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Ideas for Leaders #036

How Evidence-Based Management Reduces Entrepreneurial Risk

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Key Concept

Despite the fact that many talented individuals put hard work and diligence into new start-ups, why do high failure rates still exist? This Idea proposes that evidence-based management could help with this, reducing risks, costs, and wasted time and effort. However, the mindset-shift required to implement this approach is significant; as such, not many leaders adopt it, even though the risk of failure could be demonstrably reduced and vast sums of money saved.

Idea Summary

With high failure rates being the acknowledged inevitable cost of entrepreneurial activity, examining why this is so is important. Could improving the decision-making process associated with developing and building new enterprises be the key?

In this Idea, applying ‘evidence-based management’ (EBM) to avoid failure is encouraged. EBM emphasizes gathering and paying attention to data, understanding the best current theory about the subject of a particular decision, and continually updating both theory and evidence as new information becomes available. Though this approach seems like simply applying common sense, in practice it requires a different mind-set than is common in most organizational management.

In terms of the causes of persistently high failure rates for new businesses, a number of factors influence this, including acceptance by parties involved that failure is inevitable. This results in little effort expended in trying to improve decision-making in new venture activity.

A number of examples are given throughout the original paper, including that of a company called Rypple, which demonstrates an assiduous approach to EBM. From its start-up, Rypple has been very data driven, emphasizing the gathering of information, learning from it, and then improving the product as well as the distribution process.

Clearly, EBM has the potential to improve entrepreneurial decision-making, as well as to reduce risks, costs, and wasted time and effort—just as evidence-based medicine has improved medical practice and outcomes while saving money.

Business Application

Often, executives are extremely reluctant to substitute theory or data for their own personal clinical experience and judgment; as such, entrepreneurs (and their funders) should recognize the inherent difficulties and biases in estimating their degree of expertise. The point of EBM is not to perfectly account for every single instance, but rather, by the systematic application of data and theory, improve the odds of making a better decision. 

Practicing EBM need not consume a lot of time; online databases and libraries (such as Google Scholar) cover virtually every conceivable question, making the search for the best theory and data involve comparatively little effort.

Despite this, EBM is still reluctantly adopted and the biggest barrier to implementing EBM is the shift required in how leaders think about their job and the process of getting work done. This is a barrier that not only exists in large, traditional companies but also in small, entrepreneurial ventures. As such, an evidence-based approach can provide a competitive advantage, but only to those people with the wisdom to use it.

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Authors

Institutions

Source

Idea conceived

  • 2010

Idea posted

  • January 2013

DOI number

10.13007/036

Subject

Real Time Analytics