Written by Peter Ward, 2 September 2021
Introducing the art of measurement
Which would you prefer? It is a question that I have been posing to colleagues and
friends for a while now and, so far it has elicited a uniform response. Roughly right is
preferable.
Many years ago and as an articled clerk (in the days before accountants had student
training contracts) I was with a (very) small firm of Chartered Accountants that had
two public companies on its list of audit clients. Published accounts in those days
amounted to, as I recall, around 30 pages and a note to the accounts was designed to
provide a breakdown of a balance sheet or profit and loss account number. The audit
report was delightfully short and referred in most cases to the accounts showing a ‘true
and fair view’, a short phrase but with significant meaning behind it. Today, and I have
picked a FTSE 250 company as an example, the annual report runs to 192 pages with the
auditor’s report covering seven of them.
No I am not suggesting that we revert to the old ways of reporting, but I do wonder
whether the volume of data now presented is really helping to understand the underlying
health of the business. And by underlying health, I am referring to all aspects of the
business, not just the health of its recent and near term prospective financial position. Is
our quest for precision on financial effectiveness getting the wrong answer for the
organisation as a whole? Indeed, is our bias towards financial information skewing some
of the decisions we make so that short term performance is precisely reported at the
expense of the long term health of the business?
I met recently with the CEO of a partner organisation who quizzed me on the
effectiveness of the strategic transformation work that we have been completing for
clients over the last two decades. He was looking for a response that would demonstrate a
positive financial impact and I sensed a disappointment when I suggested that the impact
we are looking to achieve is based on the underlying health of all of the organisation’s
relationships: with customers, its people, suppliers, investors and its environment (is it a
good citizen?). The financial performance comes as a result (the product) of the strength
of its relationships, rather than the sum of transactions taken in its name. I went on to
suggest that if we could demonstrate improving metrics on the health of external and
internal relationships we would have a pretty good handle on the capacity of the
organisation to produce a consistently improving financial result over time.
Nothing new here, there are some great metrics widely employed to measure progress
with key relationships. Net Promoter Score (NPS), and similar, will give us a sense of
whether our customer relationships are improving and Employment Engagement (EE)
scores from companies such as Gallup can give us a read on how our employees are
feeling about the organisation. And yes, we know that these can be leading indicators of
future performance, even if we haven’t made the direct connection. But I fear that
the splendid work that is being completed in honing the ‘non-financial’ measures is not
always cutting through in the board room. NPS can be retained by ‘marketing’ and EE by
Human Resources (HR)and used to demonstrate the impact of the functions rather than
impact on overall performance. Harsh I hear you say, but taking just one of these
measures to illustrate. The EE score came on the agenda for one organisation only
because the CEO’s bonus was to be triggered by an improved EE score. And for another,
the commissioning process selected a method to demonstrate the relative performance on
EE against other companies. A very proud HR Director announced the superiority of ‘his
score’ and yet was less motivated to explore the areas where the information provided
could lead to improved workplace practices in the business itself. For every person
reading this and saying this cannot be true, I am pretty sure there is another recognising
the issue.
And this is where the art of measurement comes in. We have got so involved in
developing precision around the measures we use, and presenting them in such a way that
demonstrates we are making progress against our chosen performance dimensions, we
may have forgotten the context for the metrics. So let’s acknowledge that we have the
science to provide the precision, should we need it, and focus on the artistry of running an
organisation.
I am going to take us back to my accounting roots and a visit to a metal dealer to reveal
the result of our compilation of his accounts. Weeks of endeavour went into the
calculation of his profit for the year and, on announcement, he pulled out a pocket sized
card and after a few minutes agreed that we were ‘about right’. And on the piece of paper?
Apparently unrelated figures: number of calls from customers, size of stockpile, hours
worked and similar. The important point that I took away was that he was in complete
control of his business and had up to date information upon which he could make good
decisions (yes, he was very profitable).
Bringing us back up to date, ask most CEOs how the business is doing (away from the
prying eyes of investors), and the conversation will comprise a mixture of data driven
responses (usually financial but increasingly customer and people related) and a
‘feeling’ about other aspects of the business. This is the artistry of running their
businesses. While they are ‘roughly right’ on all aspects of their business, they can sleep
easily at night. But I wonder whether the precision required, particularly by investors, is
distracting us from addressing all the aspects where we need to be ‘roughly right’.
At this stage it may be worth pausing to emphasise an assumption. We are talking about
organisations that are designed to last for the long term and therefore worth careful
thought about measures for the long term; an organic, living company that changes and
adapts over time and requires guidance on what it needs to do to maintain its health (not
unlike us as people!). We need to recognise the artistry as well as the science of running a
business and create relevant measures to help us on our way. We are creating our
masterpiece, not rushing out a sketch to please a casual shopper. Three aspects we might
consider:
1. Are the fundamentals in place and do we have a way of testing they are in place?Let’s
start with purpose. There is a whole industry around the definition and articulation of
purpose, and I welcome it, but only if it genuinely reflects the ‘why?’ of an organisation,
a reason for its existence beyond money. Are our current activities in line with this
purpose and does it impact on day to day decisions? If
‘purpose’ is too abstract, are our activities in line with the objects clause in our
Memorandum of Association. I know that most of these documents are designed to
permit companies to do anything, but usually there is an opening objects clause that
defines the primary objectives. Are we still on the path for which the organisation was
designed?
2. Now a quick tour of all the relationships upon which we rely for our continuing success.
What does success look like for our people, customers, suppliers and, yes, banks and
investors. Let’s start with a rough sketch for each, the detail can come later. And
separately, as we are going to be around for a long time, our relationship with our
community and environment, the impact we have, the use of un-costed resources and
residual cost of discontinued activity.
3. Finally, a few tests of resilience. Exposure to parties that could disrupt our progress;
strength of our balance sheet and capability to sustain through difficult periods; depth
of our leadership talent and succession plans for key positions and the strength of the
culture in the organisation.
I reckon it would be possible to get to a ‘roughly right’ view of performance on each of
these aspects quickly and that the process, and the natural curiosity of the leadership of
the organisation, will trigger those areas where more precision will be needed in order
to stimulate action needed to guide the business on its long term path. And, as we
uncover the need for more precision, so the science of measurement will come back
into play.
If we are to get the art of measurement into our organisation, it will be about sketching
out what good should look like and seeking measures primarily to help us on our journey
to create our masterpiece. A living organisation that can create genuine wealth— the
improvement of the lot of all stakeholders and financial returns for both the short and
long term. And from the chosen measures we will have data to be able to report progress
to investors and other external parties. Our masterpiece will be driven by data to sustain
it, not through the pressures of reporting to financial audiences.
We live in an era where data is more readily available than ever before and in a time when
accountability for all dimensions of a business is an increasing expectation.
‘Roughly right’ about the health of the whole of our organisation will be a good start and
can help us to guard against the pursuit of perfection getting in the way of progress on our
journey to long term wealth creation.
Peter Ward
Chairman and Co-Founder of Telos Partners