Principle in Brief
As Einstein observed: “Not everything that counts can be counted, and not everything that can be counted counts.” That is why we strive to measure things that matter – things that lead to profitable action – even when it is difficult to do so. And it is why we avoid relying on measures that do not provide insights leading to improvements and innovations.
It is essential for us to have measures that help us understand reality and properly focus our efforts. Such measures include profit/loss and return on capital consumed. Rather than relying on averages or total profitability, we need to know the profitability of business strategies, customers, products, services, plants, production units, suppliers and activities. Our measures need to provide the information required for marginal analysis. The goal is not precision, but knowledge regarding future changes and opportunities to improve.
Other important areas to measure include:
- Culture- Progress in applying Principle Based Management™, including the effectiveness of supervisors.
- Opportunity cost- An activity is truly profitable only when it is more profitable than the most profitable opportunity foregone.
- Stewardship and compliance- Performance in eliminating the conditions and events that have harmed or could harm people or the environment and in complying with all applicable laws and regulations – all classified by seriousness.
- What each customer values- Not only what the customer values as a company but also what its relevant decision makers value.
- Price-setting mechanisms- Based on various supply and demand scenarios that cause marginal competitors to increase or decrease production or prices.
- Our competitive position- Where we stand in the value we create for our customers and the costs of providing it vs. present and future competitors.
- The value and cost of activities- Benchmark vs. the best in the world regardless of industry.
- Allocation and profitability of overhead costs- Whether costs are allocated according to the businesses that drive them and are profitable to each business.
Knowing what drives profitability is important. If we are doing well, is it because of favorable market conditions or our competitive advantage? Given that we tend to work on what gets measured, it is essential that we measure the right things – especially if rewards and recognition are involved. Measuring and rewarding revenue will drive more revenue. Focusing on costs will drive cost reduction. Using either as the primary measure of success will destroy rather than create value.
It is imperative for every business, facility, unit and team to continually evaluate its measures. This requires critical thinking to determine whether each measure is driving mutually beneficial outcomes. All employees need to know which parts of their work are profitable, based on measures that help them understand what to start, stop, change or improve.
Not everything that counts can be counted, and not everything that can be counted counts.
Albert Einstein
Measurement Pitfalls
For measure to provide the information and insights needed to be successful, it is important to avoid these common pitfalls:
| Measuring only what’s easy to measure and/or measuring out of habit | We should continually evaluate all measures to determine if they lead to profitable action. If they do not, we should remove them or replace them with more effective ones. |
|---|---|
Failing to apply economic analysis to measures | It takes time, effort and other resources to establish and maintain useful measures, so the knowledge gained from the measure must be worth the cost to obtain it. |
Undervaluing qualitative measures | A mix of qualitative and quantitative measures are needed to understand reality and make good decisions. |
Failing to understand key drivers | When we understand the underlying reasons for a result (good or bad), we are more likely to take effective action. |
Creating measures mostly for leaders or to fulfill legal requirements | All employees need measures to understand reality and know what to start, stop, change or improve. We will always track and document measures necessary to comply with laws and regulations, but various other measures are needed for us to succeed. |
Understand It Better
Creating Superior Value - Unscripted
Leaders discuss how profitability is an incomplete measure of value creation and superior results.
Taking a Long-Term Perspective
Hear Charles Koch describe our long term focus and some indicators of progress.
The Problem with Averages - Unscripted
De-averaging helps us understand reality and apply marginal analysis so we can achieve superior results.
Measuring the Wrong Things
Leaders discuss how poor measures can focus us on the wrong things, such as focusing on revenue instead of profit.
Measuring Application of PBM
Leaders talk about how we can measure or gauge if we're making progress on applying PBM.
Why Only Measuring Profit Isn't Enough
Leaders discuss the importance of understanding drivers of profit and how you contribute to value creation.
De-Averaging: Understanding Where Profit Is
Leaders explain how deaveraging helps us know what is and isn't profitable and develop strategies to create more value.
Examples
The right measures can help us in many ways, such as understanding where we are today, providing indications of progress, and inspiring us to do better. Notice the combination of quantitative and qualitative measures in these examples.
- Understanding Today
- Indications of Progress
- Envision What’s Possible
- Greg is a new IT help desk employee who uses a combination of measures to understand his performance and set improvement goals with his supervisor. Together they look at things like how many and the types of problems Greg resolves each week as well as comments from customer service surveys.
- A leadership team at a newly acquired Koch company has shifted to using return on capital consumed as a measure of success, instead of revenue per unit. This allows them to see some areas of the business that earn a lot of revenue but aren’t making a profitable return – and develop strategies to improve them.
- During Yvette’s feedback summary discussion, her supervisor recognizes the progress she’s made by noting a few specific performance metrics and sharing how she has effectively worked with co-workers and other teams.
- A facility leadership team reviews the safety and environmental performance data from the past three years. They discuss technical improvements they have made to get better results as well as culture changes they have observed, such as employees openly raising concerns and identifying things to work on before they become a problem.
- Robin is surprised when she sees the quality data from another facility that makes similar products. After speaking with one of the quality control engineers to learn more, Robin is inspired to try a few new things to improve their quality measures – and ultimately get better results.
- Rita’s sales team used to believe that it’s normal for relationships with product developers to be strained – as they often had conflicts on how to meet customer needs. When Rita connected with sales team leaders at other Koch companies, she learned that many of them had collaborative relationships with their product developers. This informal “benchmarking” inspired Rita to change the working relationship her team has with the development team.
Give it a try
The power of these principles happens through application. There’s no substitute for learning as you apply.
- Review the measures you and your team use. What measures could you eliminate because they are no longer leading to profitable action?
- Identify things you would like to know about customers, production inputs, suppliers, etc. What measures might provide insight in these areas?
- Research how new technology, such as AI, could help you gain insights from data.
- What makes a measure useful? How do you know a measure is helping us get better results?
- Share some examples (from your career, the news, research, etc.) when having the right measure(s) led to better results.
- Share some examples of when measures had unintended consequences. How did things turn out? What can we learn from these examples?
- What are some important things for team or business success that are difficult to measure with numbers? What qualitative measures can we use to gauge our progress in these areas?
- What are some examples of qualitative feedback the team received recently, and how can we translate that into actionable improvements?