Leading Metrics

A couple weeks ago Techcrunch had a post titled, Don't Be Fooled By Vanity Metrics. In it, Eric Schonfeld calls out the difference between what he calls "vanity metrics" and "actionable metrics".

Vanity metrics are things like registered users, downloads and raw page views. These metrics, he says, are easily manipulated and don't necessarily tie to the metrics that really matter. Actionable metrics are the ones that matter. These are things like active users, engagement, revenue, profits, etc. He argues that startups should publish the actionable metrics from the start, instead of trying to fool the press and others with impressive, less meaningful numbers.

I'm always very, very careful about trusting any metrics that come from a startup and are published on a technology blog, vanity or otherwise. Entrepreneurs are very good at stretching or morphing the truth to tell the right story (they're probably not being written about in Techcrunch if they're not good at this). And in an interview with a tech blogger there's little fear of consequences from not telling the truth and big upside from stretching it. That said, if the metrics are accurate and honest, I think both vanity and actionable metrics are critical for any startup to track and manage to.

Instead of vanity and actionable, I've always referred to these metrics as leading and lagging. Leading metrics are indicators that have a strong correlation to more important lagging metrics. The simplest example of this is to apply leading and lagging metrics to a salesperson. For a telemarketer, number of dials is a leading metric for the lagging metric sales. If it takes 50 dials to get a sale, you can track the number of dials a salesperson is making to have a good sense of what sales will look like in a given period. If your salespeople aren't making enough dials or some of them aren't converting at 50:1, then you can make changes quickly. In web startups, leading metrics can be things like: registered users, unique users, emails sent, email response rates. Lagging metrics are closer to $$$ -- things like transactions, revenue driving clicks, number of revenue driving users, and ultimately, revenue.

Determining the right leading metrics to track is critical for any company. It helps management get a sense of how individuals, groups and the company as a whole is performing in real time, allowing for far more intelligent strategic decision making and tactical management.

Bad Negotiators Use Emotion to Negotiate

I just went on a rant about this and a colleague told me I should blog about it so here goes. I had a call the other day with a big client. The call was a preliminary negotiation call. We’re going to discuss terms of an agreement extension in a couple weeks.

From the outset of the call, the client surprised me by being both rude and confrontational -- lots of sarcasm and sighing. They explained that they might want to go to RFP. Oh, and of course, they want a fee reduction this year.

Not a nice way to start off a call between two companies that have had a very positive relationship for many years. Why would they start the call this way? Are they just rude? Are they really mad?

I don’t think so. My answer is that they’re bad negotiators that don’t want to do the homework and preparation required to get what they want.

Good negotiators don’t do this. Good negotiators are polite, friendly, do their homework and have ruthless, rock solid business angles as to why they should get what they want. Good negotiators don’t simply threaten to go to RFP; rather, they build leverage by citing the rational, business reasons why they might end up going to RFP (budget cuts, poor performance, shifting priorities, changing markets, competition, etc.).

When negotiators don’t have rock solid, logical business arguments they’re forced to rely on fake, insincere emotion to make their argument.

My advice: rather than put yourself and the people on the other end of the phone through this nonsense, reschedule the call for a later date until you can do your homework and prepare your angles. That’s a lot more fun and productive than just pretending to be mad.

The Management Myth

The management consulting business has always been a bit of a mystery to me. Something just doesn't add up. Matthew Stewart just wrote a book about this called the Management Myth, where he chronicles his time as a management consultant at a major firm. I think these two quotes from the book sum up my confusion nicely.

Can you think of anything less improbable than taking the world's most successful firms, leaders in their businesses, and hiring people just fresh out of school and telling them how to run their businesses, and they are willing to pay millions of dollars for their advice?

With my overpriced advisory services and profligate spending on luxury travel, I was a grossly inefficient efficiency expert, a parody of economic virtue.

The Battle Against Outsourcing

Seth Godin blogs about some of his predictions for the future. There's one that's particularly interesting to me.

Prediction: The effort required to outsource a task involving the manipulation of data of any kind will continue to decrease until it will be faster and cheaper to outsource just about anything than it will be to use in-house talent. What will you do today to ensure your prosperity when that happens?

I think Seth is dead-on with this prediction. Here are a few tips on how you can stay prosperous despite this trend:

1. Get closer to the core value of your business. Your goal should be to either build or provide the product or service that your customers pay for; or to sell the product or service that your customers pay for. If you're an accountant at a construction company, you're doing neither. And it's only a matter of time before your job gets outsourced. Get on the front lines. Be an accountant at an accounting firm so that you grow as companies outsource.
2. Focus on the right things, the valuable things. Every quarter list the things that you do that can't be outsourced. Find a way to double the amount of time you spend on those things.
3. Innovate, innovate, innovate. Innovation is hard to outsource. Cheaper, faster, better, more efficient, more scalable. Every week give yourself an "innovation score" (from 1 to 5); answering the question: How well am I doing at continuously and radically innovating on the work that I do? If you're scoring a 4 or a 5 then you're way ahead of most workers, and you're in a great position to prosper. But don't forget, do this every week.

Finally, above all else, think like a CEO. Every quarter assume your CEO is asking the following question: How could I go about outsourcing [Your Name]'s work? Use the tips above to make it impossible.

The Big Three

It seems to me there are really two distinct issues around bailing out the automakers.

1. Should we save the employees?
2. Should we save the companies?

My answer to #1 is Yes and my answer to #2 is No.

It's important to recognize the distinction. Saving failing companies is bad for everybody (in the long run) and only delays the inevitable. If we're going to give away billions (in the short term), let's give it away in the form of unemployment and secondary education for displaced workers. 

We simply cannot continue to invest in or lend money to companies that lack vision, innovation and results. 

Inventory

Did a little shopping today. Went to Kenneth Cole to buy shoes and Staples to buy a file cabinet. I found two pairs of shoes that I liked and a file cabinet that was perfect. When I asked the sales associates for my size and for the file cabinet they came back with the same answer: "out of stock -- best to check online."

This has been happening to me so often lately. It happens almost all the time at Banana Republic. What happened to all of that Kanban, just-in-time inventory stuff I read about in business school?

I'm convinced that this is not happening by accident. I'm convinced this is a calculated business decision; that is, the risk of having me not go home and go online to buy the items I want is outweighed by the costs associated with ensuring full inventory.

Interesting.

By the way, I'll probably wind up buying all this stuff online.

Leasing Everything?

I heard about a pretty cool idea on the Harvard Business Review podcast today. There's a company (can't remember the name) that is basically leasing high-priced handbags to women. Women can't afford to buy more than one or two of these things but they'd like to be seen with way more than that. Leasing them allows them to use several different handbags based on the season or to match the outfit they plan to wear. The idea could easily be applied to cars as well -- you could have a convertible in the summer and an SUV in the winter.

I suppose you could also do it with a high-end snowboard and a high-end bike. Maybe an HDTV during football season? Or a BBQ during the summer?

I think this model is consistent with consumer's increasing demand for mobility. That is, I believe consumers want less stuff and more of the ability to move around; freedom is becoming more important than material items. If I'm right the economics could work for this model.

I think we're going to see a lot more leasing in the future.

Airlines

I heard a good quote from Warren Buffet that went something like this...

If a capitalist witnessed the first flight of the Wright Brothers, he would have been wise to have shot them down.

The Best Business Lesson Ever

Perception minus expectations equals satisfaction. I believe the first time I heard this was in reference to Disney World.

Disney's customers would spend hours waiting in line for a 2 minute ride.  They would enter the line really excited about the ride (high expectations).  But at the end, after waiting more for two hours, they felt like it was a waste of time (low perception).

So Disney had two choices:

1. Improve Perception (create a better ride/create more rides to reduce demand/let fewer people into the park.)  Or...
2. Lower Expectations (make it very clear upfront what the customer was getting into.)

You've already guessed that Disney went with the second option -- they lowered expectations.

They simply added a sign at the end of the line that would tell each customer approximately how long they would have to wait (I heard that they even added a few minutes to these estimates just to be sure that expectations were really low).

This was a brilliant (and nearly free) solution to a big problem.  The net effect was that satisfaction increased because expectations decreased -- the perception of the ride itself stayed the same.