Metrics Gone Wild

"We can see our forests vanishing, our water powers going to waste, our soil being carried by floods into the sea, and the end of our coal and our iron is in sight. But our larger wastes of human effort, which go on every day through such of our acts as are blundering, ill directed, or inefficient . . . are less visible, less tangible, and are but vaguely appreciated."

—Frederick Winslow Taylor, 1911

Those prophetic words were written nearly a century ago, but they still ring true today.

Frederick Winslow Taylor was an American engineer and management consultant, the first to promote the idea of "scientific management" to increase productivity. He believed productivity was lower than it ought to be for two reasons: unscientific design of work practices by management, and deliberate idleness by workers.

Taylor proposed motivating workers with higher wages and by closely monitoring their individual results, making it impossible for anyone to work slowly without being noticed. He also proposed dividing the work force into layers of supervisory, administrative, and technical workers, which was the beginning of today’s corporate organizational structure. The backbone of his management principles was the stopwatch. Taylor urged managers to conduct "time and motion studies," in which they timed every movement that each worker made.

In "Scientific Management," a paper that he presented to the American Society of Mechanical Engineers in 1911, Taylor explained how he had improved the productivity of laborers shoveling coal at Bethlehem Steel Company. In part by paying them $1.88 per day instead of $1.15, he accomplished an increase in the average number of tons moved per day per man from 16 to 59. This meant the number of workers Bethlehem Steel needed decreased from between 400 and 600 workers to 140. The company’s average cost to handle a ton of coal decreased from 7.2 cents to 3.3 cents. Bethlehem Steel saved about $80,000 a year, significant even by today’s standards.

"The best management is a true science, resting upon clearly defined laws, rules, and principles as a foundation," Taylor wrote. Utilizing only a stopwatch and cost figures, he proved that by measuring the results of each activity in a business, managers could manage the business effectively and increase productivity.

Sound familiar? A hundred years later, business schools and journals are still telling us to measure performance. Today, we call the numbers "metrics," but the concept is the same as in Taylor’s day. As the saying goes, "You can’t manage what you can’t measure."

What has changed is the practice of scientific management. Instead of measuring the output of workers shoveling coal, we now measure share price, revenues, net profit, earnings per share, market share, return on invested capital, total returns to shareholders, market value added, revenue per employee, return on assets, same-store sales, brand strength, and progress toward entering new markets.

But even as financial performance indicators have become more numerous and complex, business has realized that financial performance isn’t the be all, end all. For a reality check, think about Enron’s stock price skyrocketing to $90 in August 2000, then falling to less than $1 a year later, when the company’s fraudulent activities were uncovered. Enron may have hit its goal for stock price and profits, but it was all built on a house of cards.

A "balanced scorecard" approach to performance was popularized in 1992 in a Harvard Business Review article by Robert Kaplan and David Norton. Their premise was that financial performance is only one aspect of total performance, and they urged business leaders to also measure customer satisfaction, internal business processes, and the learning and growth of their employees.

Now, in pursuit of that balanced approach, many companies are taking additional measures of their health and likely future performance beyond the usual financial metrics. In Valuation: Measuring and Managing the Value of Companies (McKinsey & Company, 2005) Tim Koller, Marc Goedhart, and David Wessells advise business leaders to measure:

• short-term metrics that underlie historical performance and indicate whether growth and return on invested capital can be sustained, such as cost per unit for a manufacturing company or same-store sales growth for a retailer;

• medium-term metrics that show whether a company can improve growth and return on invested capital in the next one to five years, such as product pipeline, brand strength, cost structure, and asset health;

• long-term metrics that measure strategic health and the ability to both sustain current operating activities and identify and exploit new areas of growth. These include progress in selecting partners for mergers or entering new geographic markets.