How to Practice Evidence-Based Management
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Management Half-Truths and Nonsense: How to Practice Evidence- Based Management JeffreyPfeffer Robert I. Sutton "Instead of being interestedin what is new,we ought to be interestedin what is true." - Pfeffer's Law "Ifyou thinkthat you have a new idea, you are wrong. Someone probably already had it. This idea isn't originaleither; I stole it fromsomeone else." - Sutton's Law questfor information and research-basedinsight is an obsession in thecapital markets. There is a veritableindustry of analysts, investmentbankers, portfolio managers, and investorswho seek anyinformational advantage, which is one reasonthat academics who studyfinance - suchas NobelPrize winners Myron S choies, William Sharpe,and MichaelSpence - have been recruitedto workon WallStreet and withmoney managers. The value ofevidenced-based investment decisions also explainswhy acting on privateinformation - insider trading - is regulatedso tightly,and whyU.S. companiesare forbiddenfrom releasing information to elitegroups of investors and analysts.Instead, they must make conference calls and announcementssimultaneously available to thegeneral public. Quantitative researchon capitalmarkets abounds, and companiessuch as Vanguard,Fidelity, BarclaysGlobal Investors, and hundredsmore have used it to developinvest- mentproducts and strategies. The potentialpayoff for using valid evidence is even greaterwhen it comesto manaßinßorganizations. Capital markets are amongthe most efficient Adapted by permissionof HarvardBusiness School Press. Hard Facts, Dangerous Half-Truths,and TotalNonsense: Profitingfrom Evidence-Based Management, by JeffreyPfeffer and RobertI. Sutton. Copyright© 2006 JeffreyPfeffer and RobertI. Sutton.All RightsReserved. CALIFORNIAMANAGEMENT REVIEW VOL48.NO.3 SPRING2006 77 ManagementHalf-Truths and Nonsense: How to PracticeEvidence-Based Management in theworld, so itis hardto gainan enduringinformation advantage. Innova- tionssuch as junkbonds, indexed mutual funds, and derivatives,for example, werecopied with lightning speed. Imitation is muchslower and less effectivein theworld of management practices, in partbecause such practices depend on tacitknowledge and implementationskill, on knowingnot just whatto do but howto do it.And management practices and logicresist copying because ofthe powerof precedent and ideology.Consider how longSouthwest Airlines had its businessmodel and an amazingrecord of unparalleled profitability in the airline industrypretty much to itselfbefore JetBlue and a fewothers began to seriously copyit. Or witnessthe failure of competitors to catchToyota in productivity, quality,or timeto marketwith new productinnovations, even thoughToyota givestours to competitors,and thefundamentals of its system have been describedin numerouswritings.1 We have foundthat most managers actually try to act on thebest evidence.They follow the business press, buy business books, hire consultants, and attendseminars featuring business experts. Companies do sometimesbene- fitfrom these efforts. Yet there is surprisinglylittle rigorous use or seriousappre- ciationof what we call "evidence-basedmanagement." Firstand foremost,evidence -based management is a way ofseeing the worldand thinkingabout the craft of management. Evidence-based manage- mentproceeds from the premise that using better, deeper logic and employing factsto theextent possible permits leaders to do theirjobs better.Evidence-based managementis based on thebelief that facing the hard facts about what works and whatdoesn't, understanding the dangerous half-truths that constitute so muchconventional wisdom about management, and rejectingthe total non- sensethat too oftenpasses for sound advice will help organizationsperform better. Obstacles on the Road to Implementing Evidence-Based Management Implementingevidence-based management is a journey,not a quick-fix technique,and alongthe road you willencounter hindrances and obstacles.It is ourjob to tellyou aboutsome ofthe most pernicious potential roadblocks and providesuggestions about how to avoidand overcomethem, or at leastmitigate theireffects. UsingData ChangesPower Dynamics A formerstudent who workedat Netscapereported that James Barksdale, a formerCEO ofthat company, once remarkedat a meetingat thecompany somethingto theeffect of: "If the decision is goingto be made bythe facts, [then]anyone's facts, as longas theyare relevant,are equal. Ifthe decisionis goingto be made on thebasis of people's opinions, then mine [he was the CEO at thetime] counts for a lotmore." What that anecdote illustrates is thatfacts and evidenceare greatlevelers of hierarchy. Therefore, some ofthe resistance to 78 UNIVERSITY OF CALIFORNIA, BERKELEY VOL 48, NO. 3 SPRING 2006 ManagementHalf-Truths and Nonsense: How to PracticeEvidence-Based Management evidence-basedpractice arises because, when done right,it does changepower dynamics,replacing formal authority, reputation, and intuitionwith data. One pundit,referring to evidence-basedmedicine, called it replacingwarriors with accountants.2 Adoptingevidence -based management could send similar reverberations throughthe corporate world. Senior leaders are oftenseen as heroesand vener- atedfor their wisdom and decisiveness.CEOs and theirbrethren could lose statureas theirintuitions are replaced,at leastat times,by judgments based on evidenceavailable to virtuallyany educatedperson with access to the data.But as recentresearch by Rakesh Khurana suggests, less heroicCEOs and leaders who operateon thebasis of the best data and insightsmight actually fuel better organizationalperformance.3 The implicationis thatleaders need to makea fundamentaldecision: do theywant to be toldthey are alwaysright, or do theywant to lead organizations thatactually perform well? When Gary Loveman of Harrah's told a groupof Stanfordstudents that he frequentlymade mistakes,that he was willingto listen to all thefacts and analysis,and thathis facts and insightswere not privileged over anyone JeffreyPfeffer ¡s Professorof Organizational else's,this was notsome politically correct Behaviorat the Graduate School of Business posture.Loveman is a verycompetitive per- at StanfordUniversity. son,and he wantsHarrah's to win- and win- RobertI. Sutton is Professorof Management Science and at Stanford ningrequires mustering the truth and the Engineering University. bestinformation for making decisions, not deferringto peoplebased on title,rank, or anythingelse. Thatsort of egalitarian culturewas supposedlythe norm in the SiliconValley - and is stillevident at placessuch as Google,with its more academic and long-termorientation. But egosloom large even in high-technologycompanies, and evidence oftencuts inflated egos down to size.There is a clearimplication in all ofthis for selectingleaders - avoidat all coststhe people who thinkthey know everything. Theydon't. But worsethan that, they are unlikelyto embraceany factsthat disagreewith their preconceptions. This is whyone ofour favoritesayings is, "Whentwo people always agree, one ofthem is unnecessary."This is a principle bothof us have appliedwhen advising leaders how to interactwith others, help- ingcompanies hire new people,or lookingfor a coauthorto workwith. PeopleOften Don't Wantto Hear theTruth The phrasedon 't shoot the messenger contains an enormousamount of truth,namely, that delivering bad newsis notsomething that typically wins you manyfriends. People like to delivergood news,regardless of its validity, in large partbecause most people seem to preferhearing good news.The important insighthere is thata lie takestwo parties - theperson who tellsthe lie and quite frequentlythe listener who signalsin a numberof ways that she or he wantsto be liedto. As GaryLoveman explained to us, sayhe goes to a casinothat isn't doing well.If the leadership at thefacility tells him that they understand the problem CALIFORNIAMANAGEMENT REVIEW VOL 48, NO.3 SPRING2006 79 ManagementHalf-Truths and Nonsense: How to PracticeEvidence-Based Management and knowhow to fixit, he can flyoff feeling good thatthings will get better. If insteadthey tell him that they've tried a bunchof things, basically everything theycan thinkof, and the casinois stilllosing out to thecompetition, Loveman and his teamhave to actuallyfix the problem, possibly deliver bad news to theirbosses, the board of directors, and can'tgo offinto the sunset content and secure.But theimportant thing is thatthey can fix it, because they've been giventhe facts. Building a cultureof truth telling and actingon thehard facts requiresan enormousamount of self-discipline in orderto notonly be willingto hearthe truth, however unpleasant, but to actuallyencourage people to deliver bad news.Kent Thiry, the CEO ofDaVita, told us thatsenior managers at his companyactively seek out problemsand bad news.That's because the good newsdoesn't require any decisionsor action;it's the bad news thatcreates the need to do somethingto fixthe failure. And you can'tfix things or bringadvice and talentto bearon problemsunless you knowabout them. Thereis reallyonly one way aroundthis reluctance to confrontthe hard facts,and thatis to consciouslyand systematicallyunderstand the psychological propensityto wantto bothdeliver and heargood news and to activelywork againstit. To practiceevidence-based management you firstneed to knowthe realtruth. And it's better to knowthe truth early, when situationscan be reme- died,than later when it maybe too lateto do much. TheMarketplace for Business Ideas Is Messyand Inefficient Thereis yetanother barrier to practicingevidence -based management,