Jeff Bezos thinks about decision making by dividing them into Type 1 and Type 2 Decisions. Type 1, known internally as one-way doors, are irreversible and highly consequential, and need to be made more slowly and carefully. Decisions like this are making a large investment, changing strategy, or making big life decisions (having a baby or relocating countries for example).
However most decisions in business and in life are Type 2, or two-way doors, which are reversible, once you realise it is a wrong decision, you can back out.
Type 1 decisions must be heavily scrutinised and analysed, and looked at from many different perspectives, because the consequence from making a wrong decision are heavy. Type 2 decisions, on the contrary, can be made with a small team or even one high-judgement individual.
Bezos warns about the dangers of large organizations treating Type 2 decisions are Type 1, and this can lead to bureaucratic disaster. Oftentimes it comes down to people not wanting to take accountability for decisions, and so decision making goes up the hierarchy, or is made at Committees and sub-Committee level, with consensus from all. Start ups and small businesses, by contrast, are much more dynamic in their decision making, leading to faster “decision making velocity” which is very powerful for a business.
I have gained experience working for various different types of companies. I have worked for start-ups, where there would be a short discussion with the MD about an issue, then make the decision. I have also worked for large, regulated organizations, where any decision needs to be escalated to the appropriate Committee or Forum.
An example of what would be called a Type 2 decision, in hindsight, is agreeing to the terms of a lease agreement with an anchor tenant. In a property development company I worked for as CFO, after discussions with the tenant, the MD and I agreed to a lease on a % of revenue basis, rather than as a minimum base $ rental and % of revenue, whichever is higher, as was the typical case. The reason we agreed to the % of revenue only, was that most of the revenue for this anchor tenant was denominated in a local currency, and so they could not commit to a flat USD rental. Several weeks later, one of the partners in the Joint Venture expressed frustration that we had agreed to this % of turnover based agreement. We tried to renegotiate with the tenant but they weren’t willing to agree to the change. This would be an example of a Type 1 Decision that should have been identified and escalated.
Each person in a company should have a signed off “Limit of Authority” document, which sets out the limit of decisions they can make, and specifically outlines the decisions which must be escalated. This is a control which would prevent persons making Type 1 decisions, which should rather be escalated, and also prevent too many Type 2 decisions being treated as Type 1.
Bezos also talks about the principle of “disagree but commit”, when for example there is disagreement between a more senior person and a subordinate over a decision. The subordinate really wants to do it one way, but a senior person thinks it should be done a different way, but realises the subordinate has more ground truth than the senior person does, and goes along anyway, choosing to disagree but commit. In some instances the more senior person will overrule the junior person based on his judgment, in other cases he will agree to go along with the subordinate who is working at the coalface. This is a key component of the Japanese “kaizen” philosophy, where workers are encouraged to come up with ideas for improving workflows and quality on production lines.