Are certain actions and outcomes overvalued?
- The sport of baseball is not exactly a sport known around the world. Still, in the United States, it's big business. Lots of money is made in the business of baseball. But like so many other sports businesses, where players are paid enormous sums of money, the executives in charge of acquiring these high-priced players is more difficult than it seems. Signing a player to a long-term contract worth millions might end up a horrible decision if the evaluation of the player was poor.
Which brings us back to baseball, where for decades the sports KPIs were very misleading. Let me give you a very quick and somewhat incomplete explanation of baseball so you can discover the errors made by their executives for almost a hundred years. Don't worry, even if you don't fully understand baseball, you'll quickly see the problem. In baseball, one player throws a ball. They are the pitcher.
One player tries to hit the ball with the bat. They are the hitter. If the batter is successful, they get a hit. If they are unsuccessful, they get an out. The percentage of times they get a hit is the batting average. Batting average is one of the KPIs for hitters. There are four different types of hits, but the home run is the best type of hit. The home run was traditionally the second KPI for hitters.
Finally, a team wins by scoring runs. For each run a hitter helps a team score, the player gets a run batted in, an RBI. This is our last KPI. For decades, these were considered the most important metrics in measuring the value of hitters. Batting average, home runs, and runs batted in. So what's the problem? Well, the problem that executives overlooked for decades was the redundancy in this set of KPIs.
What does this mean? It means that some of these metrics were redundant. They were being counted more than once. With the very little, or perhaps vast knowledge, you have about baseball, tell me. Which of our three hitter KPIs is the most redundant in the bunch? Think about it. It's home runs. Why? Well, if you get a home run, your home run numbers go up.
A home run is a hit, so your batting average increases. And since a home run helps your team score at least one run, your runs batted in increases. So this system of metrics is overvaluing players that hit home runs. And what many sports agents did was to tell their clients to try and hit only home runs in years when they were due to get a new contract. And while a home run is the best hit, it is not always necessary.
Trying to hit a home run typically comes with higher risks. Now, if that redundancy lived for decades in the world of sports without detection, believe me, it's something that every business is prone to do from time to time. Consider a company that utilizes these metrics. Inventory on hand, inventory turnover, cash-to-cash cycle, and stockout rates. If you dig just a bit, you'll find that the first three metrics are all improved by keeping inventory levels low.
As for our fourth metric, stocking out, this is a result of not having enough inventory. But if I can satisfy three out of four metrics with one single action, odds are pretty high that I will do whatever it takes to keep inventory levels low even if it occasionally increases my stockout rate. As you continue your organizational tune-up, look at your metrics. Consider what each metric really means, and then see if there are redundancies in your system of metrics.
- Metrics and human behavior
- Common corporate errors in measuring
- Developing a good metric
- Using the performance measurement tune-up
- Avoiding redundancy
- Using dashboards, infographics, and other data visualization tools