Measuring what matters

I was reading about the predictions of Dr Doom, who is an economist, and he was saying the impact of this lockdown is going to have a serious impact on the economy. He was saying that things are going to get better hopefully towards the end of 2020 or Q3 orQ4 depending on what your financial year is. It appears to be a coherent argument and it can pan out the way he talks about it.

However, that led me to think about what we are measuring and how we are measuring it. My PhD thesis was to identify a way to measure how people value each other consciously and subconsciously and then create a metric around it. It sounds like a mouthful and it was one of the most challenging things that I have done in my life so far.

With the guidance of my supervisors, I realised that the problem cannot be looked at from a Psychology or Strategy lens. I had to integrate theories and concepts from multiple sciences including accounting, economics, social theory, customer service, operations, etc to arrive at a framework. I completed my PhD within three years but then realised that for my work to be meaningful, I need to embrace thinking beyond management sciences and looked at thinking behind language structures, how our brain works, behaviours, etc. It took me another 4 years to validate and refine the offering.

The task I had set out was not easy by any measure. However, I realised that you need to build something based on some assumptions and then rely on it to be true until it is disproved. At that point, I was ready to embrace the evidence to reorient my thinking. I also realised that human beings do not operate in silos and we need to embrace thinking from various sciences to come up with a metric.

I apologise for this rant. The reason I presented a mini road map of my journey was to show that a metric cannot be built out of thin air and we must base it on certain assumptions. We must be willing to embrace thinking from other sciences to refine the metric as nothing is perfect. Now apply this thinking to the current scenario of performance. We have some fundamental assumptions in measuring performance which then either enhances or erodes the value of a company.

The dot-com bubble burst as a result of too much reliance on metrics like eyeballs and with no clear strategy i.e. use of metrics with no clear focus on cashflow. In addition to this, the way analysts valued internet companies using high multipliers in their models and formulas resulted in unrealistic and overly optimistic values. A study by HSBC that indicated companies were valued by more than 40-50% of their value. Now that is something.

If we look at the financial crisis in 2008 it is the culmination of high levels of debt, too much of speculation and loose credit terms. This again was caused by another bubble i.e. the housing market. This time properties were valued by more than 40 to 50%. It was not the analysts but the estate agents who were responsible for creating those unrealistic valuations. If you ask an estate agent how they value the property, they will not be able to provide a scientific explanation or an agreed metric that has been rigorously validated to value assets. Yet the world chose to believe this and was lulled into a false sense of security. When we succumb to it emotionally, the rational brain goes for a walk. That is what happened here. We all know what happened next.

Now let us look at the current scenario. Globally the economic forecast was not that brilliant. China and India were growing only at 4% and Europe was forecast to grow 1%. Before the market crash, there was a general sentiment in the market that companies were overvalued and a correction is long overdue If we look at the stock markets today, they have dropped by 25 to 30% in the first quarter. What should have been a slow but painful transition from the current situation to a recession was accelerated by Covid19. This time around, there were no external factors that created the bubble. It was the overvalued stock market and unrealistic expectations and sentiment that goes with it.

If we look at the underlying factor in all these scenarios, a recession was triggered when unrealistic expectations and inflated evaluations couldn’t cope with reality. We have all relied on monetary gains and performance as a metric to report progress, but we can see that the metrics which we use are driven by emotions than rationality.

Why should we panic when the world shuts down? Why can’t we accept that this is a new reality and then manage the expectation accordingly? Why should we let the sentiment of the stock market and valuation of analysts dictate how we measure progress? Yes, economies go through a boom and bust cycles. If that is a certainty, what can we do differently this time around? If history has taught us something, it is that the current valuation of progress is the weak link.

Don’t get me wrong, I am not against progress nor am I a socialist. I am just questioning the metrics that we currently use to measure progress. Logical positivism in research philosophy is to posit some theory and will be valid until it is proved to be false. Measuring growth this way has failed to stand up to scrutiny. Is it not time to evaluate this more seriously?

For quite some time we have let numbers measure progress and when we use numbers, we tend to adopt a reductionist view of the world. We reduce things to an “it” or “ism” to understand it. Things that we cannot quantify, we classify as intangible, call it fluffy and woolly and tend to brush it under

the carpet. Should we start bringing metrics around people and social progress and not only organisation progress to determine if we are going through a recession or not?

As human beings, we don’t evolve even 1% every year. If we all do that, we would be a different person before we die. However, when it comes to companies and countries, we want them to grow or become better by leaps and bounds. When we let our rationality control our emotions, we set targets that are impossible to achieve. We know that any decision we take is influenced by a feeling which is then justified by logic. So, when emotions take control then we panic and it causes chaos.

What happened to a balanced view of the world where both rationality and emotions work hand in hand? Should we not evaluate the metrics that we currently use from a balanced perspective? The Japanese have a beautiful word called “Kokoro” which is about connecting heart, mind and spirit i.e. balanced. We live in a connected world and we cannot measure things in isolation. Should we not move beyond traditional financial metrics to embrace, holistic ones to demonstrate progress?

For example, an organisation exists for the benefit of society and humanity. Why should monetary progress alone be the metric to determine success or failure? Why can’t we create a set of societal measures that will demonstrate the impact of the organisation’s solutions on society? We do hear about organisations that are doing this internally. ESG index is catching up but, it is a long way to go before it becomes a mainstream metric.

We have the B Corp model where organisations obtain a certification makes it look more like a compliance tool than an engaging metric. We do have 2500 organisations that are certified but that does not address the challenge we are talking about. We hear a lot about Triple bottom line accounting. This was proposed in the 90’s, to measure people, profits, and planet, but it still has not caught on. It is easier to measure profits and more challenging to quantify the other two. For example, let us look at people, more specifically employees.

We talk of people as organisation assets, but when things go wrong what do we do, we tend to erode these assets by overworking them or disposing of them. Reducing headcount is the first thing we do to enhance performance. Can we not think of a different approach? Should we not have a measure to demonstrate how the organisation continues to employ people, nurture people and include that?

Why can’t we include metrics that will indicate how we are nurturing our people and how we treat them? An organisation does not exist in isolation. It needs suppliers, distributors, and consumers to exist. Why can’t we introduce metrics to see how the organisation treats people in the value chain upstream and downstream?

I love the Japanese concept of Ikigai which allows us to have a balanced approach. The proposed approach is an equivalent to the theory of everything which reinforces that everything and everyone is connected. I know some companies that have started adopting this approach. The beauty is that it can be applied to the individual or the collective. We need to watch this space.

With the current state of play, we have not seen a lot of economic activity. When we just use that as a metric to measure progress, then the future looks bleak. However, when we look at the impact we have all had on the society as a result of the lock down, we have reduced global pollution levels, we have started exploring new ways to work, helped repair the Ozone layer and have started longing for conversations. I am sure that does amount to something if we are to look at the bigger picture.

I can be ridiculed for my naïve view of capitalism and performance. In life we always have choices. Looking at the current state of play, we can either ignore it or do something about it. Of course, it will not be all hunky-dory to start with. Measures that we create will fall through and we will create something that will stand the test of time, that is until it is proven wrong. Isn’t it time that we use this opportunity to revisit our metrics?

Ram Raghavan is the founder of Riddlebox.

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