By Somik Raha, SmartOrg
We live in a world where it is easy to measure costs but hard to measure value. Management gurus exhort us to measure benefits with the same precision as costs. This is a good idea if we want to balance our perspective, but it doesn’t make a lot of sense for one key reason: metrics that attempt to measure value don’t drive the productive action necessary to actually create value! Such metrics distract us into measurement for the sake of measurement rather than identifying ways of driving productive action.
Let’s take a simple example. We all know that brushing our teeth twice a day is a productive action needed to get to dental health, which we value. If we attempted to measure what is of value (dental health) we’d be keeping track of the number of cavities we have. We might even get obsessed about more sophisticated measures involving x-rays. But none of these “measures of value” would drive the essential action to brush twice a day. On the other hand, the simple and humble metric of the number of times we have brushed is very productive in getting us to actually brush. Without even requiring a deep understanding of dental health, this metric gets us to dental health because it drives productive action. In simple terms, it drives results.
If we stopped using metrics to measure value, and instead used them to drive productive action, our actions would be very different. In the field of strategic portfolio management, for instance, there is a prevalence of dashboards and analytics attempting to measure all kinds of things that are considered to be of value. When these metrics get interpreted as a measure of value, portfolio management turns into a giant optimization problem that downplays the role of human creativity, innovation, and insight in creating value.
Instead, if we shift our focus to asking, “what is productive action in the context of strategic portfolio management,” we find a very different answer. It is an answer that you may have already experienced some time in your life, when you talked with a friend to get help with a difficult decision. This friend listened carefully, asked good questions, and helped you understand your own thoughts about your decision. You walked out of that conversation with great clarity on what to do next. It was a great decision conversation! The purpose of strategic portfolio management is to support great strategic decision conversations on a repeated basis throughout the organization. Imagine what it would be like to work in an organization where such conversations were the norm and not the exception?
It turns out that metrics around uncertainty, when used properly, are exceptional at driving great decision conversations. That’s because strategic decisions are difficult primarily due to uncertainty, and we need a way to thrive in an environment of uncertainty. An ineffective way to use uncertainty would be as a weight-and-rate mechanism to rank-order projects—which is how most portfolio management systems in the market today work. A far more powerful approach is to use quantifications of uncertainty to identify knowledge gaps.
For instance, consider that John and Amy are asked to assess the success of getting an FDA approval for a new drug they are working on. John assesses 70%, while Amy assesses 30%. The portfolio manager, Cynthia, gets John and Amy together and asks, “John, what do you know that Amy doesn’t? Amy, what do you know that John doesn’t?” In the course of the conversation, John and Amy’s assumptions become transparent and both learn from each other, and at the end, they may agree on a mutual assessment based on shared knowledge. More important than the assessment is the knowledge-sharing that has just happened, which is invaluable.
Three popular ways to use metrics around uncertainty to drive great decision conversations are:
- Tornado Charts: See Resolving Conflict and Confusion with Objectivity and Evidence
- Innovation Screens: See How do you Hold People Accountable for Portfolio/Project Decisions When Things are Uncertain?
- CFO Charts: See The FP&A Question from Hell
How does your use of metrics change when you shift your focus from measuring value to driving productive action? We’d love to hear from you in the comments below.