My wife thought I was crazy when I told her the reason that I majored in finance in college was because it was the one area of business where I did not feel naturally strong. My logic was why go to college to get a business degree and study subjects I was already comfortable with? While I didn’t graduate magna cum laude, I did leave with the ability to put on my analytical finance hat. It has served me well throughout my career when I have had to make decisions that were surrounded by a mountain of subjective data and opinions.
As leaders, we often have to make decisions with few facts and not enough time. After a while, we become adept at sorting through what little information we have and making a decision with our gut. Successful gut decisions advance our careers, unsuccessful gut decisions leave some scars, and really unsuccessful gut decisions often result in a person “pursuing other opportunities.” The paradigm we create from our successful gut decisions is that we become more comfortable with “using our intuition,” rather than setting up tools that will give us objective data that could steer us much better toward the right decision. How many times have you been given information that uses words like “never” and “always” to help justify a position? These words immediately tell us that it is a subjective opinion, but in the absence of factual objective data, what else is there to go on? The Reagan doctrine of “Trust, but verify” was used in reference to denuclearization talks with the Soviets, and it holds up in business, too. Trust your instincts, but verify with objective facts.
Taking the time to establish some good, measurable benchmarks can seem like a lot of work, but once you get them in place and start using them over time, they often can give you data that challenges your intuition. For example, with established benchmarks, “He’s a good salesperson” gets replaced by “He has a 38% close rate.” This information by itself may be good, if all your other salespeople have lower close rates, but it may be bad if this is the low man on the totem pole. What if this salesperson had a close rate of 60% last year? Now you have data that tells you that you may have a problem.
We all use some objective data to measure performance, such as sales volume, gross margin percent, or on-time and in-full. But what if we started looking at all of the areas of our business and tried to establish objective measuring tools? At Alexander Lumber, we use Service Level Agreements (SLA) in many of our departments. We then measure and report their performances against the established SLA. I like using percent current to assess my customers and my credit people. Suddenly, a “good customer” (because of a high sales volume) may not be so good if only 25% of their balance is current. Another good measuring stick is how does your total payroll and benefits match against the gross profit dollars produced? I have rarely seen a lumber company not make money if this ratio was under 50% (unless they had really high occupancy costs), but I also have rarely seen a lumber company that had a payroll to gross margin ratio of higher than 60% make money.
Be creative and try to think up ways to measure the more difficult areas of your operation. Even if the statement of the measure may be confusing and difficult to visualize by itself, like one’s weight, it can be useful when measuring the results from one period to the next. Just be careful when establishing measurements of what you decide success to be. There is a concept called survivorship bias that happens when we come to overly optimistic beliefs because we ignore failures or fail to take all things into account.
A favorite example of this type of bias occurred in WWII. The Allies were losing a tremendous number of bombers on runs over Europe. The Center for Naval Analyses extensively studied every aircraft that returned and diagrammed where the damage was. Its conclusion was to add armor to the areas that had the most damage. A statistician named Wald countered that they were only considering the aircraft that survived their missions. His answer was to add armor to areas on surviving planes that showed the least damage—in this case around the pilot, since no planes were making it back that showed damage in these areas and therefore that was what was probably causing them to crash.
Challenge your people to come up with ways to measure success. Don’t strive for perfection; rather, you want to aim for consistency and continuous improvement. Start by setting objective benchmarks and evaluating them over time. Remember: You can’t accurately judge what you don’t measure.