Effective Squishy Metrics

I’m no CFO, but I still subscribe to CFO magazine to get an ongoing flavor for what’s happening in the corporate finance world.  After skimming over mind-numbing articles on the intricacies of pension plans and corporate treasury rebalancing, I often find one or two stories that a manufacturing knuckle-dragger like myself can understand.  Last month there was an article on the difficulties with metrics, and how companies are struggling to effectively use them outside of traditional finance.

What would happen if business managers thought more analytically about various aspects of their operations, from customer service to worker productivity to health-care costs to the fruits of innovation?  Some companies are doing just that, extending metrics into areas that would seem to defy measurement. How, for example, do you measure innovation, or the future capabilities of your workforce, or the optimum menu of health benefits?

Ahhh… our beloved "I" word again.  But this struggle isn’t all that new; leading companies have been measuring productivity, customer service, and healthcare costs for years.  Unfortunately some haven’t put enough time into thinking about what they are measuring and what they are trying to accomplish.  Which is why there’s still a problem.

A century’s worth of MBAs would seem sufficient to propagate a by-the-numbers approach into every nook and cranny of the business world, but it hasn’t worked out that way. By most accounts, companies have done a respectable job of mastering financial metrics, but have largely taken a flier on measurements of operations or intangibles such as customer satisfaction or brand loyalty.

Regular readers know what we think of most (no, not all, Mark!) MBA’s, so that’s no surprise.  Although many of us have adopted balanced scorecard methods with some success.

Fifteen years ago the advent of the "balanced scorecard" sought to redress this imbalance by demonstrating how nonfinancial metrics could be captured and used to help managers "see their company more clearly — from many perspectives — and make wiser long-term decisions," according to its creators, Robert Kaplan and David Norton. But despite the popularity of that approach at a strategic level, many consultants and academics say it left thorny questions unaddressed at more tactical levels.

Which is exactly what we mean by really thinking about why you are measuring some attribute, and how you will react to the results.

"I’m continually astounded at how poor the use of metrics continues to be," says Brent Wortman, a senior partner in the financial-management practice at Deloitte. He cites as common problems the inclination to roll numbers up from the bottom, so that the board and senior management are overwhelmed by irrelevant numbers; the lack of standards for linking operational and financial metrics; and the failure to put enough rigor behind hard-to-measure attributes, such as customer services, opting instead for either poorly conceived metrics or none at all.

What are some of the sins of metrics according to Wortman?

Among his "seven deadly sins" are vanity (emphasizing metrics that you know cast you in a good light), provincialism (allowing functional departments to measure themselves only on their own narrowly defined goals, often at the expense of the organization as a whole), and "inanity," which he defines as a failure to appreciate the consequences of a given metric. As an example, he cites a fast-food chain that focused on reducing the amount of wasted food; to improve that metric, restaurant managers stopped the practice of cooking in advance of anticipated demand. Waste was reduced, but service was delayed and sales suffered.

The article does portray some companies that have created innovative metrics that work… and create a positive change. A few brief summaries of some examples:

Wells Fargo relies on what it calls a "happy-to-grumpy" ratio to assess whether its efforts to develop a more "engaged" workforce are on track. "We don’t want to just measure results," says CFO Howard Atkins, "we want to measure what drives our results, and that includes team-member engagement.

Hilton Corp. found that a 5 percent boost in customer-retention rates led to a 1.1 percent improvement in revenue in the following year. That, he says, is the emerging frontier: finding causal linkages between financial and nonfinancial metrics.

Best Buy has been measuring employee engagement for a decade "and customer satisfaction in a systematic way for three years," says Joe Kalkman, vice president of HR capabilities. "But we are just in the first year of understanding how these two metrics relate to one another."

At Pitney Bowes metrics played an important role in redesigning health benefits. The company has collected "de-identified" data on employee health claims, absenteeism, visits to on-site health clinics, and related measures for more than a decade. Realizing that chronic diseases such as diabetes accounted for a huge percentage of health claims, the company redesigned its benefits so that preventive care is either free or available at very low cost.

Read the article for more detail on how those companies developed and effectively leveraged those metrics.  With enough forethought well-designed metrics can help turn the intangible into tangible to guide improvement activities.