Sunday, September 6, 2009

Management by Metrics: From Organizational Escapism to Corporate Competitiveness

What cannot be measured cannot be designed; nor can its performance be monitored. So is the case with organizations which are the instruments of corporate performance. Yet, it is paradoxical to see many managers and leaders who believe that not all of organizational performance can be quantitatively measured due to the preponderant human element and its emotional component that are involved. This view represents a mode of organizational escapism that erodes corporate competitiveness. On the contrary, leaders and managers need to accept management by metrics (MbM) as a core value as a means to enhance corporate competitiveness.

Defining MbM

Management by Metrics, or MbM for short, is the author’s prescription of a managerial approach that believes that the science of metrology can be applied to the practice of management. If weather around our planet can be forecast with precision or satellites can be landed with perfection on distant planets there is no reason why human behavior in organizations cannot be forecast and managed for optimal performance.

Employees and managers need to understand that they come together in organizations to achieve corporate wealth as a corollary of which individual prosperity is also assured. Once this common understanding is in place in an organization, the perspective for measurement, be it of talent, skill or performance of each and every human resource in an organization, is well set. It is the responsibility of the chief executive officer and chief talent officer of an organization to institutionalize such a perspective.

Metrology establishes specification when an unknown material is characterized. It also compares the profile of a designed product with respect to its specification. The setting of specifications, the sophistication of the instrument, the cleanliness of the product and the integrity of the measurement process determine the accuracy of measurement. In organizations, the definition of metrics, the digitization of information, the transparency of transaction and the equity of performance analysis determine the perfection of management.

Infinite ambition; finite vision

MbM starts from the top. Every corporation needs a vision and a leader to articulate the vision. Over time, however, the task of developing a vision has become a play of strategic gamesmanship or philosophical meandering. A vision that is so individualistic that it ignores all competitive dynamics or a vision that is so general that it fits every company in the industry can hardly qualify as a meaningful vision. Neither a global Toyota nor a local Reliance became what each of them is today by envisioning international or national leadership when each was a fledgling entity. They became what they are today by defining successive horizons of growth based on measured commitments and measurable achievements.

Leadership has a major role in encapsulating its vision in quantitative parameters that are sensible, logical and achievable. An Indian software company may motivate itself by declaring that it would be the next Microsoft. If, however, it understands that the only way it can become a new Microsoft is by developing and commercializing a new operating system that beats Windows 7 or its upgrade by, say, 2015 it may discover how stiff the challenges of translating a dream into a reality would be. The system of metrics imposes sanity, discipline and accountability on leadership, which is the starting point of any constructive endeavour.

Metrics which are not backed by methodological rigor are self-defeating and counter-productive. MbM requires computational leaders who understand goal setting in the context of what it takes to achieve a metric. Indian government may find it politically inspiring to say that its goal is to make India a larger economic power than China. If, however, the government seeks to define the intent with well planned numbers, it may discover that the Indian economy has to grow at twice the pace of China’s growth rate consistently over the next twenty years to make that intent achievable.

MbM therefore requires that the language of metrics is logical and universal within an organizational setting and its environmental context, with a conceptual discipline that flows from the top and a computational rigor that springs from the bottom. Prior to expressing the vision in the form of a metric a significant amount of work needs to be carried out by the leaders and the managers to play out different scenarios, with applicable inputs and outputs in each case and arrive at the visionary quantitative expression. It may be expedient but certainly not ephemeral to articulate a vision without appropriate groundwork which can stand the test of time.

Metrics in structure, strategy and execution

A vision needs a structure and strategy to execute. Structure is a finite form of an organization with a finite number of managerial points, each with an applicable finite span of control to execute the strategy. Strategy itself is a sequential and parallel cluster of projects to achieve end goals with applicable resources. Setting out to achieve a vision without quantification of strategy, structure and execution is bound to end in failure, or at best in mixed results. Achievement of vision therefore must start with a complete listing of strategic metrics and structural metrics that are essential to support execution.

Aspirations set in just a few domains, such as a product plan or a sales plan cannot constitute a total strategic plan. Strategy has to be multi-component, covering not only the three core functions of research, manufacturing and also the enabling functions of materials, quality, information technology, finance, project engineering and maintenance, to quote a few. A count of all the organizational domains that play a role in strategy formulation and execution is the starting point in the strategic planning process, and integrating such domains in the strategic plan is the essential requirement for coordinated resource allocation and execution. A typical five year strategic plan that is inclusive would take at least six months to formulate. A company would need to start work in October to unveil a strategic plan from the April of the next year.

Linearity in structural design is the bugbear of corporations. Strategic metrics evolve and change over time. Year over year increases in manpower counts are rarely called for but are usually resorted to. Talent and skill metrics vary with strategy and time which means that human resources have to be retooled and redeployed to deliver changing metrics. Organizational design that is contemporaneous with changing needs is a key metric of successful corporations. Here again, an ossified leadership structure is an impediment for flexible and dynamic organizational metrics. Leadership structure has to constantly change to lead business variation and maximization.

Language of metrics

MbM is not about plain numbers or descriptive statistics. The core of MbM is a system of time-scaled and indexed metrics. In human endeavor everything except time can be augmented or recreated. Adding a timeline to every project, initiative and activity and even every statement is the core foundation of MbM. A fundamental change in organizational and professional culture which ensures that timelines are well thought-out in discussions, planning and are well respected in execution is the sine qua non of successful MbM.

Plans usually are annual and budgets monthly. Not all strategies are, however, appropriately planned or monitored in such standard lengthy time units. MbM requires that organizations pursue multiple time units to plan and monitor different activities. Daily production, sales and cash generation are, for example, extremely time sensitive metrics which need to be compiled and reviewed at applicable levels without fail. Similarly all non-repetitive initiatives should be treated as projects and monitored as per relevant milestones. Monthly budgets and annual plans help assess directional progress but time-sensitive reviews matter more for assured growth.

Metrics can be absolute or relative. Absolute metrics rarely are helpful; they can be often misleading. All metrics have to be indexed to be meaningful. Energy consumption, for example, has to be linked to production output to be reflective of efficiency in energy usage. Employee costs have to be indexed to cost of production to establish efficiency of value addition. Process yields have to be benchmarked with maximal theoretical yields. In sales force related businesses sales rather than per person sales productivity would be more relevant. Time series analysis has to deploy base year indexation.

Metrics can be physical or financial. Both have their applicability. Although common wisdom is that financial results are more relevant as financials often drive sustainability, physical metrics which are more reflective of efforts and outcomes are as important as financial metrics which are reflective of viability. Generation and analysis of financial metrics have to differentiate intrinsic performance from external implications. For example, global companies have to view the metrics with and without the impact of external variables such as foreign exchange rates. Similarly, each revenue or profit variance has to be judged in terms of volume related variance and price related variance.

Information technology can play a major role with Finance to generate information systems which are incisive and extensive. Corporations would need to supplement monthly reporting of absolute income and expenditure statement and balance sheet items with a comprehensive book of indexed metrics. Transparent analysis of problems and rewards of performance helps in more sustainable growth.

Universality of metrics

Many companies believe that there exist qualitative aspects of human behavior and management that cannot be quantified. Nothing can be further from truth. Can there be an index for talent in an organization? Can there be individual metrics when cross-functional performance is involved? How does one identify value addition across levels of hierarchy? How does one quantify the culture of an organization? The answer to all these, and such other questions can be found in the affirmative with adaptive analysis.

Well designed tests of knowledge can index the talent pool in an organization not only at the levels of entry but also reassess as the talent pool progresses in an organization. Designs of cross-functional teams with clarity in domain activities as well as service level agreements between domains will help capture individual metrics even in team context. Letting professionals at different levels of hierarchy make individual presentations and enabling 360 degree feedback would crystallize value addition across hierarchy. Periodic surveys of organizational culture can quantify the culture as well as morale of an organization. Various collateral markers like suggestions for improvement, intellectual property applications, employee attrition and referral indexes can reflect on the culture of an organization.

In an organization, decisions are as important as transactions. Management processes are as vital as operational systems. Quite often, measurements are directed only at transactional and operational matters. Decision making efficiency and effectiveness of managerial processes are rarely covered in metrics. MbM requires that vested interests in organizations are eliminated by a universal coverage with metrics of all activities of an organization.

Leaders and managers must be willing to subject their leadership and managerial effectiveness to a transparent system of management by metrics as much as they would like their businesses, operations and subordinates to be subject to quantitative analysis of gross revenue and net profitability. In addition, all metrics must be in terms of ratio analysis or indexation, with applicable time scales, as discussed herein to develop meaningful insights. Leaders should institutionalize a collaborative digital information highway in their organizations by enabling key departments such as cost accounting, information technology, industrial engineering, internal audit and strategic planning to develop the science and practice of metrics relevant for the organizations.

Posted by Dr CB Rao on September 6, 2009


Narayanan said...

What cannot be measured, cannot be improved and hence metrics play a major role in sustaining competitiveness as thoughtfully articulated by the author. However, as someone remarked "not everything that can be counted counts and vice versa", it would be a leap of faith to assume availability of accurate metrics will in itself trigger transformational change in organizations, especially in research based units. Success is a product of committed senior management that is involved at the humanistic level, institutes strong governance to ensure transparent decision making, provides timely feedback to key leadership, retains critical talent across the organization and holds the unit leader accountable for performance. A working watch measures time with accuracy, however a broken one is still right twice a day regardless of whether one is monitoring its function or not. Successful organizations are the ones that can merge hard metrics with soft insights and evolve as the business needs change in future.

cb@strategy said...

Thank you Narayanan. You really synced with the spirit of my blog.

Unknown said...

Thank you for this great post!!!

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