Sometimes a simple idea is remarkably powerful. The “even swap method” is such. First published in 1988 in HBR [1] and subsequently featured in a book [2] by the same authors, this simple idea has always been valuable for all but the simplest decision problems. These days where there is an increasing awareness of the importance of not only economic profit, but also the environmental and social impact of strategic decisions, I feel that the even swap method is a must-have tool in the strategic decision maker’s toolbox.
Imagine that you are trying to decide which strategy to pursue and you have many alternatives to consider. Let’s say that the company selecting the strategy genuinely cares about the triple-bottom line, i.e. people, planet and profit. But what if strategy A delivers fantastic results from a people perspective (e.g. creates many new jobs), strategy B is the preferred choice of the environmentalists (e.g. reduces Carbon footprint), and strategy C offers the greatest economic returns (e.g. generates economic profit).
The decision maker is faced with a dilemma when selecting the best strategy: how much should new jobs created count with respect to tons of Carbon reduction and with respect to millions of dollars of economic profit generated? In other words, how to decide when you are faced with alternatives that perform differently against your objectives?
To select the best strategic alternative, we can use the even swap method. Firstly, I explain the concept in the words of the architects and authors of this concept and then, secondly, I demonstrate with an example how it can be used to address the dilemma faced above.
The concept …
Firstly, a fundamental principle of decision making: if all alternatives are rated equally for a given objective, then you can ignore that objective in making your decision [1].
“The even swap method provides a way to adjust the consequences of different alternatives in order to render them equivalent in terms of a given objective. Thus this objective becomes irrelevant. As its name implies, an even swap increases the value of an alternative in terms of one objective while decreasing its value by an equivalent amount in terms of another objective. In essence, the even swap method is a form of bartering – it forces you to think about the value of one objective in terms of another” [2].
An example …
Let’s say strategic alternatives A, B and C mentioned above deliver the following outcomes. Note that these are purely illustrative numbers.
A: creates 100 new jobs, offsets zero Carbon, delivers negative $10 million economic profit
B: creates 10 new jobs, offsets 10,000 tons of Carbon, delivers zero economic profit
C: creates zero new jobs, offsets zero Carbon, delivers positive $10 million economic profit
Step 1 of the even swap method: determine what change is necessary to cancel an objective. Let’s cancel economic profit. After some deliberation, we determine that we value gaining $1 million as equivalent to reducing 1,000 tons of Carbon. We can set all strategies A and C to the economic profit of B, i.e. zero economic profit, by doing an even swap of each $1m for 1,000 tons of Carbon. This would then produce:
A: creates 100 new jobs, creates 10,000 tons of Carbon
B: creates 10 new jobs, offsets 10,000 tons of Carbon
C: creates zero new jobs, offsets 10,000 tons of Carbon
Now, it is clear that B is a better strategy than C, since they both offset the same amount of Carbon, but creates new jobs, so we can eliminate C.
But, still we have A and B to decide between. A second even swap is called for. This time between jobs and Carbon. We make another subjective choice by saying that each job created is worth 200 tons of offset Carbon. So, if we set B to 100 new jobs, we are creating an extra 90 new jobs for B, which costs us 200 x 90 tons of Carbon. This leads A and B to both create the equivalent of 100 jobs, but now B’s Carbon offset becomes a negative 8,000 (or 8,000 tons created; this comes from the original 10,000 minus the cost of 200 x 90).
A: creates 100 new jobs, creates 10,000 tons of Carbon
B: creates 100 new jobs, creates 8,000 tons of Carbon
At this point, A and B can be compared on a single variable, i.e. Carbon offset. They are both negative with A creating 10,000 tons (nothing’s changed) and with B now creating 8,000 tons. So, by two applications of the even swap method, we have determined that B is the better overall strategy.
In closing, “The even swap method will not make complex decisions easy; you’ll still have to make hard choices about the values you set and the trades you make. What it does provide is a reliable mechanism for making trades and a coherent framework in which to make them” [1].
Postscript 1: if this technique reminds you of the Benjamin Franklin technique, you’re quite right as the even swap method was informed by this.
Postscript 2: if you’re wondering why not just use weightings for each of the objectives, then I should remind you of a great quote by Kahneman: “Hypothesis testing can be completely contaminated if the organization knows the answer that the leader wants to get” [3]. Weighting the objectives is a sure-fire way of manipulating the process to achieve the outcome you want – I’ve seen this more than once at my clients. The even swap method also has some vulnerability to this form of manipulation, sigh, but it is better in it that forces swaps to be explicitly defined and hence justified.
References:
[1] “Even Swaps: A Rational Method for Making Trade-offs”, Hammond, Keeney and Raiffa
[2] “Smart Choices”, Hammond, Keeney and Raiffa
[3] “Strategic decisions: When can you trust your gut?”, McKinsey Quarterly