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Has your boss made a stupid decision? Think again

By on January 20, 2012
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I make it a rule that I never believe someone has made a stupid decision. I have always just not understood their reasons yet.

Let me give you an example. The CEO of a major telecoms company once said that he would rather pass on the opportunity to buy one of two potential market leaders for $100 million and pay $1 billion two years later to buy whichever of the two has won.

At one level, that’s a stupid decision: pay $900 million less with a 50% chance of picking the right one (and possibly helping it win). On another, it’s sensible: acquisitions are hard enough to make work without the risk that you might have backed the wrong horse and send the entire company down the wrong path.

But at a personal level it makes even more sense. If you bought the market leader and the acquisition failed, that was tough luck. You backed the demonstrably best horse and it didn’t work out. If you bought one of two contenders and back the wrong one, that’s much harder to explain away. Career-wise, spending $1 billion was safer than spending $100 million.

The same happens in any negotiation, large or small. The other side is, consciously or subconsciously, trying to ensure that if the deal turns out badly they won’t get fired.

So a games publisher hires a market research firm to tell them that yes, the market really does want another special forces FPS.

Or a private equity firm hires a bunch of consultants to provide detailed reports so that if the deal goes badly, they can say “It’s not my fault, I hired the best to advise us” (otherwise known as “to cover my ass”, and yes, I know my place.)

Or your boss says “that’s a nice idea, now go away, write it up, give me a cost-benefit analysis, bring in the accountants to verify, etc, etc”

Fear of getting it wrong beats prospects of getting it right

In any major organisation, the key to success is not getting fired. So stupid decisions can often make much more sense if you change your point of view. When you see a stupid decision consider which of the three following things might be true:

  • The decision is in the best interests of the decision maker and the company (or country if a politician is making the decision)
  • The decision is in the best interests of the decision maker (note that I think that this is rarely about corruption – it’s the unconscious desire to protect our asses that affects us all)
  • The decision is genuinely stupid

Option three is rare.

So for example, why are there so many first person shooters on the market? Because no-one got fired for making yet another first-person shooter. Why were there so many World of Warcraft clones made? Because no-one got fired for trying to replicate the market leader. Why were so many social games companies funded over the past two years? Because no-one gets fired for backing the same type of company that everyone else was backing (especially if the experts said it was a good idea).

Raise your viewpoint

Sometimes, it’s simply that your point of view of flawed. I’ve seen developers rail against publishers who cancelled a big game when it was weeks away from being finished.

“We were finished,” the developers rant. “They could at least have released it and seen how it did the market”.”

Do they have no idea how much money it takes to release a game? Modern Warfare 2 cost $50 million to develop. The launch budget, including marketing, manufacturing, distribution and the Sony/Microsoft royalty, was $200 million. Development was only one quarter of the cost.

So a games publisher which has spent, say $2 million on development, needs to decide whether it was worth investing another $6 million to publish the game if they think it isn’t up to scratch. Canning a new game weeks before release can be a rational decision, from a certain point of view.

No-one is stupid. Perhaps misguided…

I have found it enormously useful to assume that all decisions make sense, and are never stupid. They may be irrational (in the strictest sense of the word), but they make sense when you think about how they might be influenced by fear, prejudice, self-protection or straightforward procrastination. They usually have a strong underlying reason.

Don’t waste time being cross about decisions you think are stupid. Assume the other side has a reason, however irrational. Then decide whether you can counter the reason, accept the rationale, or walk away.

Once you start looking at the world like this, it makes a lot more sense. And a world that makes sense is a much less stressful place to live in.

About Nicholas Lovell

Nicholas is the founder of Gamesbrief, a blog dedicated to the business of games. It aims to be informative, authoritative and above all helpful to developers grappling with business strategy. He is the author of a growing list of books about making money in the games industry and other digital media, including How to Publish a Game and Design Rules for Free-to-Play Games, and Penguin-published title The Curve: thecurveonline.com
  • Good post. Understanding how people make decisions (e.g. through knowing psychology and economics) helped made me much more accepting of events in the world.

  • JS

    Good article.  In short, “if you aren’t privy to the decision-making process, how can you know the decision is stupid?”

  • Except I bought DNF and enjoyed it in a “trash-movie” sort of way 🙂

  • I’d strongly disagree Ivan. Sometimes it is better a game never launches and is _thought_ to be great than come out and show how awful it was.

    Duke Nukem Forever is a good example here.

    Plus is it a good launch for a publisher to release a title with the caveat, “We didn’t think this was good enough for a real launch, but we still want your money”? It’s unlikely that the game is completely finished before the plug is pulled – often it will still require a lot of quality assurance, some marketing, maybe even some final fixes. There are still costs involved with launching a game.

  • Ted Chen

    I think the takeaway that people
    aren’t stupid is the right thing, but I’d further postulate that it isn’t
    necessarily that they’re selfish (consciously or unconsciously) either.  It’s important to realize that a rational
    decision is strongly dependent on the inputs involved and the outcome
    priorities.  You and your boss surely do
    not have the same inputs nor priorities. 

     

    Let’s take the telecom example.  On the surface, it seems like the CEO is
    covering his ass, since a 9-1 ratio is surely worth the risk.  But our frame of mind from the trenches is
    vastly different and I’ll illustrate by going through the non-selfish
    business-side rationale.  Bear with me if
    it gets a bit heavy, but it is unavoidable since this is not something we necessarily
    think of in our daily lives.

     

    The first thing we have to address
    is that the $1 billion is a valuation, not the book-asset cost.  A valuation is the book cost plus a
    reflection of the expected future cash flow of a company.  A valuation of $1 billion means that you
    expect the potential profits from the company to pay you back that $1 billion
    in X number of years.  It doesn’t say how
    much was spent to get here over the past two years.  For most firms that have direct competitors,
    the actual profit margin is low if it is even positive at all. 

     

    Lets say you did buy the company two
    years ago for $100 million.  That amount goes
    into your asset account in exchange for cash out of the same account.  For the next two years, your revenue from
    that division is added to your total.  At
    the same time, expenses incurred while expanding the market also goes on to
    your total expenses.  As you gain market
    share in that segment, your return on investment is depressed because of the
    new division, which typically has the effect of lowering your overall valuation
    since your profits are shrinking.  When
    the division finally becomes profitable, it has the effect of raising your
    valuation for the opposite reason.  In an
    ideal world, it should raise your total valuation by $900 million.  But in gaining that valuation, you’ve also
    made your company volatile, which tends to discount stock prices and hence a
    lower effective valuation.

     

    Now, say you waited and bought it at
    the $1 billion valuation.  The competitor
    is dead.  For all intents and purposes,
    that business segment has a monopoly and will always turn a profit.  The $1 billion dollar cost goes directly to
    your asset account in exchange for cash. 
    Your valuation also increases by the $900 million amount.  It’s a no-brainer which path to take.  The only reason to ever buy a startup at an
    early stage is if you think that with your resources, you can enhance the
    valuation to beyond $1 billion, or to preemptively stop a competitor from buying
    it. 

     

    I hope this illustrates that we not
    only need to raise our viewpoint, but also refrain from negative ideas that the
    other person is selfish.  I’ve been in
    the trenches myself and while working, have had occasions where I thought my
    boss was mad for not wanting to do something right which in my mind would have
    a lasting long term impact.  Back then, I
    was naive and chalked it up to ego/self-interests much the same thinking you
    have.  In hindsight, I realize now that
    the game design itself was more flexible, and it made more sense to spend
    little upfront to test their concepts, and then rework the design around the
    winning proven technologies.  Not to
    spend massive amounts of money getting the technology right.  I didn’t know what the design nor business
    concerns were. 

     

    Accept the fact that they know
    different things than you.  After all,
    that’s their job.

     

  • I said I agree with the basic sentiment behind your post, but not this specific part of it. 🙂

    Decision action is needed — but in this example, releasing the game if it’s finished can bring in some dough. Only reason against releasing that I can think of is that — it might affect the corporate brand. However, you could release the game under another brand, or just face the fans and tell them: “This is a game we’re not happy with. That’s why we’ve decided to sell it so cheap.”

    And having an indie feel and direct approach to fans doesn’t seem like a  bad thing these days. 

  • Justin Self

    I agree with what you’ve said here. Something that has helped me in addition to realizing there is something behind the scenes I am unaware of is those decision makers, generally, truly believe they are doing with is best for the company. Perhaps that’s a slight against my innate ‘distrusting’ side, but when I believe that, it is easier to take any personal feelings out of the matter and focus on how the vision could be misguided (be it my vision or theirs).

  • I disagree. Too many business fail to factor in opportunity costs/distraction/wrong path to their decisions.

    Sometimes decision action can be exactly what is needed, even if it is unpalatable.

  • > “We were finished,” the developers rant. “They could at least have released it > and seen how it did the market”.”
    > Do they have no idea how much money it takes to release a game? Modern
    > Warfare 2 cost $50 million to develop. The launch budget, including marketing, > manufacturing, distribution and the Sony/Microsoft royalty, was $200 million. > Development was only one quarter of the cost.
    I think this may be a bit misleading. Game launched on PC with a minimum marketing budget (as a download only $10 game) still pays back a bit.

    There is really little sense in completely throwing out the game, unless you want to reuse artwork somewhere else and don’t want it to be obvious. But throwing away the game and assets? Marketing expenses are not the key.

    What I’m trying to say is, the game will flop without a marketing budget. But releasing it without a marketing budget gives it a chance to restore at least some of the name. Launching on a console is a different matter, but throwing away a game ready to launch on PC? 

    Not justifiabale.

  • Actually, I think I wrote the sentence in a misleading way. The LA Times article suggest a dev budget of $50m and a launch budget (including dev) of $200m

  • I like the quote “When I was 20, I thought my dad knew nothing. Now that I’m 40, it’s amazing how much the old guy has learned.”

  • Your dev cost there is 1/5th, not 1/4 🙂

  • Good post, and I would broaden it out to suggest that generally, decisions made by people at the top of big businesses are often pretty sensible. The internet is full of 15 year old kids pointing out that the billionaire head orf corp X is ‘an idiot’.

    The billionaire didn’t get there by making random dumb decisions.

    Peoples POV is very different. Someone who has grown a business from 1 to 10,000 employees (for example) has probably seen a lot of fad come and go, and whethered a lot of storms. We can all laugh at microsoft for not ‘getting’ the internet as fast as everyone else, but they survived it. Maybe they were right to hold back and let other companies make the dumb mistakes first.

    As you get older, you understand your parents POV much better than when you were a teenager. When you have been in business a long time, you understand better the POV of big business. Small startups spending other peoples cash have nothing to lose. The big megacorps do.
    Sorrt for derail 😀