Optimization, explained Steve Sashihara at the Princeton chamber breakfast on April 18, can be understood by invoking the concepts of Nobel prize-winner Daniel Kahneman. The Princeton University psychologist won the prize in economics because he aptly explained why people make biased decisions. Sashihara named a handful of bias types, including the “optimism” bias, example: the kitchen renovation that you estimate will cost less than the final cost. Reducing bias in investment decisions, studies from McKinsey reveal, will result in a seven percent increase in profit.
“Think of your business as a factory for making decisions,” said Sashihara, in a tour-de-force of explaining a complicated topic in simple terms. If it’s a non-profit business, someone is deciding when to hold an event, whom to invite as a speaker, where to hold it, etc. etc. “Organizations of all types are making all sorts of decisions.” Eliminating the bias in those decisions – is optimizing them.
Everyone likes to optimize, but in the business world, software programs do the optimizing. To qualify as optimizing, the software must make recommendations. Everything else is like the dashboard on your car. You read the speedometer, the REMS, the fuel tank level. But not until you turn on the GPS does something on the dashboard make recommendations.
Sashihara admitted that he has had a 30-year disease – he can’t get away from thinking about optimizing, whether in the grocery store or an airport security line. You would think that the big companies would turn to optimization, but no, most decisions are made in the board room, after a Power Point presentation, with people going around the table to state their opinion. (Even that method can be improved, he says, merely by asking everyone to write their opinion on a card and all show their cards at once – then no one is affected by the Important opinion.)
Yahoo and Google exemplify the difference. Yahoo paid experts to rank web pages in the early days of the Internet. Google wrote optimizing software. Yahoo couldn’t keep up once the web attained the size of 44 billion pages.
Jeff Bezos, a Princetongrad like Sashihara, has said he just wanted to get a piece of the action on the Internet before it went away. His company started so small that they rang a bell when they sold something. (This is encouragement for small consulting companies that work with small businesses – ergo, your client could grow into an Amazon that now has $17.4 billion in sales and grew 30 percent last year – yet event that disappointed Wall Street.
Amazon, said Sashihara, makes its money on the alsos — the five “other things you might be interested in,” and they are controlled by optimizing software. Amazon also makes a profit by optimizing its fulfillment strategy.
You don’t have to be a big company to use optimizing software. Sashihara – in his talk and in his book – discusses a Latin America-based bulb company that is small but, with optimizing, dramatically increased its profit. U.S. Sugar is another of his clients that reaped big profits from small optimization changes.
Sashihara’s tips for consultants, any consultants:
1. Look for the wallflowers. If three priorities are named in the annual report, look elsewhere. The department that is ignored – that is working where the air has been sucked out of the room – it needs help and will welcome you.
2. Pick some low hanging fruit first, a quick project for an easy win. You’ll earn admirers who turn into supporters.
3. Don’t loll in your own success. Yes you can do the same thing two years in a row, but don’t be tempted to do that.
Of the many door prizes, a management consultant – Benjamin A. Burditt of Princeton Strategic Advisors – won a copy of Sashihara’s book, The Optimization Edge: Reinventing Decision Making to Maximize All Your Company’s Assets.