’s Leadership Principles state investments will pay off, others will not, to customer obsession and having the that leaders are “obligated to respectfully and we will have learned another valuable conviction that it would be made fiscally challenge decisions when they disagree, lesson in either case. prudent. Bezos took a future-back even when doing so is uncomfortable or When forced to choose between perspective, asking the obvious but exhausting; they do not compromise for optimizing the appearance of our GAAP commonly neglected question: How will the sake of social cohesion.” Amazon accounting and maximizing the present the shipping cost change? employees well understand their value of future cash flows, we’ll take the He believed it would drop. Why? obligation, not only to the company but cash flows. Because when customers spend more, also to the customer and to the share- We will share our strategic thought Amazon’s volume will increase, and that holder. Also, as John Rossman, former processes with you when we make bold increased scale would help Amazon director of enterprise services at Amazon, choices (to the extent competitive negotiate lower prices from shipping writes in The Amazon Way, employees pressures allow), so that you may evaluate vendors and decrease the amount of have learned that disagreeing with senior for yourselves whether we are making fixed-cost allocation of each shipment. executives is actually beneficial to their rational long-term leadership investments. In addition, with continuous system careers at Amazon. We will work hard to spend wisely and upgrades, Amazon’s logistics system I personally observed Ray Dalio, founder maintain our lean culture. We understand would continue to “drive down Amazon’s and co-chairman of the world’s largest the importance of continually reinforcing transportation costs by double-digit hedge firm, Bridgewater Associates, in his a cost-conscious culture, particularly in a percentages each year.” In addition, the meetings for one full year and saw him business incurring net losses. frequency of customer interaction will very effectively seek opposing viewpoints. We will balance our focus on growth with provide more data, and data is equity. Also, he made it easier for people to emphasis on long-term profitability and disagree with him when he often said, capital management. At this stage, we 3. Combat group thinking. Bezos places “Here is my view, and I could be wrong.” choose to prioritize growth because we huge emphasis on fighting conformity, He developed a mobile app that he would believe that scale is central to achieving avoiding group thinking and resisting the use several times in a meeting to get hon- the potential of our business model. conventional thinking that achieving est input from participants anonymously. We will continue to focus on hiring and harmony is desirable. He expects people Each person in the meeting votes yes or retaining versatile and talented employees, to challenge him. He demands a quality no on a decision and explains why. Every and continue to weight their compensation discussion with people bringing in new word of the “why” is recorded. Later, all to stock options rather than cash. We know ideas, different perspectives and, even that information is analyzed. our success will be largely affected by our better, disruptive thinking. He “believes This process was implemented at the in- ability to attract and retain a motivated that truth springs forth when ideas and vestment firm Matrix Capital Management. employee base, each of whom must think perspectives are banged against each After Matrix founder and CEO David Goel like, and therefore must actually be, an owner.” other, sometimes violently,” writes Brad implemented the dialogue process, I Stone, author of The Everything Store. observed several sessions where the Source: 1997 Letter to Shareholders, Jeff Bezos

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AMAZON STORY 1Q20.indd 29 12/11/19 4:06 PM , WA

were not reasonable, what critical technology breakthrough was bet on and why it did not happen as expected, and the list could go on. Among all the REUTERS/LINDSEY WASSONREUTERS/LINDSEY inputs, the most important one is probably people. Even when you make the right decision in the business sense, if you put the wrong person in charge, the endeavor will probably fail. Amazon management emphasizes and measures input metrics all the way through. The reason is that if the inputs ‘AMONG ALL THE INPUTS, are right in terms of timing, quality and THE MOST IMPORTANT ONE IS How to make a decision when two quantity, the goals will be achieved. This PROBABLY PEOPLE.’ viewpoints are so opposite? Bezos asked is deep in the culture. the marketing department to run TV commercials in two cities, Minneapolis and SCALING HIGH-VELOCITY Portland, and then measure the additional DECISION-MAKING local purchases they helped generate. In essence, decision-making is about The test went on, the result came back, making choices. Tough decisions force us and the conclusion was clear, “not enough to choose between two goods or weigh

REUTERS/LINDSEY WASSONREUTERS/LINDSEY to justify the investment.” Based on this two evils. There is no perfect solution, and powerful test, Bezos decided not only to everything has two sides—the upside and cancel all TV advertising, but also to the downside. make drastic changes to the marketing In a commencement speech at department. Today, by any measure, Princeton University, Bezos asked, “Will Amazon is the number-one brand in the you choose a life of ease or a life of world—and this was achieved through very service and adventure?”, “Will you wilt little mass advertisement or traditional under criticism, or will you follow your company’s executive team members marketing effort. That is because having a convictions?” and “Will you be clear at the logged their candid opinion about whether customer experience on an individualized expense of others, or will you be kind?” or not to approve a deal and the underly- basis that is second to none earns Of course, Bezos didn’t expect every ing detailed logic behind their decisions customer admiration for the company. audience member that day and every in the mobile app. The data collected Experimenting is a natural habit in future reader of the speech to choose during those sessions was analyzed on a Amazon. When they do their operating paths like service over ease and clarity longitudinal basis, which yielded biases plan, they provide a narrative of learning over diplomacy, but for people in Amazon, analysis, conviction analysis, assumptions from the previous year. he demands that everyone follow the analysis and logic analysis, and the same principles and methodologies that process improved the judgment quotient 5. What if a decision goes wrong? “We deliver good decision-making. of the whole team. will make bold rather than timid invest- Now for the $1 billion question: How to ment decisions where we see a sufficient scale high-velocity and high-quality 4. Test through the experiment. When probability of gaining market leadership decision-making as your company grows? people have genuine disagreements or advantages,” Bezos stated in a 1997 when the future is murky, rather than shareholder letter. “Some of these invest- 1. Crystalize the consistent principles. endless debates, fuming arguments and ments will pay off, others will not, and we In his first shareholder letter back in 1997, efforts to persuade one another, Bezos will have learned another valuable lesson Bezos explicitly set forth the decision-mak- opts for an experiment. Stone vividly in either case.” ing principles of Amazon (see sidebar, captured such a scenario back in 2001. What’s unique about Amazon’s way right): Why go through what was surely “As usual, Bezos battled his marketing of learning? The secret weapon is mid- an onerous and taxing effort? The obvi- executives. They argued that Amazon course adjustment. They ask questions ous answer is so shareholders can make had to be on the airwaves to reach new such as what factors should have been informed investment decisions regarding customers. As Amazon’s losses mounted, considered but did not, what assumptions Amazon. It’s also so customers can be Bezos’s opposition hardened.” had been made and why some of them more willing to build a trust-based, long-

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AMAZON STORY 1Q20.indd 30 12/11/19 2:58 PM THE CHRONOLOGY OF GOOD DECISION- term relationship with Amazon. But, much or no safe haven. Everyone has skin in the more importantly, it is for all current and game and is held accountable. MAKING future people working in Amazon, so that Another cultural shock for newcomers Getting to High-Velocity Decision-Making every single one of them can clearly under- to Amazon is that nearly every meeting 1. Recognize two types of decision-making. stand the decision-making logic and is able starts with attendees sitting in silence and 2. Don’t make all the decisions by yourself. to make the right choice when duty calls. reading the narratives for 15-30 minutes. This is because business meeting attend- 3. Don’t wait for all the information. 2. Specify the consistent methodology, ees typically begin interrupting presen- 4. Don’t require approvals that are lengthy standard operating procedure (SOP). On tations on the very first slide, without and go through large numbers of June 9, 2004, we witnessed a brilliant in- an understanding of the full picture the hierarchical layers. novation in human management practices. presenter has in mind, and the discussion 5. Don’t wait for everyone to agree. From that day on, Amazon embarked a begins to deteriorate. crusade against PowerPoint presentations As Bezos noted in the same interview Controlling for Quality and bullet points, and a journey toward with Rose, “Executives are very good at 1. Find the best truth. what evolved into “Six-Page Narratives.” interrupting....” So, reading memos togeth- 2. Imagine the possible change. If you doubt this methodology’s signifi- er is a very effective way to ensure that 3. Combat group thinking. cance, you are not alone. PowerPoint has everyone is well-equipped for a high-qual- 4. Test through the experiment. become the second language of business. ity discussion afterwards. As a result, Am- 5. What if a decision goes wrong? Some companies have a stand-alone azon’s meetings rarely end without clear functional department devoted entirely to decisions or specific actions. As ex-Am- Scaling High-Velocity Decision-Making producing PowerPoint presentations. azonian Samir Lakhani put it, “Bezos has 1. Crystalize the consistent principles. But Bezos’s was not a capricious whim, given all employees a standard SOP for but a well-thought-through decision to ensuring the basics get done well.” 2. Specify the consistent methodology. embrace the value of narrative memos 3. Reinforce the consistent approach in that were often time-intensive endeavors 3. Reinforce the consistent approach in every decision. involving multiple iterations. Many Amazo- every decision. One of Bezos’s most con- nians recalled this practice vividly even af- spicuous traits is consistency. He actually To order the book ter they left the company. In The Amazon attached the 1997 shareholder letter to ev- on which this article Way, Rossman wrote, “I can’t tell you how ery single letter afterwards, probably both was based, visit many of my weekends were consumed by as a constant reminder to himself, and as a amazonmanagement this writing and editing process.” powerful proof to the customers, share- system.com. In my teaching at Northwestern Univer- holders and all employees at Amazon. sity, I required my students to write in two In 2010, Bezos noted that “customers who pages, clearly, concisely and to the point, browsed—but didn’t buy—in the lubricant their case analysis. The purpose was to section of Amazon’s sexual-wellness catego- train their brains to sort out what matters ry were receiving personalized emails pro- from what does not matter and to write moting a variety of gels and other intimacy that in a way that a teenager could under- facilitators.” He “believed the marketing It is such defining moments that con- stand it. And I read each paper and made department’s emails caused customers em- vince others of what is important to you comments. barrassment and should not have been sent” and how you will make decisions in tough Why the huge investment of people’s and called for a meeting, reported Stone. situations. As Rossman wrote in The time and efforts? And why do Amazoni- In the meeting, executives argued that Amazon Way, Amazon’s “principles aren’t ans, present and past, revere it so highly? lubricants were available in grocery stores slogans printed on wall posters and coffee As Bezos noted in a 2012 interview with and drugstores and were not, technical- mugs. They are lived and breathed every Charlie Rose, “When you have to write ly, that embarrassing. They also pointed day by Amazonians from the CEO on your ideas out in complete sentences and out that Amazon generated a significant down.” We have cross-checked this with complete paragraphs, it forces a deeper volume of sales with such emails. Bezos the employees and ex-employees who clarity of thinking.” Authors are forced didn’t care; no amount of revenue was admire this practice. to run complete analyses, distinguish worth jeopardizing customer trust. It was I urge readers to reflect on each of the between subtle nuances, articulate their a revealing—and confirming—moment. He Amazon decision-making mechanisms logic, prioritize various ideas and take was willing to sacrifice a profitable aspect described here as potential ways to im- full accountability for specific proposals. of his business rather than test Amazon’s prove your organizations for high-velocity, There is no wiggle room, no hiding place bond with its customers. high-quality decision-making. CBM

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