Monday, November 26, 2012

Benchmark Organizational Effectiveness

 It’s amazing how close to philosophy business can be.  The idea of benchmarking an organization’s effectiveness sounds like a fairly simple exercise but it is anything but. It reminds me of a poem by William Carlos Williams from 1923 often referred to as The Red Wheelbarrow but called XXII:

so much depends
a red wheel
glazed with rain
beside the white

So much depends on how we define the words “benchmark”, “organizational” and “effectiveness” in this exercise.  Let’s start in Part 1 with just the word “benchmark”.  What kind of philosophical questions does this raise?

Against whom? Specifying high tech companies is not fine enough grain because it includes contract manufacturers as well as consumer goods companies. Instead, we need to compare ourselves to the direct competitors in each of the markets we serve.

About what? What are the key performance indicators?  A measure like Cash to Cash conversion cycle may be more relevant for a cash strapped company or during times when alternative investments for that cash are very lucrative.

Available where? Many of the things you’d love to know like how much Supply Chain Overhead costs Juniper are simply not publicly reported.  You may be able to find proxies through a consulting firm but what categories of cost that are included may differ. If you don’t have the whole provenance and contents list, it’s not going to be apples to apples.

Calculated how? Forecast accuracy is commonly defined as MAPE (Mean Absolute Percent Error) and you’d think it’s a standard mathematical calculation but the lag period that it is calculated with can vary from 1 month for example to 6 months.  For a direct comparison of forecast accuracy between companies, you’d like to calculate it the same but you may not have access to the root data to do so.

If it’s red, is that really bad? Sometimes, you have the perfect metric using externally available data that is calculated the same way such as Days Payable.  And you discover that your company’s performance is in the deep dark red end of the scale.  Is that bad?  It may not be if it’s a policy decision that was made in order to gain some other measurable advantage that still exists.

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