UsingDecisionMatricestoResolve

ComplexIssues

ByDouglasW.Zeisel,MSF,CTP

Whenfacedwithdecisionsbasedonseveralfactorsthat
arenotallquantitativeinnature,adecisionmatrixcanbe
veryhelpful.
Adecisionmatrixprovidesameansofconvertingnon
numericcriteriatoaquantifiedresultwiththebenefitsof
reducedbiasandfuzzythinking.
Ahugeadvantageisthatalternatedecisionscanbe
presentedtostakeholderswithconfidencethatthebest
alternativewillbechosen.Usingadecisionmatrixhas
otherbenefits.Itaddsdisciplinetothedecisionmaking
processandincreasesthelikelihoodthatallfactorsthat
shouldbeconsidered,havebeenconsidered.

FirstStep

Thefirststepincreatingadecisionmatrixistolistalltherelevant
factorsthataffectthedecision.Forexample,adecisionmatrixcanbe
usedtochoosebetweenproposalsfromlendersonalineofcredit.
Whileonecouldarguethatthisisatotallyquantifiabledecision,
considerthecasewhereacompanyhassignificantcashonhandbutis
forecasttohaveshrinkingcashflowthreetosixmonthsafterloan
closing.Thisshouldbeaneasydecisionsinceyouwantthelowest
overallcostofcapital.Butsupposeonelenderscovenantsare
significantlylessrestrictivethanothersbeingconsidered.Nowthe
situationbecomesmurkier.Supposealsothatthesizeoftheline
offeredbyoneofthelendersisconsiderablyhigherthantheothers
andthecompanyisworriedthatitmighttemporarilyneedtorunits
creditlineabovethelevelsofferedbytwoofthefourlendersbeing
considered.Murkierstill.Clearlysoftfactorsotherthanthelowest
overallcostofcapitalentertheequation.

Forthisexamplesomeofthedecisioncriteria
couldbelistedas:

Interestrateontherevolver(includingmonitoringfees,
etc.)

UpFrontfees(commitmentfees,closingfees,auditfee,
etc.)

Sizeofthelineoffered

ExpectedCovenantRestrictions

AdvanceRateonInventoryandAR

Unusedlinefee

DefaultRate

Perceivedfriendlinessoflender

thenextstepistorankthedecisioncriteriaasto
importancetothesituationathand.Intheexamplegiven
wecouldrankthedecisioncriteriaasfollows:

Decision Factor

Weight (1-10)

Interest Rate on Revolver

Up Front Fees

Size of Line

Covenant Restrictions

Advance Rate

Unused Line Fee

Default Rate

Friendliness of Lender

RankingDecisionCriteria

Theinterestrateontherevolverisweightedhighbecausecostoffundsis
obviouslyimportant.Upfrontfeesareweightedlowbecausethecompany
hassignificantcashonhandtopayclosingcosts.Ifthecompanywerecash
strappedthiswouldberatedmuchhigher.Sizeoflineisimportantsincethe
hypotheticalcompanyexpectsitmayneedsignificantfundsafewmonths
afterclosing.Covenantrestrictionsareweightedhighsincethecompany
expectswidelyfluctuatingcashflow;Itdoesnotwanttotriggercovenantsif
earningsaretightforaquarter.TheadvancerateoninventoryandARisrated
neutralsincealllendersareofferingthesamerates.Unusedlinefeeisrated
lowsinceitisanticipatedthattheamountofunusedcreditwillnotbe
significantandsincethefeesfromeachlenderarenotsignificantlydifferent.
Likewisethedefaultrateissimilarwithalllenders.Finally,thefriendlinessof
lendersisgivenaslightlyhigherthanaverageratingsincetheconsultant
knowsthatsomelenderswilljackupratesatthedropofahatandotherswill
bendoverbackwardstohelpoutifthecredithasabadquarter.Hehas
experiencewiththelendersinvolvedandknowstheirtendencies.

Thenexttaskistorankeachlenderastohowtheycompareineach
category.Theserankingsshouldbefromhighesttolowest.Inthis
casearatingof4goestothewinnerofeachcategoryand1tothe
losersincetherearefourcompetitors.
Decision Factor

Weight (110)

Lender 1

Lender 2

Lender 3

Lender 4

Interest Rate on
Revolver

Up Front Fees

Size of Line

Covenant Restrictions

Advance Rate

Unused Line Fee

Default Rate

Friendliness of Lender

Notethatinsomecasestiescoreswereawardedsincetheproposals
werevirtuallythesameinacategory.(seeDefaultRateforexample).

Thelaststepistomultiplytheweightsofeachfactorbytheranking
togetascoreforeachfactorforeachcompetitor.Thenfindthe
winnerbysummingthescoresofeachcompetitor.
Lender 1
Decision Factor

Weight

Rank

Lender 2

Score

Rank

Lender 3

Score

Rank

Lender 4

Score

Rank

Score

Interest Rate on
Revolver

32

16

24

Up Front Fees

12

Size of Line

21

28

Covenant Restrictions

14

21

28

Advance Rate

20

15

15

20

Unused Line Fee

12

12

Default Rate

10

10

15

20

Friendliness of Lender

28

21

14

Total Score

119

121

138

102

Withoutadecisionmatrixallthedatagivenmighthavemadethislook
likeadifficultandconfusingselectionbutthedecisionmatrixgivesa
clearresult.Lender#3winsbyawidemargin.

 Adecisionmatrixcanbeusedforanydecisionthatisnotclearly
quantifiableandwherealargenumberoffactorsaffectthe
outcome.Examplesincludeselectionofanauctioneer,selection
ofanappraiser,andselectionofanexpertwitness.
Nowhereisthepayoff.Asturnaroundprofessionalsweare
responsibleformakingdecisionsthatcanaffectavarietyof
interests.Byusingdecisioncriteriatoreachappropriate
conclusionswereduceourriskofanentityclaimingan
inappropriatedecisionwasmade.Furthermorethedecision
matrixgivesusatoolforcommunicationwithstakeholdersina
matter.Ifdecisionsareclearlyjustifiedbeforetheyareputin
effect,itbecomesmuchmoredifficultforanyonetocryfoulata
laterdate.
CopyrightFeb2009
DouglasW.Zeisel,MSF,CTP

CONTACTINFORMATION
Forfinancialconsultationandadvisoryservicescontact:
DouglasZeisel,CTP,MSF
FulcrumFinancialManagement,LLC
4432535174
dzeisel@FulcrumFM.com