The cult of accountability (#6 in the Death by tools and metrics series)

Photo: jecate (Flickr)

Although there are some things that each financial crisis has in common (e.g. a bubble in a commodity that bursts spreading problems across the whole economy), each crisis also has its new elements.

Jerry Muller, writing in The American, says that what's new about this particular crisis is the role of "opacity" and "pseudo-objectivity." By opacity, he's referring to the complexity of financial instruments designed to reduce risk but which, instead: "created a fog so thick that even its captains could not navigate it."

By pseudo-objectivity, he means the search for standardized measures of achievement as a way to supervise and coordinate activity across large and disparate organizations. His thoughts on this fit with the themes I've explored in earlier Death By Tools and Metrics posts (see below).

Here's how he starts his critique on this "cult of accountability": "Its implicit premises were these: that information which is numerically measurable is the only sort of knowledge necessary; that numerical data can substitute for other forms of inquiry; and that numerical acumen can substitute for practical knowledge about the underlying assets and services."

He continues: "Attaching a number creates a belief that the information is more solid than is actually the case..... In each case, it is a response to what (to recoin a phrase) one might call alienation from the means of production, the attempt to substitute abstract and quantitative knowledge for concrete and qualitative knowledge."

He gives, as an example, pay for performance compensation. This, he says, creates tremendous incentives for executives and traders: "to devote their creative energies to gaming the metrics, i.e. into coming up with schemes that purported to demonstrate productivity or profit by massaging the data, or by underinvesting in maintenance and human capital formation to boost quarterly earnings or their equivalents."

As I said in an earlier post in this series, there is an inherent "risk of relying and focusing on things that can be measured rather than things that matter." And focusing on the wrong signals in a thick fog, well that's a recipe for disaster.

Earlier posts in the Death by Tools and Metrics series:
1) Discounted cash flow
2) The P&L
3) Same store sales
4) ROI
5) Treating the numbers

Winning by changing the scoring system

I've been in the middle of reading: "The Metric behind the Slogan" by Michael Schrage in strategy + business for some time now (requires registration to read). Somehow, work projects, Thanksgiving, other things to read and playdates (for the kids) have gotten in the way. It's not even that long.

Here's the one nugget I've already gleaned. James Watt was not only a mechanical genius but also a marketing genius too. Faced with the dilemma of how to get 18th century brewmasters to use his steam engines to turn their mills' grindstones instead of horses, he invented the term horsepower. Brilliant! By comparing his steam engine output to a team of horses, he developed a very persuasive tool to help build his Boulton & Watt brand.

As I skim the rest of the article, I see other examples: Carrier's work on establishing air conditioning metrics, Ivory's 99.44% pure soap as well as Intel's MIPS performance standard.

I was reminded of this article when I read Jack Trout's post: "Price Reductions Threaten Brands." He points to the dangers of getting sucked into price competition. If that becomes your focus: "What you're doing is making price the main consideration for picking you over your competition. That's not a healthy way to go."

He recommends several approaches of getting around a price attack but the one that caught my attention was to "shift the argument." Try and find a way to move the conversation from one metric (in this case price) to another. His example is "total cost" which luxury car makers like Mercedes have used to shift the discussion from price at purchase to price over the life of the vehicle. Total cost accounts for the longer life and lower maintenance costs of luxury cars so leads to a more favorable metric for comparison.

Something to consider. Are there ways in your business that you can change or set up the way success is measured for your advantage?

Brand value bubble ready to burst?

Not wanting to be left out of anything, we branders now have our very own bubble to talk about.

A new book, titled The Brand Bubble claims that most worldwide brands are dangerously overvalued by financial markets in comparison to their value in the minds of consumers. If this bubble bursts, company values could fall by billions/trillions of dollars.

Authors John Gerzema and Ed Lebar reached this gloomy conclusion by taking a look at 15 years of data from BrandAsset Valuator (BAV), the world's largest database of consumer attitudes to brands. Their conclusion is that investors are dramatically overvaluing brands because they are looking at the wrong metrics, specifically brand trust and awareness. Gerzema and Lebar show that these measures do not correlate with real brand value and, furthermore, that companies that try and increase these scores via traditional awareness-building marketing programs are likely to actually destroy value.

What companies and investors should be focusing on is "energized differentiation" or, in less technical language, a company's "appetite for creativity and change." Moving the needle on that metric will help drive brand value and start closing the gap between how consumers perceive and investors value brands. The book offers a model to help companies assess and develop energized differentiation in their own brands.

A while back, I wrote about the dangers of focusing on things that can be measured rather than things that matter. In that post, I used the example from the medical field where doctors rely on proxy metrics to see if a drug is working. The problem is that this "treating the numbers" approach backfires if there are faulty assumptions made about the relationship between the condition and the proxy metric.

Tracking brand awareness because it's easy seems to be a classic case of this problem, close to home.

Previous Posts in the Death by Tools and Metrics series:
1) Discounted Cash Flow and Earnings per Share
2) The P&L
3) Same store sales
4) ROI
5) Treating the numbers (measuring what you can measure instead of what's important)

Death by tools and metrics #5: Treating the numbers

This is the fifth in a series of posts about the dangers of blind allegiance to tools and metrics. Today's subject: Treating the numbers.

Two examples of this. The first comes from an article published in Knowledge@Wharton about the work of Gavin Cassar, an accounting professor. He's shown that using accounting tools designed to help bring some discipline to the management process actually can make things worse.

As he says: "It's been shown in many studies that people are overly optimistic. What's interesting here is that when you use the accounting tools, the optimism is even more extreme." Using these tools actually leads to bigger mistakes.

One area that Gavin has researched is financial projection preparation for entrepreneurial ventures where he showed that people who did these projections were the most likely to overestimate future sales. Financial projections seem to subvert the thinking of entrepreneurs. I know, from my own experience, how easy it is to make the numbers work by tweaking assumptions and, once the numbers start telling the story you want to believe, they become powerful reinforcers.

The second example comes from the medical field. As reported on NPR, doctors rely on proxy metrics to see if a drug is working - "treating the numbers," they call it. For example, the reason diabetic patients take Avandia is to reduce their chance of getting a heart attack or stroke. But doctors measure its impact on blood sugar levels assuming this is important and because this is something they can track. Unfortunately, recent studies have shown that people taking Avandia actually had more heart attacks and strokes. Same with Vytorin. It does a good job of lowering cholesterol levels but patients taking it didn't have any less plaque build-up than patients taking less potent drugs.

Both of these medical cases show the danger of treating patients on the basis of unproven assumptions. They also, together with the accounting example, show the risk of relying and focusing on things that can be measured rather than things that matter.

Earlier "Death by Metric " posts:
1) Discounted cash flow
2) The P&L
3) Same store sales
4) ROI

Links:
1) Biased Expectations: Can Accounting Tools Lead to, Rather than Prevent Executive Mistakes?: Knowledge@Wharton
2) Doctors 'Treat the Numbers' Approach Challenged: NPR

Death by tools and metrics #4: ROI

This is the fourth in a series of posts about the dangers of blind allegiance to tools and metrics. In the wrong hands, used for the wrong purposes, they can be killers.

Today's metric: ROI (Return on investment). There's no doubt that ROI is a useful, if not critical, tool for marketers. It helps objectively evaluate the relative benefits of different marketing options and it creates a common language between marketing and finance. But here's the problem. People can get so enamored with ROI that they want to use it for everything to the point where they discount the value of anything that can't be evaluated by it.

In an article in this week's Advertising Age, Tim Calkins and Derek D. Rucker, from the Kellogg School of Management, argue that such ROI dependency leads to bad decision making. They point out that many important marketing activities are difficult to measure: Building the brand, improving customer satisfaction, building employee morale, for example. The danger is that these programs will be downgraded in importance vs. more measurable activities such as price promotions only because their benefits can't be so readily tracked.

It's a battle I fought many times as a brand manager. The dice were always loaded against advertising and in favor of coupons etc. "Run the numbers," the finance group would say and, unless we could sneak in some completely unsubstantiated assumptions about brand value, sure enough the coupons won out. Short term focus vs. long term gains.

Calkins and Rucker suggest, convincingly, that Starbucks is a clear example of ROI dependency. Many of its recent initiatives: machine automation, breakfast sandwiches etc have boosted short term profits and increased same store sales but have finally led to a serious dilution of Starbuck's brand equity.

They are not arguing, and nor would I, that marketing should be a "black box" with a spending free for all. But rather that executives must consider a wider variety of measures to figure out the best marketing approach. As they say: "Focusing solely on ROI is dangerous and naive."

Earlier "Death by Metric " posts:
1) Discounted cash flow
2) The P&L
3) Same store sales

Links:
1) Don't Overemphasize ROI as Single Measure of Success: Advertising Age (registration required)

Death by tools and metrics #3: Same store sales

This is the third in a series of posts about the dangers of blind allegiance to tools and metrics. In the wrong hands, used for the wrong purposes, they can be killers.

Today's metric: Same store sales. This metric is used in the retail industry to look at the underlying performance of existing stores by separating out revenue growth from new stores. This makes sure that new outlet sales don't mask weakness in performance from stores that are already open. Its value is that it puts the focus squarely on a company's ability to increase demand for its products, a less expensive option than opening new stores and more indicative of underlying strength. Over time, same store sales has become the all-important metric for analysts that track the industry. One bad month reported, one share price drop more or less certain.

The hidden dangers? Well, they come if retailers are so focused on these numbers to protect their share price and meet Wall Street expectations that they start making poor strategic choices. Problems can come from bad decisions made against either of the two components that make up same store sales number: price or store traffic.

1) Price: The introduction of new, higher priced items will drive up same store sales even if store traffic remains the same. Often nothing wrong with that. But not if a company drifts away from its core values. As an example, The Gap started introducing more and more expensive items in the 90s and eventually lost touch with its consumer base and what it stood for. Maybe another example is Starbucks that's been introducing all sorts of high-priced paraphernalia, some of it (e.g. music) well beyond the core business of coffee. At the very least, these items complicate what the Starbucks brand stands for.

2) Store traffic: The other side of the coin (and the more common) is increasing sales by cutting prices. As long as volume goes up enough to cover the price discounts, same store sales will continue to increase. The problem is that this is often a short term fix that will run out of steam. A recent example is Bed Bath & Beyond. Its same store sales were propped up by discounts for a while but, in 2007, it had to warn that its earnings would be lower than expected. All the while its same store sales had been increasing, the quality of its sales had been falling. When a company goes down this path to increase its store traffic, it can find the road back to health a very long haul since its brand may well be indelibly marked and cheapened.

As with the previous posts in this series, I am not advocating that this metric is abandoned. Rather I'm proposing that the limits and blind spots of all tools and metrics are better recognized. That will help protect companies from being run by their metrics rather than them using metrics to run their business better.

Earlier "Death by Metric " posts:
1) Discounted cash flow
2) The P&L

Death by tools and metrics #2: The P&L

This is the second in a series of posts about the dangers of blind allegiance to tools and metrics. In the wrong hands, used for the wrong purposes they can be killers.

Like the P&L. Of course, no business could run without managing the topline, bottomline and all the lines in between. This tool is fundamental to efficient business operation. But, unfortunately, it doesn't cover all the things that a brand manager needs to pay attention to. Specifically, it doesn't measure brand equity. That's an intangible asset only to be found (with difficulty) on the balance sheet.

The unfortunate consequence of this is that equity that has been built up in a brand, sometimes over years, can be used or tapped into at any time to help meet P&L targets. And the temptation can be very difficult to resist. Behind in sales in the first quarter? Let's cut advertising and get back on track. It works but it has a hidden cost. The good news is that brands are generally quite resilient and can stand up to some abuse. But with long term neglect, the damage can become irreversible.

A couple of ways companies can protect their brands against the short term bias a P&L tends to generate:

1) Promote leaders who are brand believers and strong enough to protect them against those who want a quick fix for financial problems

2) Add other performance measures that make it less easy for the brand treasure chest to be raided with impunity

First post in this series: Discounted Cash Flow and Earnings Per Share and their crimes against innovation

Death by tools and metrics #1: DCF and EPS

2007 was the year of the death of the CMO articles and blog postings. (Here's just one that refers to the frequently quoted Spencer Stuart survey on their short life expectancy.) These days, more than ever, marketing executives need tools and metrics to help them decide what to do and to demonstrate the success of what they chose to do.

But, watch out. These tools can be dangerous. Some are so alluring that you may fall in love with them and forget their inherent flaws. Others so blunt and powerful that they can kill strategically sound business initiatives. First in what will be an occasional series: DCF and EPS or Discounted Cash Flow and Earnings per Share, if you prefer English. Both of these metrics stand accused of major crimes against innovation.

Clayton Christensen, in a recent Harvard Business Review article (subscription required), shows how the misguided application of DCF and EPS can kill innovation. The problem isn't the tools themselves, just how they are used.

For DCF, one of the problems he describes is that projected cash flows of innovations are compared to how well off a company is today, assuming that a company that does nothing will thrive forever. But we all know that, in reality, if you stand still for too long your competitors are going to catch up with you and run you down. The right comparison should be between the DCF of an innovation vs. the accelerating decline of a company if it doesn't do anything. A much more difficult analysis but a much more realistic approach.

The problem with EPS is simpler to explain. Executives who focus on share price (which is driven by EPS) are going to be reluctant to invest in innovations that have long term benefits but don't pay off immediately. As Christensen points out, senior executive compensation is now heavily weighted towards share price improvement making it more difficult to get the green light for innovation projects.

That's the risk of incentives. They are powerful motivators, effective in changing behavior but they can lead to a single-minded focus on the measures being rewarded at the expense of everything else. It's a game where smart and competitive managers figure out how to win based on the rules set by the incentives program. With EPS, it's a game where innovation has been the unwitting victim.