The Decision-Making Process of Managers and Controllers

What role do analytics and intuition play?

Controlling is often compared to mathematics. However, bare figures don't always produce the right results. It is important to take into account a "feel" for the numbers. Analytics alone are not enough, especially when making important decisions. Intuition must be brought into the process. What's more, this applies to managers and controllers alike. Managers should not rely solely on their gut feeling, just as controllers should not limit themselves purely to analytics.

Controllers are deemed to be “numbers people” and incorruptible analysts – it is a fundamental part of their role to make sure that projects are transparent and quantifiable. Intuition, that “gut feeling“, is primarily associated with managers or, more particularly, with entrepreneurs. This latter connotation is somewhat ambivalent. On the one hand, it is hard to imagine a manager without “entrepreneurial instinct”. On the other hand, intuition is associated with the flaws of a gung-ho approach, imprecision, or even arbitrariness, which really needs to be corrected using analytical methods or reflection. Are controllers allowed to be intuitive, and do managers really need more analytic methods?

We believe that there are no simple answers here. Of course, it is inconceivable to think of controlling without analytics; reflection is the key strength of controllers while an analytical approach to problems is their trademark. These characteristics form the basis of their central role as the company’s “business conscience”. Indeed, controllers do add value in countless cases by counteracting the intuition of corporate patriarchs with hard facts. But again, seeing intuition as always being a problematic approach to decision making and strictly attributing analytics to controllers and intuition to managers is not totally correct. Analytics and intuition are in fact two strategies for solving different types of problems which are particularly valuable when used in tandem.

It is not always possible to reach final decisions based on data alone. The more uncertain the outcome is, the more it is necessary for decision makers to supplement data-based reflection with intuition and gut feeling. Uncertainty may typically consist of two aspects: On the one hand, the objective to be achieved with the decision, and on the other hand, the route to be taken to reach this objective.

Where both the objective and the means of achieving it are largely known, the decision maker is faced with only a slight degree of uncertainty. In such situations, it is necessary to adopt an analytic approach. In this case, the decision problem can be expressed largely in terms of numbers. Here, intuition only serves to reinforce the decision that was already made. A lot of decisions concerning operational planning are made in this way.
 
However, if the decision maker is relatively sure of the required outcome but has no idea – or only a very vague idea – of how to achieve it, data is an unreliable basis. Past experience can show the way forward, although it is not certain whether it will lead to a successful outcome or a dead-end. It requires analytic reflection as well as creative imagination. Intuition becomes an active and indispensable way of making decisions. In particular, far-reaching, fundamental decisions, such as those concerning strategic planning, are made in this way.
 
Finally, if both the objective and the means of achieving it involve a high degree of uncertainty, neither analytics nor intuition can provide a reliable approach. Typically, the only remaining option in this case is improvisation. It’s difficult to calculate the risks here. Accordingly, this case tends to be an exception in everyday business.

As a result, the problems typically encountered by companies lead to favorable outcomes (only) with a combination of reflection and intuition; the weighting of these resolution mechanisms varies depending on the degree of uncertainty.

The interplay described above can be found in human decision-making behavior in general. Nobel Prize winner Daniel Kahneman describes the interaction of two cognitive systems:
 
“System 1 operates automatically and quickly, with little or no effort and no sense of voluntary control… I describe System 1 as effortlessly originating impressions and feelings that are the main sources of the explicit beliefs and deliberate choices of System 2.” (Kahneman 2011, p. 33) This is what is generally referred to as intuition. “System 2 allocates attention to the effortful mental activities that demand it, including complex computations. The operations of System 2 are often associated with the subjective experience of agency, choice, and concentration.” (Kahneman 2011, p. 33) This is the field of analytics.

Fig. 1: The constructive tension between analysis and intuition – the RIC matrix

Based on the above, the first step for controllers is to classify any problems for which decisions are required in terms of their uncertainty. What is already known from past experience? Are the old solutions still valid? Can problem-solving expertise be brought in from outside if it is not available within the company? The second step is then to find solutions based on a combination of varying degrees of analytics and intuition.

To illustrate this point, the following example compares estimates for an investment project that were obtained in parallel using an analytical and an intuitive method. For this purpose, we have a team made up of a manager and a controller; however, the controller and the manager each take both an analytical and an intuitive approach to decision making. The two judgments can either correspond with each other or differ. There are four possibilities.

Case 1: Here, the investment figures are clear-cut: The capital value is positive; the pay-off time is short. Nonetheless, there remains a gut feeling that something isn’t right. This could be fueled by various sources: Perhaps there is a lack of trust in the person applying for the investment, who may be suspected of making personal gains from the investment, or the estimated figures are considered to be overly optimistic. This situation is not new to controllers, as it occurs quite often when plans come out into the open. Experienced controllers instinctively know when they need to take a more critical look and intervene. If the figures withstand critical examination, the decision from the reflective judgment stands, otherwise they must be corrected accordingly.

In case 2, the controller’s gut feeling confirms the findings of the analytical method. Here, it is important to avoid being overconfident.

Case 3 is the same as case 1 but in reverse: Here we have the situation where the manager is convinced about a new scheme – a new product or technology, for instance – but is unable to make the necessary calculations. It is the controller’s job to find arguments that support the manager’s 6th sense and which weren‘t part of the previous plans. For example, a new product in a new market may not be feasible in itself, but it could open the door for future products. This could involve changing the calculation method (from a present net value analysis to a real options analysis). An assessment of the manager plays an important role when reviewing the case. Have there been similar situations in the past? How often has he tried to box through other schemes under the guise of “strategic premiums“? What is his track record? How much can be put down to luck? Whenever reflection and intuition produce different results, it is important to exercise caution.

Finally, case 4 is similar to case 2 and, therefore, uncomplicated. If both reflection and intuition provide negative results, then the decision is clear – at least as long as the judgment wasn’t made too hastily.

Let’s sum up: Analytics, or reflection, is an essential skill for both managers and controllers. Managers who rely solely on their intuition are taking a considerable risk. On the other hand, controllers can’t limit themselves to analytics alone: They aren’t able to carry out their complementary and constraining tasks (Unburdening, Complementary, and Constraining Tasks) successfully, if they don’t have a 6th sense for recognizing rationality deficits. It is essential that both approaches to problem solving are used in tandem in order to make good decisions.

Professor Utz Schäffer & Professor Jürgen Weber

  • Kahneman, D. (2011). Thinking Fast and Slow. New York: Farrar Straus & Giroux.
  • Weber, J., & Schäffer, U. (1999). Sicherung der Rationalität in der Willensbildung durch die Nutzung des fruchtbaren Spannungsverhältnisses von Reflexion und Intuition. Zeitschrift für Planung, 10(2), 205–224.