Category Archives: Business

The Limits of Measurement

I had a conversation with a business partner the other day about data, and the importance of being data-driven.  There’s little question that data is important – as we’re fond of saying around the office, it’s critical to avoid “the land of the thinks.”  But to this person, data was everything – as he put it, if something couldn’t be predicted and measured, his business wouldn’t do it.

hammer

This strikes me as a fundamentally limited way to think about decision-making.  While having data is critical, it’s vital to keep in mind that data is a tool – and like all tools, it has its limitations.  How?  Here are the three primary problems I see with being too beholden to data:

  • The “round peg, square hole” problem.  One of the realities of business is that decisions must often be made in low-data environments.  You can test, gather intelligence, do research, but ultimately you may be guessing:  how a market will react, what actions regulators will take, how a counter-party will respond.  It can be comforting in such situations to rely on whatever information is at hand, and elevate its importance.  The problem is that what you may consider “data” may well be little more than “anecdote.”  Or worse yet, modeling based on all sorts of rickety assumptions – “garbage in, garbage out” elevated to the status of solid forecast via the numbing comfort of a financial model.  This can obviously lead to overconfidence and an unwillingness to adapt as reality starts to deviate from the model.  Far better, then, to identify such decisions as what they are: educated guesses.
  • The elevation of irrelevancy.  The benefit of having measurable goals is obvious:  by focusing on those items, and holding people accountable to those goals, you greatly increase the likelihood that they will be met.  Which is great, as long as those are the only goals that matter.  The problem is that there may be other things that matter more.  These may be new opportunities or risks that pop up, or simply more amorphous things that are enormously important but which are hard to measure or set goals for.  The more you get down in the weeds with measurement and goals, the likelier you are to drive grocery clerk behavior: ticking off boxes on the to-do list rather than asking, every day, “what is the best thing I can be doing for the business?”
  • Paralysis.  After nearly 20 years in business, I’m convinced that the ability to embrace ambiguity and make confident decisions in the absence of complete information is the single biggest driver of success.  Yet “analysis paralysis” runs rampant throughout the workplace, as people are deathly afraid of making a decision without having as much data as possible (often defined as “more”).  The problem, of course, is that there is a cost to not acting, of not making a decision.  And you often can’t wait for more data – either because it’s simply not going to be available, or because by waiting on it the window of opportunity will close.  A business that worships at the altar of data is going to find itself constantly at risk of letting hand-wringing and delay keep it from pushing forward.

Ultimately, data can be so comforting, but too often what it provides is a false sense of security: the idea that because we are measuring something, and because we are making progress against that measured goal, we are succeeding.  But businesses – especially those that are new or growing rapidly – operate in an environment of ambiguity and constant change.  Our checklists, goals and to-dos can only offer so much help on that front.

Campaigning on Blind Faith

It’s been nearly two weeks since the election, and I’m still struck by the comparison between the campaigns run by “community organizer” Obama and “businessman” Romney.

One campaign was a data-driven juggernaut, executing on its get-out-the-vote strategy in a systematic and fluid manner. The other was a mess, plagued by IT problems, poor communication and high levels of insularity and confirmation bias.

It’s not terribly surprising that Obama ran an effective campaign. He has experienced staff, and incumbency confers significant monetary and organizational advantages. But what of the man who promised to bring his years of business experience to the problem of managing the country? Should we heave a sigh of relief that Mitt wasn’t given the chance to bungle running the country as badly as his campaign was mismanaged?

In fact, it’s not that big of a shock that things floundered so badly for team Romney on election night. Many businesses, are, in fact, poorly run – and when faced with decent competition, left lurching in the dust.

Somewhat more surprising was the insularity that left Romney so convinced he was going to win that he didn’t even write a concession speech. While some businesses persist in burying bad news and choosing to credit only that which they want to hear, the accessibility of business performance data and the growth of tools to analyze it have made such willful blindness less and less of an option.

One week before the election, all objective data pointed to the extreme likelihood of an Obama win. Everyone (led by Nate Silver) was predicting the same thing. And most importantly, European sports books – where real money was being wagered on the outcome – were seeing a big move toward longer and longer odds for the former governor. And this pattern only accelerated as the final days to the election ticked off. By the day before the election, betting odds on Romney were 4-1 – basically the same odds the Baylor University football team has of beating #1 rated Kansas State in tomorrow’s game.

Like a mismatched football game, Romney could have pulled out a monumental underdog victory. It happens. But unlike the Republicans, underdog football teams go into such games with no illusions about the likely outcome. The coaches will motivate, the players will compete with grit, but they all know what they are up against.

So many on the right were so committed to their thesis of victory that they blinded themselves to the avalanche of data pointing in the opposition direction. They squinted hard and focused only on the few thin reeds that, lined up correctly, could deliver the outcome they were looking for. And then they really believed it. That’s strange, and a little scary – especially coming from an outfit that sold hard on bringing their business prowess to government.

Tax Policy & Business

The jumping off point for expanding SSS to business-related topics is a post I recently wrote for Forbes on why we’ve got to undo the Bush-era tax cuts. My position is pretty self-explanatory, and, I would like to think, pretty obvious: It’s not sustainable to spend 24% of GDP on 15% in tax revenues.

Not that you’d know that from the magical thinking of today’s politics. Whether it’s the mantra of “have the rich pay their fair share” or the supply-side nuttiness that cutting tax rates will boost revenues, there’s precious little engagement with the hard work of crafting policies that will get us spending something closer to what we take in. And yes, that will require both more tax revenue AND spending cuts.

One point that deserves additional attention, however, is the pernicious effect of interest rates and a stagnating economy on businesses. Whether you run a small bike shop or a Fortune 500 company, it’s really hard to operate in such an environment. Capital dries or or gets expensive and inventory is hard to move. The door stops swinging as often.

Any business owner will tell you that they would take higher tax rates and a growing economy over the inverse, any day of the week.

Of course, it would be even better if that was combined with tax code simplification as well. But if rationality on the need for addressing the deficit is in short supply, imagine how hard it would be to get some sanity on that front.