Ask VeraSage: Measuring What Matters

Barry from Seattle, Washington e-mails us this very intriguing question:

Dear Ronald J. Baker and VeraSage,

As a fan of Pricing on Purpose—oh, what a book, my top pick of the year for classical schools—and having just ordered your new book, Measure What Matters to Customers, I wonder:

Would you elaborate on how Jim Collins advocates misguided measurement in Good to Great...and, more specifically, where your Measure What Matters... may improve upon/correct Good to Great and the Social Sectors (Collins' follow-up accompanying monograph)?

I'm fascinated by how we establish and measure Value in the non-profit arena. Especially when nothing is "for sale" (at least in a monetary sense). Thanks for your consideration!

Yours for Value,

Barry

Seattle, WA

First, let me say thank you very much for your kind words on my book, I'm glad you enjoyed it. Seattle is one of my all-time favorite cities, and all of my books have been partially written up there—I find the Emerald city a very inspiring location to write.

What a great question, Barry. It's one I have not given a lot of thought to in the context of the not-for-profit sector, but it's obvious that value is just as important there as anywhere else. I have not read Collin's follow-up monograph, but I have read his earlier works.

I do have problems with his work. For a useful critique of Collins' work, see The Halo Effect, as well as the VeraSage review.

My main problem is with Collins' "one metric mentality" for businesses to focus on. Here is what he writes in Good to Great, page 104-06:

[W]e did notice one particularly provocative form of economic insight that every good-to-great company attained, the notion of a single "economic denominator." Think about it in terms of the following question: If you could pick one and only one ratio—profit per x (or, in the social sector, cash flow per x)—to systematically increase over time, what x would have the greatest and most sustainable impact on your economic engine? We learned that this single question leads to profound insight into the inner workings of an organization's economics.

Walgreens switched its focus from profit per store to profit per customer visit. Convenient locations are expensive, but by increasing profit per customer visit, Walgreens was able to increase convenience (nine stores in a mile!) and simultaneously increase profitability across its entire system.

Gillette: profit per customer. Key insight: Shift from profit per division to profit per customer reflected the economic power of repeatable purchases (e.g., razor cartridges) times high profit per purchase (e.g., Mach3, not disposable razors).

So what would be the one metric for a professional knowledge firm, or a not-for-profit? I don't know. Perhaps value created per unit of intellectual capital, but we do not yet have the tools and methodologies to measure this (though models do exist that try).

On the other hand, perhaps it is the wrong question. I side with management thinker Charles Handy. In a lecture to the Royal Society of Arts in London in 1996, he described "the fallacy of the single criterion":

Trying to find one number that is the sum of everything is misguided. There is never any one number that will actually explain success in life and we are foolish ever to think that it might be there. Money certainly isn't it. Businesses know very well that profit is not the only measure. Sensible organizations now have about 18 different numbers they look at. Nevertheless, the myth pervades our society that if you are profitable you are successful. Or if you're in the public sector, then efficiency is what matters. But efficiency is not quite the same as effectiveness. You can have a very efficient hospital if you don't take in very sick people or people who are not going to get better, like the old ones. So you push them outside. You're efficient but you're not terribly effective. Looking for the one number has corrupted our society.

Handy is right in one respect when it comes to the productivity of knowledge environments: the one criterion is not inputs based on cost or man-hours. That metric tells us nothing about how well a company is creating value. Maybe a more holistic, interdependent approach is needed, one where we strive to improve the means and enable the ends to take care of themselves.

In the non-profit world, perhaps Alvin Toffler's theory of the Prosumer economy is a good approach for understanding value. In his recent book (now out in paperback), Revolutionary Wealth he explains this notion of the prosumer economy.

Toffler posits that the "visible economy" is approximately $50 trillion, but that there's another $50 trillion in the "invisible economy." This economy consists of people, or groups, who both produce and consume their own output—prosuming to use his word. When we bake a pie and eat it; use an ATM; write shareware; bake brownies for a fund raiser; and most importantly, have children. This invisible sector, according to Toffler, is the subsidy on which the entire money economy depends. Toffler offers the "potty test" to business audiences: how much is it worth to your company that your people are toilet trained. Interesting question. We at VeraSage call that social capital.

The non-profit sector is incredibly huge, and increasing every day due to the enormous wealth of our country (just think of Warren Buffett donating his fortune to the Bill and Melinda Gates Foundation). I do write about this in my forthcoming (November) book, Mind Over Matter, and I'll continue to give your question more thought, Barry.

Till then, I'd be very interested in other people's insights as well.