1.25.2006

TIP: Swim in a sea of metrics

It has been said that what gets measured gets done. But this is not strictly true - managers today are deluged by a sea of metrics that are completely irrelevant to the task at hand, Floyd blogged. In fact, as early as the 1960's, academic researchers were discovering that top executives rarely if ever used or relied upon the stacks of reports that were painstakingly produced and dutifully delivered to their desks each month. Instead they were much more likely to rely upon the news, hallway conversations, rumours and gossip in making business decisions.

The truth is that what gets managed gets done, and choosing which metrics to manage is the most highly levered strategic decision that an organization of any size can make. This indeed is "the hard part". Choosing what is important is both science and art and requires attention to an uncommon mix of disciplines - psychology, business strategy engineering, systems science, finance etc. And you must choose. As a rule of thumb, the human short-term memory limitation of 7 items plus or minus 2 is an excellent guideline. You should choose a total of somewhere between 5 and 9, and preferably 5 metrics for your organization to focus on.

So how do you choose the 5 numbers to manage?...

The bad news is that even by answering these questions, you can still get it wrong - wildly wrong - like the call center in which support representatives are rewarded for increasing the number of calls handled, and thus hang up on their customers as quickly as possible. Here are some characteristics it takes to choose great metrics:

  • Truth telling. There are lies, damn lies and then there are statistics. Do not fall into the trap of choosing numbers that make the situation look better than it is. The more transparent a metric makes your organization, the better it is...
  • Systems thinking. Follow Peter Senge's advice and look for the first, second and third order effects of optimizing your business around a particular metric. In the example above, if call volume is increased at your call center, what will the impact on customer satisfaction be? What will the effect of that change on customer loyalty? What will the impact of customer loyalty be on transaction costs? Etc.
  • Undying curiosity. Understanding why things "are the way they are" is the best way to figure out how to make them better. Sometimes you may want to choose a metric just so that people in the organization will become curious about it. Perhaps the best thing about choosing a particular metric to focus on is that it will inspire passionate debate amongst those who care about making things better.
  • Story telling. Selecting metrics is part of the process of creating a story that explains why the people in your organization should get up and come to work in the morning...
  • Strategic intuition. Often the route to success is not around optimizing an internal operation, but instead requires a complete change in the direction and focus of the organization to access some new dynamic in the external environment...
  • Tolerance for imperfection. Numbers will never tell the whole story; they are merely an approximation of reality. Still, these approximations are incredibly useful in focusing attention, and raising questions that drive organizational learning...

Category: C++ Quant > Random Walk > Success breeds Failure > When More is Less

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