“You can’t bank a percentage” – entrepreneurial wisdom
Disruptive businesses change the metrics that measure success by focusing on more effective outcomes. How are you rethinking the measures in your business?
Your Metrics Weren’t Always Thus
Metrics are one area where we can easily form views that they ‘have to be this way’. Metrics are often driven by prior year plans, industry standard comparisons or by the expectations of analysts and investors. It is taken as gospel for businesses and industries to have standard growth rate, cost to income and other metrics.
If you want to get a sense for the changing dynamic of metrics read back in the history of business to completely different eras. Here we can see innovation in metrics changes the fundamental understanding of business activity.
If you read the biographies of early industrialists and railroad barons in the US you will find a very different perception of shareholder value and company performance. Shares in the late 19th century in the United States traded like subordinated bonds. The questions of valuation were how large was the dividend the company might pay and how close the shares traded to par. Innovations like consistent approaches to value accounting practices and models of cashflow valuation were introduced to sustain the modern approaches to valuations.
Metrics Illuminate and Create Blindspots
Metrics are how businesses see. As they say, if you want something done, measure it. However, the light that measures cast also creates shadows and blindspots. What doesn’t get measured, doesn’t get done.
A fixed view of metrics makes them a fertile ground for entrepreneur change. The traditional competitors will struggle to see and understand the performance of new businesses because they will be trapped judging the new threat by old metrics.
There are many examples of innovations that change the metrics. Here’s a small sample:
- Craig McCaw built up and sold huge businesses in both cable television and mobile telephony by having a more effective view of valuation to that prevalent in each industry when he started
- Online display advertising was sold by effectiveness (cost per click) rather than (cost per thousand). New measures that made it hard for traditional media to see a way to respond to the changes
- Many industries are dealing with competition that does not value the unit of content or service, but instead values the community of users that is created by giving away the content or service.
- The taxi industries around the world are faced with moving from the value of a licence and a cost per km to the utilisation of and returns to a driver as a measure of effectiveness
- Changing the unit of measurement of delivery effectiveness to time enabled courier services to change the game in parcel delivery
Traditional businesses with their measures of success will often miss these changes initially or see them as unsustainable. If you are assuming the irrationality of your competitors, look again at their metrics. Ultimately, new valuation models and new investor expectations develop around the new metrics provided that they prove more effective.
The worst outcome for the future of your business is that you are happily delivering your plan as the value erodes away.
Don’t accept as gospel the returns, growth rates and margins that you have inherited in your business. You can’t bank a percentage. Focus instead on exploring with new metrics to measure the effectiveness of your business in creating sustainable value.