Measuring Up

When Red Sox ace Pedro Martinez gave up a double, a single, and another double in Game 7 of the 2003 American League Championship Series, he not only squandered a three-run lead (and ultimately the pennant), but also provided a poignant lesson in the value of metrics.

Martinez's eighth inning collapse against the New York Yankees underscored what even a casual Red Sox fan knew: as Pedro got closer to the 100-pitch mark, his effectiveness declined markedly. Plotted on a line graph, the opposing team's batting average soared like a shot over the Green Monster whenever Martinez approached a triple-digit pitch count.

But baseball managers don't manage by line graphs. Grady Little left Martinez in, losing the game and, several weeks later, his job. The best the Sox could do was to enjoy watching the Yankees lose to the Florida Marlins in the World Series.

Those events unfolded even as Michael Lewis's book Moneyball, which described how a new breed of baseball visionaries used statistical analysis to assemble competitive teams on modest budgets, was proving to be not only a best-seller but also a business touchstone. If disciplined and innovative measures of player performance could level the literal playing field, what would happen if business managers thought more analytically about various aspects of their operations, from customer service to worker productivity to health-care costs to the fruits of innovation?

Some companies are doing just that, extending metrics into areas that would seem to defy measurement. How, for example, do you measure innovation, or the future capabilities of your workforce, or the optimum menu of health benefits? It's not easy, and before serious progress can be made companies may need to overcome organizational inertia. But some experts say the time is ripe for companies to move away from a managerial "feel for the game" in favor of more-rigorous, data-driven decision making.

It's hardly a new idea, of course; a passion for measurement lies at the very heart of American business history. Harvard Business School, which will celebrate its centennial next year, took as the model for its initial curriculum the works of Frederick Winslow Taylor, the efficiency guru whose careful quantification of manual labor gave birth to what came to be known as "scientific management."

A century's worth of MBAs would seem sufficient to propagate a by-the-numbers approach into every nook and cranny of the business world, but it hasn't worked out that way. By most accounts, companies have done a respectable job of mastering financial metrics, but have largely taken a flier on measurements of operations or intangibles such as customer satisfaction or brand loyalty. Fifteen years ago the advent of the "balanced scorecard" sought to redress this imbalance by demonstrating how nonfinancial metrics could be captured and used to help managers "see their company more clearly — from many perspectives — and make wiser long-term decisions," according to its creators, Robert Kaplan and David Norton. But despite the popularity of that approach at a strategic level, many consultants and academics say it left thorny questions unaddressed at more tactical levels.

"Metrics are a powerful communications tool," says Michael Hammer, the reengineering pioneer who recently described the "seven deadly sins of performance measurement" in an article of that name in the Sloan Management Review. One value of metrics, he says, is to provide real-time assurance that long-term improvements are on track. "Even a small company that has embarked on any kind of major process improvement faces a long haul," he says. "But with the right metrics in place, you can measure results right away, which becomes a powerful driver."

That was the case at Wells Fargo, which relies on what it calls a "happy-to-grumpy" ratio to assess whether its efforts to develop a more "engaged" workforce are on track. "We don't want to just measure results," says CFO Howard Atkins, "we want to measure what drives our results, and that includes team-member engagement. That measure might not get cited in your general ledger, but it can be quantified in a statistically valid way, compared over time to certain goals, and correlated to business outcomes."

Atkins says that groups within the bank that have higher employee-engagement scores also rank higher on productivity and customer satisfaction. James Harter, chief scientist for the Gallup Organization's workplace-management and well-being practice, says that while it can be complicated to connect employee attitudes to financial performance, it can be done. Gallup administers a 12-question survey on behalf of its clients (including Wells Fargo) that assesses, on a one-to-five scale, how employees feel about everything from their role at work to their co-workers' commitment to quality.

"We focus only on things that affect performance," Harter says. "Otherwise, managers become overloaded with too much information." Wells Fargo, in a sense, outsources the calculation of its happy-to-grumpy ratio, then incorporates that metric into a broader universe of measures that help it develop its workforce in a way that enhances corporate performance. Some critics argue that strong company performance may be what makes employees feel engaged, rather than vice versa. Harter agrees that there is some "reciprocal feedback" but says that employee engagement is more often predictive of financial performance than the reverse, in part because it predicts customer-service quality, employee turnover, and other outcomes that drive the bottom line.

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