Safe at Home
Posted by Mark Bennett on March 28, 2011
Like the saying goes, “What is measured is what gets managed.” And while you may rationalize that you are measuring things that really ought to be managed, what about the things that aren’t getting measured or aren’t being measured the best way?
Let’s take costs as an example. Businesses often focus on costs because they are a more “tangible” item on the books. You “see” costs all around you; people, supplies, capital equipment, etc. Their impact on the bottom line seems very clear as well. So, you measure costs, then you imagine lower costs, and you think, “There is where we will get our profit!”
Yes, profit can come from lower costs. But if those lower costs result in lower revenues by more than your costs were lowered, what happens to your profit? You get one guess.
Measuring revenue is not difficult, but understanding the connection between what you did by lowering costs with what happens to revenues is a little tricky.
Lessons from Baseball
What’s the connection to “Safe at Home” and baseball? Think of Profit as scoring a run – i.e. “Safe at Home.” How did that happen? What contributed to scoring a run?
For a long time, the most common measurement of a player’s contribution to their team’s score was based on the “Triple Crown” of offense: Home Runs (pretty obvious), Runs Batted In (almost as obvious), and Batting Average (not so obvious). What is common about these measures is they are tangible and/or easy to measure.
The problem is that by focusing on these measures, teams can end up encouraging or pay too much for behaviors that don’t really help them. That’s because these measures don’t give a very good picture of how individual performance affects team performance.
It turns out that there are two (instead of three), better measures: Slugging Percentage and On Base Average. These measures step back and think about scoring runs more in terms of “production” (hey, a business term!). These measures aren’t as tangible, but together they were found to better relate individual performance to team performance.
Back to Business
It’s the same for Profit. A big component of cost is often labor, but do lower labor costs always mean higher profit if there’s also a connection between labor and revenue as well? Since cutting a cost can mean reducing revenue (and likewise, increasing a cost can create revenue), it’s vital that your measurements take into account the real relationship between the two.
That seems obvious. What’s not so obvious is what measurements to use to make the best decisions. Conventional wisdom and best practices might point out what not to do, but they really won’t give you the insight to beat your competition. You must think in terms of your company’s production.
Is there a magic answer? No. But if you’re only measuring things in a way that doesn’t really show the connection (think “Time to Hire”, “Total Payroll”, etc.) you run a high risk of pulling the wrong levers and losing profit unnecessarily. At the very least, step back and think about how all the pieces relate and fit together to bring in Profits “Safe at Home” and then make the call.
Photo by SD Dirk