Bad metrics continue to be worse than no metrics because, as Mark Twain famously said, “It ain’t what you don’t know that gets you into trouble. It’s what you do know that ain’t so.”
Which brings us to Deloitte, its Center for the Edge’s Shift Index, and the “Big Shift” it concludes is happening to our economy.
I quote: “The Shift Index highlights a core performance challenge that has been playing out for decades: return on assets (ROA) for U.S. companies that has steadily fallen to almost one quarter of 1965 levels …”
It’s a shocking statistic, strongly suggesting that economic collapse is imminent (oh, wait …), even though, as the report continues, “… while labor productivity has continued to improve,” which hints at some redeeming virtues.
(Note: The full report runs 142 pages and has far more virtues and faults than I can do justice to here. It gives the ROA trend great prominence as a symptom, which is why I’m focusing on it here.)
You’ll recall that the KJR Manifesto specifies consistency as one of the six characteristics of a good metric. Consistency means the metric must always go one way when the item being measured improves and the other way when it gets worse. ROA fails this test. Here’s why:
On the surface, this 45-year private-sector-wide decline seems to reflect an across-the-board failure of management to do its job. It’s a tempting perspective, as it satisfies our shared need to find a group of people who aren’t “we” to blame for whatever we’re unhappy about.
Too bad it doesn’t stand up to close scrutiny.
ROA is a dubious measure, even for assessing the performance of individual companies. It’s too easy to manipulate, and fails the consistency test.
But that doesn’t matter. Big Shifts are a macroeconomic matter, so the question is whether ROA, aggregated across the whole economy, is a useful way of looking at things.
It isn’t.
Something investors know well is that different industries have radically different asset requirements. Comparing ROA across industries doesn’t work.
And yet, in 1965 the U.S. economy depended heavily on manufacturing. Since that time, as you might have heard, we decided manufacturing belongs in China. Our economy now relies much more on finance, service, and entertainment.
Interestingly enough, finance, service, and entertainment seem to have far lower ROAs than manufacturing. Might this be the Big Shift that has caused the huge fall in economy-wide ROA and not a colossal failure of management?
Nor should we conclude that building an economy on low-ROA industries is a bad idea, because why would we? GDP grew from $719 billion to $14.5 trillion over the same period of time after all, and GDP growth also has some value as a measure of aggregate economic health.
Here’s what’s unfortunate: I strongly support one of Deloitte’s conclusions, namely, that “… the gap between potential and realized performance is steadily widening as productivity grows at a rate far slower than the underlying performance increases of the digital infrastructure,” (although it isn’t just a nitpick to complain that their assessment of the “digital infrastructure” has more to do with amount than with sophistication and capabilities.)
Why might this be? Here are two likely explanations, both regular themes in this space.
The first: Businesses don’t integrate IT into their functioning – either the technology itself or the organization. Instead, IT delivers software that’s supposed to “meet requirements,” leaving it up to its “internal customers” to figure out what to do with it. That’s in contrast to IT collaborating with the rest of the business to design, plan, and implement business changes and improvements … a more enlightened model, but one relatively few companies have embraced.
The second: Far too many companies are equipped with 21st century tools but a 20th century workforce. We have SharePoint. We have web conferencing. We have internal blogs, wikis, and all manner of other tools that can help employees be more effective, both individually and as they collaborate in teams.
And few companies make mastering those tools even a data point in assessing employee performance.
These two factors matter greatly, both to your company’s success, and to our success as a world economic power.
It’s too bad I can’t cite Deloitte’s analysis as supporting evidence.
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Disclaimer: The folks at Deloitte are smart enough to have thought all this through, and know the subject matter better than I do. I’ve forwarded this column to them, and will publish their reply next week if they choose to provide one.
Re: “The first: Businesses don’t integrate IT into their functioning – either the technology itself or the organization. Instead, IT delivers software that’s supposed to “meet requirements,” leaving it up to its “internal customers” to figure out what to do with it. That’s in contrast to IT collaborating with the rest of the business to design, plan, and implement business changes and improvements … a more enlightened model, but one relatively few companies have embraced.”
IT collaborating is how the CIO at Norfolk Southern RR became the CEO a year or two ago, maybe a bit longer. Great story, if you missed it check it out. IT improved delivery times, reduced time in the switch yard, changed how trains are built at the yard, enable the RR to predict delivery to customers, etc, etc and so forth.
The quote you attribute to Mark Twain I read in Finley Peter Dunne and some attribute to Artemis Ward. Just another example of what people know that ain’t so?
Also attributed to Josh Billings.
I didn’t read Deloitte’s missive, but I did read yours, so I figure I can’t be far wrong 😉 Still, I wonder if I’m out of context regarding this comment that “… the gap between potential and realized performance is steadily widening as productivity grows at a rate far slower than the underlying performance increases of the digital infrastructure”. Well of course it’s far slower. Without knowing how Deloitte proposes to measure these things, it seems patently absurd to expect that the productivity of corporations, economies, or any human-based system could possibly grow at a rate approaching that of digital infrastructure.
Just one example. Back in the day, the mainframe in the next room cost millions of dollars and managed to run at a couple MIPS. Just recently I purchased 10-MIPS processors for the princely sum of $1.40 a copy. Granted, that’s not exactly apples-to-apples, but few would argue that we’ve seen performance increases in digital infrastructure amounting to many, many orders of magnitude. To expect the same of human systems would be to reduce the economies of large countries to a handful of people.
If the performance gap refers to business productivity (vs individual employe productivity) we must realize that, a given amount of improvement in systems performance will not yield a corresponding increase in business productivity. In my opinion this is mainly due to the fact that regardless of system performance we must still work and communicate with each other… as people. Systems may allow us to analyze trends and data much faster today than last year but it still takes the same amount of time to convince others about our conclusions. This will necessarily limit the business improvements that can be obtained from systems performance.
I agree with your points regarding IT/Business integration and outdated skill sets. It takes an enlightened leadership to realize these issues and take the necessary steps to address both of them…specially in these uncertain financial times.
There is a sidebar to the companies equipped with 21st C tools and 20th C workforce. Simply bringing in the tools without training, support or encouragement to use them results in those tools never being used or only used superficially. If we are required to book x% of time to development and y% to support and there is no provision for learning or training…nothing new is learned.
Or worse yet, having four versions of Visual Studio and two separate source code repositories to contend with because there is never a project to upgrade in house applications or migrate source from the old library to the new…except as you need to visit them to add functionality or revise business rules…it never gets done either.
You need that 20th C workforce if you only have 20th C applications to support.
The problem with both the Deloitte report and your response is with the definition of assets. There are only two assets in any company, any industry – employees and customers. Everything else is just stuff.
So Deloitte got it right suggesting “The Shift Index highlights a core performance challenge that has been playing out for decades: return on assets (ROA) for U.S. companies that has steadily fallen to almost one quarter of 1965 levels …” They just did not understand assets to mean people. You got it right suggesting “Far too many companies are equipped with 21st century tools but a 20th century workforce.”
Today’ businesses will do almost anything to avoid investing in their employees unless they are “C” level employees. Witness the divergence between “C” level compensation and everyone else. Training is considered an unnecessary expense that should be shouldered by the employees and provided to the employer free of charge. And we all have our own stories of poor customer service in all types of industries. Obviously, very little effort has gone into improving the return there as well.
While the focus of KJR is IT, this problem is much more widespread and it is contributing to the decline in the quality of life of us all.