When faced with any decision there are first order issues to consider. However, great business leaders consider the second and third order issues too. And that’s the key to making better business decisions. Read on to find out why.
I recently read Ray Dalio’s book, Principles, and boy, were there some great ideas contained in it.
Dalio has spent his life trying to understand decision making and has written down a bunch of principles that he feels have helped him learn and make better decisions.
Here’s one of my favourite ideas from the book. Dalio calls them second and third order issues, and they can arise whenever we are facing a decision. Yet most of us tend to consider only the first order issues.
I’m paraphrasing, but his simple example is:
- I want cake (the first order issue).
- Yet most of us fail to spend time considering the second order issue; I might feel a bit rubbish afterwards (my words, not Dalio’s).
- Or the third order issue; I’ll get fat.
He then goes on to apply this principle to business decision-making. When you start considering the second and third order issues up-front, before making a decision, you make better decisions.
There are a few examples I thought of in relation to this principle that I see in financial planning businesses:
1. The Stand Alone Fact Finding Meeting
As part of the advice process we teach in our Uncover Your Business Potential programmes (Liveand Online), we recommend doing any formal fact finding as a stand-alone second meeting, or collecting data from clients online. Yet lots of advisers and businesses still try to do their fact finding at the first meeting.
Why do we recommend formal fact finding be separated from your first meeting?
Because of the second and third order issues.
A good first meeting has one objective; to engage the client with their own challenges and to have them say ‘yes’ to doing some further work with you, if you want to work with them and you think you can assist.
In that first meeting, you will be asking interesting questions to achieve that outcome. And although you might well discover lots of interesting factual information in that process, the information you gather is just a happy by-product of your first meeting; it’s not the focus.
If the client elects to engage with you and agrees to pay a fee for your advice, you can then collect (or finish off) the fact finding process at a second meeting, or online, or via email or telephone.
The first order issue is time and this is the issue most advisers focus on when they decide to collect the fact finding information as part of their first meeting process. They believe it saves time.
The second order issue that’s not considered, is thoroughness or attention to detail. By separating the first meeting and the second fact finding meeting, you can really focus on getting every single piece of information that you need in the fact finding process. It’s really hard to do that properly in the first meeting, because your goal is to create engagement in that meeting. Questions like, “What’s your full name?”, “What’s your date of birth?”, “What’s your address?” etc are not engaging or interesting questions.
The third order issue is the impact on the rest of your team as they prepare the client’s advice.
In my experience 90% of problems in your back office are actually caused by not having all the data that you and your team need to prepare full and complete advice. Solve the data collection problem and you shorten your delivery times, reduce your teams annoyance and frustration, and improve the quality of the advice you give. Yet these third order issues rarely get considered by advisers.
Can you see how when you consider the second and third order issues in this example, taking some extra time to do the fact finding properly, or taking it online so it’s even more client friendly, makes perfect sense?
However, when you only look at the first order issue, time, making the extra effort makes no sense, and leads to a poor decision with serious consequences.
2. First Meeting Skills
The first meeting itself has second and third order issues arising from it too, if it’s not done well.
Once again the first order issue is saving time. That is, advisers believe they don’t have time to spend on further training and skills development to improve their first meeting skills. They just need to get on with trying to do more business.
The second order issue that comes from that is they don’t convert as many people as they could from prospects into clients at the first meeting.
The third order issue is that they and the business spend lots of time, emotional energy and money on trying to increase lead flow to the business. Although they call it marketing so it sounds sexy and businesslike.
Can you see how when you consider the second and third order issues in this example, that finding time and some budget for more training makes perfect sense?
However, when you only look at the first order issue, saving time, it makes no sense, and leads to a poor decision.
The same line of thinking applies to most of your technology issues too.
The first order issue once again is time. It feels like it’s quicker to just do a work around when your printer doesn’t work, or you can’t find the data you need in your back office system.
The second order issue is actually more wasted time for everyone across the business, not just you. By not fixing the real issue with your technology, you might save some time now on this job. However, you (and your team) will waste this time repeatedly on every job that uses this technology. That will far exceed the short-term time saving you measured in your first order considerations.
The third order issue is that you put limits on your growth. As I saw in a recent US survey of advice firms, the industry leading firms are growing at just under 15% pa, while the rest of the industry is growing at just 3.7% pa.
If you can grow at 15% pa you will double the size of your business every 5 years. If you grow at 3.7% pa it will take you nearly 20 years to double in size.
What’s the cost of that?
It doesn’t bear thinking about.
Consider second and third order issues up-front
When you stop and think about the second and third order issues, you’re much more likely to make better decisions.
Next time you’re faced with a business decision, ask yourselves out loud, “What are the second and third order issues we can see occurring here?”
Let me know how you go.