“You cannot manage what you don’t measure.” You may have heard that before. Certainly this truism holds today. However, John Hauser, professor of marketing at MIT Sloan School of Management, takes it further: metrics influence the behaviour of the entire organisation, and affect both actions and decisions related to future strategies. According to Hauser, “you are what you measure”! I’m inclined to agree.
Let’s say a firm measures a and b, but not y or z. Pretty soon, managers begin to pay more attention to a and b. Managers who perform well against a and b are promoted or given more responsibilities, increased pay and bonuses. Recognising these rewards, managers start asking their employees to make decisions and take actions that improve these metrics. Often, management won’t even need to ask – employees will start to focus on delivery against a and b of their own volition. These metrics become embedded in the culture of the organisation, and the entire organisation focuses on ways to improve a and b. The firm even gains core strengths in producing a and b. In essence, the firm becomes what it measures.
Value of data and analytics
This is also true of metrics associated with investments in data and analytics. Some organisations consider such investments an overhead. As an overhead, data and analytics investment is viewed as a necessary cost, but one that does not add value. An alternative approach is to view such investments as part of the process of creating value for the organisation. Differences in measurement approach determine the culture of the organisation: either cost driven or growth driven.
What is the right approach to measurement?
In Australia there’s currently a cost versus benefits public debate raging, with a focus red-light speed cameras. A quick calculation shows the differing views of cost versus value, with each having implications on investment decisions.
- Total annual costs are $5.6million for 227 fixed camera sites and 5 mobile vehicles
- To reach break-even point the police must catch 93,000 offenders per annum, each with a $60 average infringement fee
- The associated speed warning and safety awareness campaign has reduced deaths from 120 per annum to 81 per annum
- ‘Financial benefit’ is $64.5million from avoidance of cost per death of $1.65m (ambulance, pathologists, hospital, police, etc.)
- ‘Real benefit’ is 39 lives saved
The best of both worlds!
Of course, it is prudent to focus on efficiencies of cost management while at the same time taking measures to improve revenue growth. However, many organisations face difficulties on both accounts as a result of not leveraging their data assets appropriately.
Sometimes the overall cost of data is not visible, and therefore escapes scrutiny because data is duplicated and spread across several data marts in the organisation. The consequence of not having all information in one place is that the business executives will have great difficulty in seeing the entire situation of the enterprise, resulting in suboptimal decision making. As a result of disconnected information, businesses experience some common pain points:
- Inability to identify customers affected by mobile network coverage and service quality due to lack of correlated telecommunication network and customer data
- Inaccurate forecasts resulting from disparate data
- Imprecise view of profitability caused by inability to charge for overuse and lack of detailed usage data
- Inability to identify unprofitable products or most valuable customers due to insufficient information
- Inability to meet customer commitments due to inaccurate service metrics
What can the CFO do to encourage the ideal value-measurement culture?
Focus on cost economics where appropriate, be it establishing a data lake or integrating the data in an ecosystem. Establish a framework for governance that takes into consideration regular measurement of return on capital. The framework should include the regular audit of data and analytics assets that can provide a strong incentive for managers and executives to use them efficiently and effectively.