I have this theory that ‘confirmation bias’ is a load of BS, so I looked on the net and found, after careful search, some people who clearly agree with me. Most don’t, but they must be idiots.
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Category Archives: Science
Why big ideas evade big businesses – An Analysis
Big companies usually sell many products – and this collection of products is in constant flux – new ones come, poor ones are chopped and the population may grow or shrink accordingly.
The sheer number of products is however not directly correlated to the revenues or profits though, this is determined by the quality of each product. The main benefit of having a large family of products is that allows diversification (thinks eggs in baskets) – but the down side of having many products is all the additional overhead.
The real health of a product portfolio is not the number of products but an aggregate of the health of the individual products – for each product we consider the margins, the security of those margins, the revenue, the trends in revenues and the prospects of the target market.
Thus a large company should be constantly nurturing and pruning its portfolio, adding products with good margins, and killing off products that do not give the target ROI.
The process, if done well, can result in a company slowly morphing as its follows the money. A company that fails to follow the money is doomed to either die or settle at a marginal profitability protected only by their slim margins and depreciated assets.
It is in this sense that new products make you future proof – the first player in the game gets to makes the rules while new technologies can often be patented to block competition – leading to higher margins. The first entrant may also corner the market and then benefit from an economy of scale that makes competition for the scraps pointless.
Of course, launching new products requires investment – you need to spend money to make money. And big business has the money entrepreneurs can only dream of.
So the question is this: why is it that small start-ups keep upsetting the apple cart? Why can’t big business with all its money, all its brainy MBA’s and all those shiny laboratories corner all the good ideas?
Allow me to hazard a guess as to why this is.
Firstly, because of risk:
- Once you have a lot of money, it’s no longer a good strategy to “bet the farm”. You have too much to lose.
- Once you have money, a better strategy is to spend some of it on risk analysis, and find ideas that are a surer bet – this leads you to products whose success you can predict – which are more likely to be those similar to your existing products.
The problem is, that in the population of all ideas, the game changers are probably at the risky end. See my illustration:
As you can see, big business is stuck in the white sector. The problem is there will always be a risky idea – that big business will pass up – that will turn out to be pure gold.
Now let’s think about the competition. The competition is the world of entrepreneurs – all those people out there itching to start something up.
What we have to realise is that while big business is, on average, smarter than the entrepreneur, it does not have the monopoly on thinking, and though the ideas that come from the general populace may on average be lower in quality, the sheer volume of thinking that gets done and the sheer number of things that are tried out, mean that great ideas will happen. And we won’t hear much about the hundreds that don’t.
My next drawing shows the frequency of idea birth for the two communities – the little curve shows the ideas born and investigated by big business while the big curve shows the ideas pursued by the wider public. Although big business only pursue nice valuable ideas, the sheer size of the public idea base, combined with their access to riskier options, means the wider community still has the lion’s share of the truly game changing ideas!
So this is my theory about why big business is less innovative than small business. Small business benefits from darwinian selection – it is really a multitude, most of which die – whereas big business cannot afford to die, so its strategy is always to hedge.
So what to do about it? Clearly this should give heart to the entrepreneur – yes, you have an advantage, yes, you will win! Alas, reading more deeply, your advantage is your dispensability – so the trick is to see its a game of numbers, so the real key is to keep trying. You can keep failing and rise to try again, but big business can’t take that risk.
But what if you are big business? In this case, watch out for promising start-ups and buy them! Connect with the entrepreneurial community by getting involved with things like “open-innovation“, where you publicize what you have and what you need and work with inventors and other companies to solve market needs. Otherwise take your business where entrepreneurs can’t follow – where money is still a huge barrier to entry – land management, mining or pharmaceuticals spring to mind.
And what if you’re an big $ investor? Well in that case, get in touch with The Provincial Scientist 🙂
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Disclaimer: it may be the era of micro-electronics and software that is to blame. When the fuss about these has died down, maybe big business will rule securely as the aristocracy once did.
The compensation factor – or why shoes might just be bad for your feet
There are many modern innovations around which we take for granted as good, that are, indeed, not.
Some interventions, such as seat belts, are shown by statistics to save lives, and as the cost of strapping in is not too high, so the case in favour is strong.
But what about modern running shoes? It may be turning out that nice cushiony running shoes actually cause more injuries than they prevent – and for a similar reason that taking out all the safety features from a traffic intersection may actually make it safer.
Why is this so?
It seems in these latter cases that making people safer only leads them to take more risks, sometimes cancelling out the benefit completely – this is has been termed “risk compensation” – but how does that apply to running shoes?
It turns out the cushioning makes us feel safe – safe to slam down our heels without feeling the shock. It also turns out that while it may feel ok, it allows us to use our foot in a way it was never intended, and results in far greater forces going up our legs.
Think for a moment about the foot of a cheetah, or a deer, or a dog. Ask yourself, where is the heel?
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Of course, it is clear once you think about it, it’s way up the leg, far from the floor! And do you think a cheetah has thuds of force going up its spine? I don’t!
Ok, so someone could point out we did not evolve from gazelles and they could also point out that no other primates show a raised heel; true enough – but primates started off as rubbish runners, and it was only the humans that started down the road to better feet for running during all those years hunting on the African savanna. Whenever there is selective pressure to run, that great engineer (evolution) eventually finds that a raised heel is the optimal solution – remembering of course that the engineer has only the stump of a redundant old fin to work with. Of course, the invention of shoes (and ultimately cars) has completely removed the shaping forces, so I guess our heels will fall once more.
Don’t agree? Ok, pop on those big comfy shoes, and just like a beemer driver cruising at 100mph, tell yourself its safe to slam down those heels 😉
Some interesting sources:
- Walking robot – gee look, to make it work, they abandoned heels: http://www.youtube.com/watch?v=sv35ItWLBBk
- Walking robot “with heels” seems to need bizarre extra hip mobility: http://www.youtube.com/watch?v=67CUudkjEG4&NR=1
- Even Nike, they who started the whole thing now seem to admit openly that bare is best, and sell you the shoe that does it for $90: http://inside.nike.com/blogs/nikerunning_news-en_CA/2009/07/12/engineering-the-nike-free-50
- Take a sneak-peek into the barefoot community: http://www.barefootted.com
- Oh, and I got put on the scent of this by Christopher McDougall’s excellent book, Born to Run: http://www.chrismcdougall.com/
- In the wiki for Risk Compensation it interesting to learn that in Sweden, traffic collision rates dropped for 18 months after they changed which side of the road they drove on. Wow!
- The classic tale about how making roads seem more dangerous made them safer: http://www.wired.com/wired/archive/12.12/traffic.html
Air Fresheners Exposed!
Ok, so I know its not a conspiracy to take over the world, but my inner nerd has been provoked.
Have you ever wondered how air fresheners work?
Let’s take a sceptical look.
This cool pic is from hybridmedicalanimation.com
I’d love to think that AirWick / Glade / {insert preferred brand here} consist of an army of nano-bots that round up and deport any molecules without the right paperwork.
Although we aren’t there yet, it’s actually not too far from the truth!
Although many cheap deodorisers do simply mask the truth by overpowering our senses, I really like to give credit where credit is due, so I am happy to disclose that there are indeed certain substances that can detain odours – such as zeolites and silica gels, and there are also organic molecules that will react with a wide array or hydrocarbons rendering them odourless. These ideas are in fact used by several big brands today.
Hurrah!
But that’s not the whole story, is it?
No, because none of that really means the substance (or it’s source) is ‘gone’; all they have done is disabled our ability to detect all that foreign matter around us!
The last time I looked, our sense of smell, just like our sight and hearing, was there to help us survive – to detect when there is something unsavoury in the vicinity and force us to deal with it. If your bed or sofa stinks, you should probably take it outside and try to remove to 5 lbs of skins flakes and other sundry bodily oozings rather than spray the bed with an extra long burst of febreze.
You wouldn’t season rotten meat in curry then serve it to your in-laws, would you?
Now, to be fair, the purveyors of these products do not intend for you to use their product to allow you to live in filth disguised with the scent of lavender, and their scientists are smart people – however, there marketing departments do need to be brought to book for giving a few misleading impressions.
The world ‘fresh’ for example is used universally. I don’t know about you, but to me this should mean clean, pure and new. It may certainly allow for some sweet floral aroma, but it certainly doesn’t include ‘complex organics we cannot smell’.
Some solutions – like Resolve carpet cleaner, where an absorbent powder is applied liberally then hoovered up, deserve a break – but, as far as I can see there are the exception – most odour control is still in the form of the old “cover up”.
What we have to remember is that in order to claim a product is ‘absorbing’ an odour, one only need prove it absorbs ‘some’ odour – not necessarily the majority and very rarely “all”. Thus it can be that it absorbs 2% of the odour and the other 98% of the odour is still there but overwhelmed by the scent of a pine forest. The same is true with biocidal deodorisers (like Lysol) which may kill bacteria – a common source of odour. These products can actually kill germs – however the impression that a quick spray will effectively sterilise is falsely reassuring.
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I sign off now by pointing out that the best way to avoid odours is by good hygiene, though not too good: remember that we humans co-evolved with this slimy little planet!
Does natural really = good?
Don’t you hate being taken advantage of?
You don’t have to look far in supermarkets to see scientifically dubious claims on product packaging. We already know about dubious health effects of certain foods and the arms race by advertisers to come up with fancy ways to pretend their products are good for us. Now the latest trend is to crow about how ‘natural’ a product is – the world natural, is however now officially anointed a weasel word.
What exactly does it mean? We all know what they want us to think: wholesome, pure, robust, healthy; but what does natural really mean?
As the provincial scientist, I will take a scientific view: natural originally meant ‘of nature’, that is to say, real, or not-supernatural. So technically humans are natural as is all we do. Of course, the term has now been somewhat perverted, and is commonly taken to mean: not man-made.
Any decent scientist is going to have trouble with this definition because it is far too open to interpretation and begs the question: how much human involvement is required to make something non-natural?
This is the vagueness has has been unconsciously used to create a definition that helps sell products: this definition suggests somewhat arbitrarily that ‘some’ degree of purification, or ‘some’ types of blend constitute something unnatural. In addition, if the substance is not found in nature at all it is considered even worse. Sometimes the product is cast as unnatural just for having a chemical sounding name, or because it’s produced by a drug company. On the other hand, some products are branded natural despite containing preservatives, colourants and so on. We simply cannot trust food marketing.
Modern diet sodas would meet most people’s definition of synthetic: but what about bread? Milk? Where do we draw the line?
One argument says if all the ingredients are natural, then the product is natural – so, for example, beer made without recourse to ‘chemicals’ may be considered natural.
Unfortunately, this argument simply displaces the vagueness: now the question is: what constitutes a ‘chemical’? We are all chemical, after all. So yet again, chemicals are arbitrarily divided into good and bad depending whether they occur in nature. Fruit flavoured sodas rarely contain actual fruit: we learned which chemicals were responsible for apple, strawberry and banana flavours and can now synthesize them perfectly – this is done in large quantities that make it far cheaper than actually farming the fruits themselves. It is fair to say that the supply chain for these flavours is often complex, so a little skepticism is warranted, but upon inspection, it turns out that most synthetic flavours are very well understood and are often far purer than the ‘natural’ alternatives. The idea that we eat barbecued meat, smoke tobacco and drink coffee, but are afraid of Acesulfame K is somewhat irrational.
So it leads us to ask – why? Why is the devil’s brew OK, and Acesulfame K not? Why is something man-made inferior to something natural? Why have we got it in for synthetic stuff?
In the study of ethics, there is an argument called the appeal to nature used to justify actions as moral: this is an argument that basically says natural=good.
However, there is no good reason to suppose this. I propose that this fallacy is behind our fears of the synthetic and is the driving force behind major societal trends such as the organic movement, and is a mainstay in the ongoing survival of many useless alternative medicines… so I thought it deserves to be unpacked a little.
The Moral Maze
Get this shirt, click the image!
It is worth reading up on the thought experiments done to try and understand morals. See for example the trolley problem: would you push someone in front of a train to save five lives? Or consider the scene in the last episode of M*A*S*H were a mother is given the choice to smother her own child to avoid a group of villagers from being detected by enemy soldiers.
By thinking through these scenarios, and unpicking our reactions, scientists have learned that different parts of us have different reactions – there are the more emotional reactions and the more logical, reasoned reactions. The logical reactions can seem immoral, and we would struggle with guilt if we made them, but why?
Emotions like fear, revulsion, guilt and love often seem illogical – and so they often are. They we not designed, but emerged as evolutionary advantageous, thus they often seem without purpose. Thus we can have emotions that do not make logical sense; on average they help, but they do malfunction, as in the trolley problem.
Will knowing this failure of the mind help us make these hard choices by reducing the guilt? I don’t think so – we cannot escape our emotions. However, the logical approach should still be used – for example by leaders who need to create policies for the greater good. This makes me think of the famous line in A Few Good Men “You want the truth? You can’t handle the truth!”. I am suggesting that there are situations when the most moral act for a leader is immoral on the face of it and would be condemned if made public.
Thus, we see that the study of what is moral is a tricky field and we see that the systems used in society, while designed to be ethical, may often not be moral (such as a lawyer defending a suspect they know to be guilty).
So how does this tricky world apply to the question of naturalness? Well I would assert that our reaction to substances, like our reaction to the trolley car problem, is again a battle between deep evolutionary instincts and our power to reason.
Firstly, we have a natural (and wise) aversion to new things, especially foods: eating anything new increases the risk of poisoning, and so, eating things eaten for generations is safer. Synthetic foods are clearly ‘new’; they do not have grandma’s stamp of approval – we do not know if generations of people have thrived on this stuff. While this rule of thumb is a good starting point, it is obviously an emotional generalization that fails simple examination. What’s more, as our understanding of both nutrition and hygiene have massively improved health and lifespan in the last hundred years, we should actually favour the new – and fear the old!
The next argument goes something like this. We have a vague feeling that as our bodies evolved in a natural world, and the highly purified chemicals will somehow put our wonderfully complex systems out of whack. It is true that when we eat natural foods, our bodies are very adept at ‘processing’ them; and many natural foods do contain a wide array of essential and complementary nutrients, but it is unsupported speculation to suggest that our bodies needs cannot be met by more processed ingredients. Modern nutrition science understands very well what the body needs in terms of fuel, salts, roughage and so on, and we also understand how diet effects the risks of disease. While modern nutritional science does conclude that natural foods have many benefits – it does not conclude that synthetic is bad. There is room for both!
Lastly, there is an argument straight from moral philosophy: does it makes sense, for example, so say that killing someone is morally worse than failing to save someone, even though a choice is made in both cases and the outcome is effectively the same? If so, then this reveals a built-in preference for ‘non-interference’. So perhaps in a similar way, nature may be considered a ‘default’ – it’s what happens when humans are absent, ‘it’s what would happen anyway’ – like animals hunting for food – and so has a moral free pass. Following this through, nature has no immorality, morality is something tied to us humans and our choices – and so everything we do as humans is therefore potentially immoral.
This argument is also a little weak – as humans have the power to do tremendous good – and the evidence that animals do things we find immoral is there – after all, we are animals. Animals, like us have complex societies, trade favours, shun freeloaders and much more. If you want to learn more, the writings of Marc Beckoff shine a spotlight onto this.
So is there a take home?
OK, now we know – the ‘nature card’ will take advantage of our irrationality, it will stoke our fears and play with our conscience. It will manipulate how we spend our money, and it will sometimes do us more harm than good.
But what makes it worse, is that most people who draw the nature card are good people.
This is one of the many small tragedies that make up our modern times.
Death by KPI. The unintelligent design of the modern company… and what to do about it.
A beginner’s guide to KPIs…
Background, Context and all that…
Some of you luckier readers will be wondering what on earth a KPI is. Alas, many of my readers will know, and rarely will they have a happy tale to tell about them. Let me tell you mine.
You see, to me the story of the KPI is none other than the story of the modern trend to remove the human element (that most fallible of elements) from big business. I propose that there has crept up upon us, starting when we came down from the trees and now coming to its final fruition with the industrial revolution, a situation in which the workings of our society, our organisations, governments, armies or companies, are simply too complicated to be designed or managed by any one person, whatever force his or her personality might possess.
No, the time of the one big man, the head honcho, the brain, scheming away in his tower, is over – and we enter the era, nay the epoch, of the human hive.
For now we see that in order to achieve great things, it is the ability to sort and organise mankind, rather than the ability of each man on his own, that matters most.
I could wander from my thesis awhile to describe a few side effects, for example, to point out the age of ‘middle management’ is here to stay, or to philosophize about the world where no one is actually ‘driving’ and the species is wandering like a planchette on a Ouija board and how this explains why no one seems to be able to steer us away from the global warming cliff just ahead…
But no, I will not be pulled off course, I will return to our good friend, the KPI.
So it seems we have these complex organisms, such as the venerable institution that is the company, that have evolved to survive in the ecosystem that is our global economy. Money is the blood, and people, I fancy, are the cells. And just as no particular brain cell commands us, no particular person commands a company. Just as the body divides labour among cells, so does the company among its staff. We train young stem cells into muscle, tendon and nerve. We set great troops of workers to construct fabulous machines to carry our loads just as our own cells crystallize calcium to make our bones.
Having set the scene thus I must move on, for where are the KPIs in all this?
As clever as the cells of our bodies may be, to choose depending on the whims of circumstance to turn to skin or liver or fat, that is but nothing compared with the cleverness with which the cells are orchestrated to make a cohesive body, with purpose and aim, with hopes and dreams, and of course sometimes even the means to achieve them. And the question is: how is that orchestration achieved?
Being a devout evolutionist, its is clear to me that it was by no design, but rather by the constant failure of all other permutations that led to the fabulously clever arrangement, and so it is with the organism that is the company.
It is this conviction that leads me to claim, contrary to the preaching of many business schools, that good companies are not designed, but evolve, and by a process of largely unconscious selection. Like bacteria on a petri dish, companies live or die on their choices, and by every succeeding generation, the intelligence of these choices is embroidered into the DNA of the company.
Yes, I am saying that the CEO of Microsoft, or Rio Tinto of Pfizer, is no more sure of his company’s recipe for success than any one cell in your brain is at understanding how it came to be that you can read these words. Ok, maybe that is unfair. They probably have a good shot at reproducing success in other companies, but they only understand how the company works, not why.
It is well to remember that very few of the innovations present in a modern successful company were developed within that company – the system of raising money from banks or through a system of stocks and shares, the idea of limiting liability to make these investments more palatable, of development the of modern contract of employment to furnish staff; nay the very idea that a group of people can actually get together and create the legal entity that is the ‘company’ has been developed over centuries.
Even within the typical office we see many innovations essential to run a business that could never have been ‘designed’ better by single mind – the systems to divide labour into departments – finance, marketing, sales, R&D, logistics, customer service; the reporting hierarchies and methods for making decisions; the new employee checklists, the succession plans, the new product stage-gate system, the call-report database, the annual budget, the balance sheet, the P&L – these are all evolved and refined tools that incorporate generations of brain power.
Whether it is the idea of share options or the idea of carbon copies, the list of machinery is endless and forms the unwritten DNA of the modern company. The company of today has little in common with the farmstead of 300 years ago, and indeed, just like the bullet train, it would not work too well if taken back in time 300 years. It only works in its present setting. It is part of a system – an ecosystem.
Now a business tool that has been evolving for some time, slowly morphing to its full and terrible perfection is the Key Performance Indicator or KPI.
The Key Performance Indicator
There is a saying in engineering circles: you cannot improve what you do not measure.
This philosophy accidentally leaked to the business community, probably at Harvard, which seems a great place to monetize wisdom, and so there is presently a fever of ‘measurement’ keeping middle managers in their jobs, and consultants on their yachts.
This sounds reasonable – but let’s pick at it a little.
When the engineer installs a sensor in a reactor to measure its pressure, it is usually just one element in a holistic system of feedback loops that use the measurement in real-time to control inputs to that reactor. Thus we can see that measurements in themselves are not enough, there needs to be an action that is taken that affects the measured property – a feedback loop.
Likewise any action taken in a complex system will tend to have multiple effects and while you may lower the pressure in a reactor, you may raise it somewhere else, thus the consequences of the action need to be understood.
And lastly, if the pressure in the reactor is now right, the value of the knowledge has diminished, and further action will be of no further benefit.
So just like a body, or a machine, a company needs to be measured in order to be controlled and improved, and it occurs to me that these key measurements, the KPIs, need to fulfil a similar set of requirements if they are to be of value.
A few years ago I decided to write a list of KPI must-haves, which I present here:
- the property measured must be (or correlate with) a company aim (eg profitability)
- measurements need to taken to where they can be interpreted and acted upon, using actions with predictable effects, creating a closed loop
- the secondary effects of that action need to be considered
- repeat only if the benefits repeat too
Now let’s take a look at some popular KPIs and see if they conform to these requirements.
Production KPIs
There are a multitude of KPIs used the ‘shop floor’ of any enterprise, be it a toothpick factory, a bus company, a florist or a newspaper press. Some will relate to machines – up-time metrics, % on time, energy usage, product yield, shelf life, stock turns – indeed far too many to cover here, so I will pick one of my favourites.
“Availability” is a percentage measure of the fraction of time your machine (or factory or employee) is able to ‘produce’ or function. If you have a goose that lays golden eggs, then it is clear that ‘egg laying activity’ will correlate with profits, so point #1 above is satisfied, and measuring the egg laying frequency is potentially worth doing. If you then discover that your goose does not lay eggs during football matches you may consider methods to treat this, such as cancelling the cable subscription. A few trials can be performed to determine if the interference is effective, proving #2. Now all you need to do is worry about point #3; will the goose fly away in disgust at the new policy?
What about #4? Indeed you may get no further benefit if you continue to painstakingly record every laying event ad infinitum. KPIs cost time and money – they need to keep paying their way and may often be best as one-off measures; however, what if your goose starts to use the x-box?
So that is an example of when the KPI ‘availability’ may be worth monitoring, as observing trends may highlight causes for problems and allow future intervention. So surely availability of equipment is a must-have for every business!?
No. There are many times when plant availability is a pointless measure. Consider for example an oversized machine that can produce a year’s supply in 8 minutes flat. So long as it is available for 8 minutes each year, it does not matter much if it is available 360 days or 365 days. Likewise, if you cannot supply the machine with raw materials, or cannot sell all the product it makes, it will have forced idle time and availability is suddenly unimportant.
The simplest way to narrow down which machines will benefit from an availability or capacity KPI is to ask: is the machine is a bottleneck?.
For other types of issues, let’s look at some other KPIs.
Quality KPIs
Quality KPIs are interesting. Clearly, it is preferable to ship good products and have happy customers. Or is it?
In any production process, or indeed in any service industry, mistakes will be made. Food will spoil, packaging will tear, bits will be left out. It is now fashionable to practice a slew of systems designed to minimise these effects: to detect errors when they are made, to re-check products before they are shipped, to collect and collate customer complaints and to feed all this info back into an ever tightening feedback loop called ‘continuous improvement‘.
KPIs are core to this process and indeed KPIs were being used in these systems long before the acronym KPI became de rigueur. To the quality community, a KPI is simply a statistic which requires optimization. The word ‘Key’ in KPI not only suggests it represents a ‘distillation’ of other numerous and complex statistics, but implies that the optimising of this particular number would ‘unlock’ the door to a complex improvement.
Thus, a complex system is reduced to a few numbers, and if we can improve those numbers, then all will be well. This allows one to sleep at night without suffering nightmares inspired by the complexity of one’s job.
The reject rate is a common quality KPI – it may encompass many reasons for rejection, but is a simple number or percentage. It is clearly good to minimize rejects (requirement #1) and observing when reject rates rise may help direct investigations into the cause thereof satisfying requirement #2.
However, from rule #2 we see that this KPI is only worth measuring if there will be follow-up: analysis and corrective action. This must not be taken for granted. I have visited many plants that monitor reject and when asked why, they report that head office wants to know. What a shame. Perhaps head office will react by closing that factory some time soon.
The failure to use KPIs for what they are intended is perhaps their most common failure.
Another quality KPI is the complaint rate. Again, we make the assumption that complaints are bad, and so if we wish to reduce these we should monitor them.
Hold the boat. How does the complaint rate fit in with company aims? We already know that mistakes happen, but eliminating quality issues is a game of diminishing returns, so rather than doggedly aiming for ‘zero defect’ we need to determine what complaint rate really is acceptable.
So here is another common KPI trap. Some KPIs are impossible to perfect, and it is a mistake to set the target at perfection. Think of your local train service. Is it really possible for a train system to run on time, all the time? The answer is an emphatic no!
The number of uncontrolled inputs into a public transit system – the weather, the passengers, strike actions, power outages and the like will all cause delays, and while train systems can allow more buffer time between scheduled stops to cater to such issues, this type of action actually dilutes other aspects of service quality (journey frequency and duration). Add to that finally the fact that a train cannot run early so losses cannot be recovered.
The transport company will of course work to prevent delays before they occur, and lay on contingency plans (spare trains) to reduce impacts, but the costs and practicality mean that any real and meaningful approach needs to accept a certain amount of delays will be inevitable. A train company could spend their entire annual profit into punctuality and they would still fall short of perfection.
So it is with most quality issues, the law of diminishing returns is the law of the land. Thus the real challenge is to determine at what point quality and service issues actually start to have an impact on sales and cashflow. This is another common pitfall of the KPI…
The correlation between the KPI and profitability is rarely a simple positive one, especially at the limits.
Some companies get no complaints. Is this good? No, often it is not! This company may be spending too much money on QC. The solution here is to work with and understand the customer – what issues would they tolerate and how often? If you did lose some customers by cutting quality, would the financial impact be greater than the savings?
However, and on the other hand, don’t make the opposite mistake: once a reputation for poor quality is earned, it is nearly impossible to shake.
Financial KPIs
As companies become bigger, there is a tendency to divide tasks according to specialized skill and training. Thus it can happen that the management of a big mining company may never set foot in a mine, may not know what their minerals look like, nor may they know how to actually dig them up or how to make them into anything useful. In other words, they would be useless team members after a nuclear apocalypse.
However, this is no different from our brain which is little use at growing hair, digesting fat or kicking footballs.
It is thus necessary that the organism (the company) develops a system to map in a flow of information from its body to its mind and then another mapping to take the decisions made in that mind and distribute them to the required points of action.
Indeed to blast in a quarry, or to kick the football are indeed best done by organs trained and capable and no less important than the remote commanders in the sequence of events.
And just as our bodies have nerves to transmit information about the position of our lips and the temperature of the tea to our mind, so the company has memos, telephones and meetings. And KPIs are the nouns and subjects in the language used.
Furthermore, some KPIs need to be further distilled and translated from the language of the engineer (Cpk), the quality manager (reject rate) or the plant manager (units shipped) to that of the accountant (revenue) , the controller (gross margin) and eventually that of the general manager and the shareholder (ROI). This is perhaps the main duty of middle management, bless their cotton socks.
Unfortunately, the mapping of everyday activities to financial KPIs is fraught with danger. The biggest concern comes from the multiple translation issue. That is to say, KPIs can suffer from a case of Chinese whispers, losing their true meaning along the way, resulting in the worse result: a perverse incentive.
Yes, ladies and gentlemen, this does happen.
Let’s say you want to improve your cash situation. You may choose to change the terms in your sales contracts for faster payment, in essence reducing the credit you allow your customers. This may have the desired effect, lowering the KPI called “receivables” and this looks good on the balance sheet – but let’s look at requirement #3 in the KPI “must have” list. What are the ripple effects of this move? It is clear this will not suit some of your customers, who, considering recent economic trends, probably also want to improve their cash situation; thus you may lose customers to a competitor willing to offer better terms.
And so we see the clear reason for perverse incentives is the consideration of KPIs individually instead of collectively. There has to be a hierarchy upon which to play KPIs against one another. Is revenue more important than margin? Is on-time shipping a part-load preferable to shipping “in full” a little late?
So we see again that the systems used to distill company indicators the choice of which decisions are centralized and which are localized need to be developed and constantly refined using an iterative process. The art of translating the will of shareholders into a charter or mission statement and then translating that into targets for sales, service and sustainability is a task far too complex to perfect at first attempt.
KPI Epic Fails
While on the subject of KPIs I cannot resist the opportunity to bring to mind a few fun examples of KPIs gone badly wrong.
The Great Hanoi Rat Massacre
The French administration in Hanoi (Vietnam) were very troubled by the rat population in Hanoi around the start of the last century, and knowing as they did about rat’s implication in the transmission of the plague, set about to control the population. A simple KPI was set – “number killed” and payments were made to the killers on this basis. There was immediate success with rats being brought in by the thousand and then the tens of thousand per day. The administration was pleased though somewhat surprised by the sheer number. There surprise gradually transformed into disbelief as time wore on and the numbers failed to recede.
You guessed it. The innovative residents of Hanoi had started to breed rats.
The Magic Disappearing Waiting List
Here’s a more recent example from the National Health Service in the UK (the NHS).
A health service is not there to make a profit, it is there to help the population, to repair limbs, to ease suffering, to improve the length and quality of life – and to do this as best it can on a finite budget. So the decisions on where to invest are made with painstaking care – and needless to say, KPIs are involved. Not only big picture KPIs like life-expectancy, or cancer 5-year survival rates, but also on service aspects, such as operation or consultation waiting times.
It will therefore not be surprising to you to learn that the NHS middle management started to measure waiting times and develop incentives to bring these down, or even eliminate them. This sounds very reasonable, does it not?
Now ask yourself, how do you measure a waiting time? Say a surgery offers 30 minute slots – you may drop in and wait for a vacant slot, but as the wait may exceed a few hours it is just as well to book a slot some time in the future and come back then. So one way to measure waiting times is to measure the mean time between the call and the appointment. This of course neglects to capture the fact that some patients do no actually mind the wait and indeed may choose an appointment in two weeks time for their own convenience rather than due to a lack of available slots. Lets put that fatal weakness aside for the minute as I have not yet got to the amusing part.
After measurements had been made for some time, and much media attention had been paid to waiting times, the thumb-screws were turned and surgeries were being incentivized to cut down the times, with the assumption they would work longer hours, or perhaps create clever ‘drop-in’ hours each morning or similar.
Pretty soon however, the results started coming in, the waiting times as some surgeries were plummeting! Terrific news! How were they doing it?
Simple: they simply refused to take future appointments. They had told their patients: call each morning, and the first callers will get the slots for that day. This new system meant nobody officially waited more than a day. Brilliant! Of course it is doubtful the patients all felt that way.
How The Crime Went Up When It Went Down
If you work for the police, you will be painfully aware that measuring crime is difficult. And so it is with the measurement of many ‘bad’ things – for example medical misdiagnoses or industrial safety incidents.
Let’s look at workplace safety; while it may be fairly easy to count how many of your staff have been seriously injured at work, it is much harder to record faithfully the less serious safety incidents – or more specifically, the ones that might have been serious, but for reasons of sheer luck, were not. The so-called ‘near-misses’.
Now to the problem. Let us say you are a fork-lift driver in a warehouse and one day, it a moment of inattention, you knock over a tower of heavy crates. Luckily, no-one was around and more luckily, no damage was done. So what do you do? Do you immediately go to the bad-tempered foreman with whom you do not get along and tell him you nearly killed someone and worse, nearly caused him a lot of extra work? Or do you carefully stack the crates again and go home for dinner?
The police suffer a similar predicament. The reporting of a crime is often the last thing someone wants to do, especially if they are the criminal. Now let’s say you are an enterprising young administrator just starting out in the honourable role as a crime analyst at the Met. You want to tackle crime statistics in order to ensure the most efficient allocation of funds to the challenges most deserving thereof. Do bobbies on the beat pay for themselves with proportionately reduced crime? Does the ‘no broken windows‘ policy really work? Does the fear of capital punishment really burn hot in the mind of someone bent on murderous revenge? Such are the important questions you would wish to answer and you have a budget to tackle it. What do you do?
You set out to gather statistics of course, and then to develop those tricky little things, the KPIs.
Now let’s say a few years pass, and after some success, you are promoted a few times and your budget is increased. Yay! You have always wished for more money to get more accurate data! Another few months later and the news editors are aghast with the force. Crime is up! Blame the police – no, blame to left – no blame the right! Blame the media! It’s video games – no, it’s the school system!
No, actually it’s a change in the baseline. The number of crimes recorded most likely went up because the effort in recording them went up. The crime rate itself may well have gone down.
The opposite can also happen. Say you run a coal mine and you will be given a huge bonus if you can get through the year with a certain level of near misses. Will you really pressure your team to report every little thing? I think not.
So the lesson here is: watch out for a KPI where you want the number to go one way to achieve your longer term aims, but where the number will also depend on measurement effort.
The Profit Myth
Most KPIs are dead dull. The very mention of KPIs will elicit groans and be followed swiftly by a short nap. The ‘volume of sales’ KPI is no different. The issue with the volume KPI is probably made worse by the clear fact that actually thinking about KPIs is a strong sedative. Surely selling more is good? Well, if you can fight through the fog of apathy, and actually think about this for a second, it is easy to see this is often not so.
To see why, it is important to understand price elasticity. It if often true that lowering price will increase sales, so an easy way to achieve a target ‘volume’ (number) of sales is to drop price. That way to can make your volume KPI look good, as well as your revenue KPI, and so long as there is still a positive margin on all the units sold your earnings KPI (aka profit!) will see upside. There can’t possibly be any downside, can there?
Of course, astute financial types can find this fault easily, and perhaps the question of ‘how’ would make a good one for a job interview. It turns out more profit is not always good (seriously!). Whether more profit is really worth taking depends on the ratio of the increased earnings to the increased investment that is needed to make them.
There is another KPI I mentioned earlier the “ROI” or return on investment. When I discussed it I implied that it was only of interest at the GM level, but really the reason only the GM tends to see this KPI is because it is difficult to calculate, and often only the GM has the clout to get it – but it should be considered by all. To me, it is the king of KPIs for a publicly listed company. And it turns out the ROI may actually go down with increasing profit.
If making more widgets requires no further investment, then the maths is easy, but that is rarely true.
The question is this: is it better to have a large ‘average’ business or a smaller one with higher profit margins? It turns out, from an investor’s perspective, that the latter is fundamentally preferable.
The ROI treats a business a bit like a bank account: asking what interest rate does it offer? The business should be run to give the highest interest rate‘(%), not the highest interest ($). It is always possible to get more interest from a bank account – just put more money in the bank.
Translating a Mission Statement into company KPIs
I mentioned above that the ROI is a pretty darn good KPI – so can we use it alone? Of course not. Recall that the KPIs are mere numbers we measure that try to tell us how we are doing against the company mission statement, and while the company mission statement may unashamedly describe vast profits as a goal, this is almost universally not the whole story.
The organism that is the modern company has one particular need besides profit today, and that is profit tomorrow. The ROI does not capture this need, so more KPIs are required, and trickier ones – ones that capture sustainability, morale, innovation and reputation (brand value). This is the turf of the mission statement.
Even though the more cynical of my readers will know the mission is usually ‘make lots of dosh’, and anything beyond that is window dressing, I would venture that the mission statement is the first step to figuring out which KPIs to put first.
Let’s dissect a few examples. In my own 2-minute analysis I decided they fall into four types:
- To appeal to employees:
McGraw Hill:
We are dedicated to creating a workplace that respects and values people from diverse backgrounds and enables all employees to do their best work. It is an inclusive environment where the unique combination of talents, experiences, and perspectives of each employee makes our business success possible. Respecting the individual means ensuring that the workplace is free of discrimination and harassment. Our commitment to equal employment and diversity is a global one as we serve customers and employ people around the world. We see it as a business imperative that is essential to thriving in a competitive global marketplace. - To appeal to customers (aka the unabashed PR stunt)
A recent one from BP:
In all our activities we seek to display some unchanging, fundamental qualities – integrity, honest dealing, treating everyone with respect and dignity, striving for mutual advantage and contributing to human progress.
I couldn’t leave this one out from Mattel:
Mattel makes a difference in the global community by effectively serving children in need . Partnering with charitable organizations dedicated to directly serving children, Mattel creates joy through the Mattel Children’s Foundation, product donations, grant making and the work of employee volunteers. We also enrich the lives of Mattel employees by identifying diverse volunteer opportunities and supporting their personal contributions through the matching gifts program.
- To appeal to investors. This is usually a description of how they are different or what they will do differently in order to achieve big dosh.
CVS:
We will be the easiest pharmacy retailer for customers to use.
Walt Disney:
The mission of The Walt Disney Company is to be one of the world’s leading producers and providers of entertainment and information. Using our portfolio of brands to differentiate our content, services and consumer products, we seek to develop the most creative, innovative and profitable entertainment experiences and related products in the world.
- For the sake of it – some companies clearly just made one up because they thought they had to, and obviously bought a book on writing mission statements:
American Standard’s mission is to “Be the best in the eyes of our customers, employees and shareholders.”
Now a great trick when analysing the statement of any politician, and thus any mission statement, is to see if a statement of the opposite is absurd. In other words, if a politician says “I want better schools”, the opposite would be that he or she wants worse schools, which is clearly absurd. Thus the original statement has no real content, it is merely a statement of what everyone would want, including the politician’s competitors. Thus to judge a politician, or a mission statement, it is important to look not at what they say, but at what they say differently from the rest.
Mission statements seem rather prone to falling into the trap of stating the blindingly obvious, and as a result become trivial, defeating the point. Such is the case with American Standard. Of course you want to be the best. And of course it is your customers, employees and shareholders who you want to convince. Well no kidding!
So discounting those, we can see that a good mission statement will focus on difference. If we look at CVS, their mission is to be easy to use. This may seem like a statement of the obvious, but I don’t think it is – because they have identified a strategy they think will get them market share. Now they can design KPIs to measure ease of use. This is the sort of thinking that led to innovations like the ‘drive-thru’ pharmacy.
If we look at Disney, you can go further. “…[To] be one of the world’s leading producers and providers of entertainment…” OK, so they admit being #1 is unrealistic, and if you want to be taken seriously, you need to be realistic. But if you are one of many, how do you shine? “Using our portfolio of brands to differentiate” They realise they can sell a bit of plastic shaped like a mouse for a lot more than anyone else can. There is a hidden nod to the importance of brand protection. So KPIs for market share and brand awareness fall right out. They finish off with “the most creative, innovative and profitable entertainment” Well you can’t blame them for that.
Very rarely, you see a mission statement that not only shows how the company intends to make money, but may also inspire and make pretty decent PR. I like this one from ADM:
To unlock the potential of nature to improve the quality of life.
I have no idea how to get a KPI from that though!
Summary
In this article I have tried to illustrate how measuring a KPI is much like taking the pulse of a body – it’s a one-off health check, yes, but more importantly it can be a longer term measurement of how your interventions are affecting company fitness in the longer term.
I also try to describe some common pitfalls in the use of KPIs and presented four simple tests of their value:
- the KPI must correlate to a company’s mission
- the KPI must form part of a corrective feedback loop
- perverse incentives can be avoided by never considering any single KPI in isolation
- repeat the treatment only if the benefits repeat too
I have personally used this checklist (with a few refinements) over the years to some good effect in my own industry (minerals & materials) and though I am confident many of my readers will have more refined methods, I live in hope that at least one idea here will of benefit to you.
How people use negativity to influence and self-promote
I have learned through my career that being negative can be a very powerful social tool.
For example, if you taste a freshly opened bottle of wine and declare it ‘decidedly average’ to the surrounding company, what will they think? People who dislike the wine will like you as you clearly share their discerning taste, whereas those that like it will imagine that you must drink some rather marvellous wines at home. It would only be a very small minority of experts who may actually determine if your judgement is a fair assessment, and even then, wine experts have admitted openly to me that it is largely a matter of personal taste anyway once you get to a certain minimum level of quality.
On the other hand, being positive about the wine is more risky. People who like it will be fine, but those that don’t will assume you to be either incompetent or at best, to have strange taste.
Thus you can see, that if your choice of commentary is to be “done by the numbers” then being a little negative is a good strategy.
Of course, wine is fairly trivial, but this concept goes much further. Imagine, if you will, a panel discussing a job applicant.
Imagine yourself on an esteemed panel, and your job is to discuss the most recent hopeful. Eyes turn to you. If you say you though the applicant was superb, and they agree, all is well – however, if they felt the person’s claim at competence was a flagrant lie, they would be inclined to review their opinion of you. If, on the other hand you are generally dismissive, the others may be led to think you know something they don’t.
This phenomena, while not often discussed, has been commonly found to be highly developed, but , I would suggest, more often by accident than design. In other words, some people, who are wont to be negative and dismissive may rise to positions of respect and influence for no good reason other than people’s assumptions about them. These individuals have no alternative to assuming that they are indeed wise and discerning, since they are so routinely deferred to.
There are most assuredly also people who use the method deliberately, but I have yet to see the skill claimed when I have discussed it openly.
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After deciding to rant a little on the subject on this blog, I thought it may be just the thing to actually do a little research. It did not take long to see similar effects being used in other walks of life. It turns out marketeers and advertisers have long known about the power of negativity – the theory that the fear of loss is stronger in us than our ambition for gain, is borne out in our tendency to allow negative product reviews more to sway us further than equally positive ones. Thus the strong desire by advertisers (or politicians) to denigrate the opposition rather than to spend time actually developing some genuine merit.
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The Take Away
So what can be done about it? Well clearly it is well worth taking a moment to reflect the next time we hear someone being negative about something. I also suggest a much more interesting course of action. Next time you are chatting idly to a colleague to whom you may have in the past turned to for advice or critique – and ask yourself: are they one of these nasty negative nancies? Unless they are positive at least half the time, I posit they are, and you should smile inwardly and take them down a notch or two.
Reality: a hard sell
I can’t help but wonder if doggedly debunking all spewings from the purveyors of woo is somewhat a fool’s errand.
There are a number of pseudo-scientific disciplines whose concepts are inherently highly attractive and contagious to the average Joe, saying things that make him feel good and making him want to pass on the good news. Think of how easy to sell these messages are:
- organic food – frolicking chickens, steaming compost, happy farmers, healthy food – a return to basics, back to a purer time when humans actually had roots in the earth and cared for it; you too can go organic!
- complimentary medicine – age-old wisdom, so long suppressed by big pharma is unlocked just for those open-minded enough to look. Are you open-minded! Yes? Here are your keys to healthy prosperity!
- astrology – our fates, entwined with the universe, form a beautiful unity; enigmatic scholars have acted custodian to its cipher through the ages. Are you a spiritual soul? You too can share time’s secrets!
- parapsychology – our minds are more powerful than science knows, and we all have potential beyond our wildest dreams! But hold on! Only those willing to break free from the trappings of conventional science will ever see the light…
- and of course the big kahuna, religion – imagine for a minute the greatest most wonderful thing in all the world, and that is but nothing compared with the joys that await the believer, and for all eternity too!
It is little wonder the bible I had as a kid said “Good News” on the cover.
The issue is that the logical shredding of these pieces is often a sobering dose of reality that fills most people with instant sleepiness:
- organic food is not always kinder to the planet and claimed health benefits are of the ‘hard to verify’ sort
- alternative medicine actually does work, but only the level one would expect from getting time, care, attention and the placebo effect
- the laws of physics do allow marvellous things (x-rays, computers, holograms) but it takes serious study to understand why they don’t allow for the positions of stars and planets to have predictable effects of the day-to-day ongoings in suburbia.
- the mind is indeed fabulously clever and poorly understood, but those tedious laws of physics, and indeed dry, cold logic, are annoyingly sticky when it comes to clairvoyance, ESP, psychokinesis and precognition.
So YAWN! Boring!! Logic and analysis mean effort, work, thinking things through, totting up totals, cross-checking claims, testing, questioning and doubting. Pretty much the opposite of nice & easy. Accepting we are not all-powerful, we are not immortal and that we will all be forgotten someday is just no fun. These are not messages that will go viral, that will breed missionaries, that would generate a manic fervour. More like manic depression.
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So the deck is stacked. Pseudo-scientific ideas persist because they are tenacious memes, and they are almost impossible to kill. They are contagious and sticky, and lovely and easy, and fighting them off requires not just the will, but also the ammunition.
And that is why it worthwhile to continue to fight the good fight – to keep trying to debunk poor thinking – to provide the ammunition to that small number, those that may be on their own, surrounded by superstition, but with that gift in their heart that is that first inkling of doubt.
I will do it for those that think they are alone as I once did.
We live in a time of unprecedented opportunity – people have better access than ever to the tools to arm themselves to achieve a new sort of ideal: to make life choices with full access to all the facts. We are after all free to choose to believe anything, the problem only comes when we are not given the choice. No information, no balance, no choice.
Hysteresis Explained
Hysteresis (hiss-ter-ee-sis). Lovely word. But what on earth does it mean?
Hysteresis is one of those typically jargonny words used by scientists that instantly renders the entire sentence if not lecture lost on its audience. Sure, you can look it up on wikipedia, but you may die of boredom before you get to the point, so I am going to explain it here.
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Hysteresis on the way to school
Let’s go for a walk. Let’s say we are ten years old and we are walking to school. The route is simple. The school is a few hundred yards down the hill on the other side of the road. Now consider the question: at what stage do we cross the road? Immediately? Or do we walk all the way to opposite the school before crossing – or somewhere between?
Assuming there are no ‘official’ crossing points, I bet you cross immediately, then walk down the far side of the road.
How can I make this prediction? Well, I assume that crossing the road requires there to be no traffic, so if there is no traffic as you start the journey, it is a good time to cross. If there is traffic, you just start walking down the road until a gap appears, then you cross. This strategy allows you to cross without losing any time. If your strategy had been to cross at the school there is a real risk you will need to wait, thus losing time. So it turns out the best strategy to avoid any waiting is to cross as soon as you can.
So now picture your walk home. Again, it makes sense to cross early on. The result is that the best route to school is not the same as the best route from school. This is an example of hysteresis – or a ‘path dependent phenomena’.
Hysteresis everywhere
The dictionary will drone on about magnetism and capacitance and imaginary numbers. A much nicer example is melting and freezing of materials – some substances actually melt and freeze at different temperatures. This shows that the answer to the question: “is X a solid at temperature Y?” actually depends – on the path taken to that temperature. Just like what side of the road you are halfway between home and school will depend on whether you are coming or going.
It seems to me that falling asleep and waking up also bear some of the hallmarks of hysteresis; although they could be considered a simple state change in opposite directions, they feel very different to me – I seem to drift to sleep, but tend to wake to alertness rather suddenly.
Now think of a golf club in mid swing. As the golfer swings, the head of the club lags behind the shaft. If the golfer where to swing in reverse, the club head would lag in the other direction – thus, you can tell the direction of movement from a still photograph. We can therefore say the shape of a golf club exhibits hysteresis – and again you see see why it is so-called “path dependent”.
This logic can be taken further still – wetting is not the opposite of drying and likewise heating is rarely the inverse of of cooling. Let’s imagine for example that you want to make a chicken pie warm on the inside and cool on the outside. This is best done by warming the whole pie and then letting it cool a little. The temperature ‘profile’ inside your pie thus depends not only on the recent temperature but has a complex relationship with its more distant temperature history. This particular point is somewhat salient at the moment as we ask the question: is the earth heating up? 
So what?
Good question. I’m not a fan of jargon, and hysteresis is not a word I hope to need to use in my smalltalk. However, you can see that it encapsulates a rather specific and increasingly important concept that is pretty hard to replace with two or three simpler words; thus it passes my test of “words a scientist should understand that most don’t”. Please let me know your own additions to such a list!
Educational way to spend four minutes…
[youtube=http://www.youtube.com/watch?v=jbkSRLYSojo]