Business Metrics: Better Mind What You Measure
by Paul Wiefels, Managing Director
The Chasm Group, LLC
This article addresses the need for executives running high technology firms to understand and actively manage an appropriate set of metrics based on the type of strategy that is actually deployed.
My original partner in The Chasm Group, Geoffrey Moore, recalls a story in his family concerning his great-grandfather, Dan, who being a man of his times valued frugality perhaps to excess. It seems that he was cleaning out the medicine cabinet one day reading each of the labels on the medicine, finally deciding that maybe he did have a little bit of this and he might just benefit from that. So he took every one of the leftover medicines rather than throwing any of them out. Great-grandfather Dan survived, but not before having his stomach pumped.
This same type of story might be told of some high technology management teams and boards of directors when it comes to their use of business metrics. If one is good, two must be better, and if we can have five or six, well, the more the merrier. Better still, throw in something trendy from a recent magazine article or the Harvard Business Review.
Take heed. Metrics are the equivalent of an aircraft’s flight instruments and thus serve to track strategic imperatives. We believe that over the technology adoption life cycle, these imperatives must and should change, and so must the metrics that track them. Indeed, at any given stage in the life cycle, not only are there key metrics but also key anti-metrics. These latter measurements must be understood for what they represent and often, must be ignored or suppressed.
Why? Misinterpreted, these anti-metrics can promote a strategic focus that runs directly counter to successful behavior—and successful outcomes.
Here is how it all plays out.
The earliest stage in the technology adoption life cycle focuses on gestation. Consider this phase as the birth of a new paradigm. The key market goal is to win a handful of big deals from visible, visionary customers. At this stage, the focus is on technology leadership, and the key metric is design wins. This is the operating context for multitudes of venture-funded start-ups. Lately, we gasp as the CEO’s of “whatever.com” proudly announce the signing of another new customer or alliance while proclaiming almost simultaneously that the loss this quarter will be less than that of last quarter. What they and their backers know is that the key anti-metric during this gestation phase is profitability.
The good news for new ventures is that this principle is well understood, and thus we do not debate how to measure and motivate start-up ventures. In stark contrast, consider the established company or conglomerate that establishes a “skunk-works” operation. The fashionable description given to such efforts was “intrepreneuring.” Many of these initiatives attributed to established enterprises end in failure because their sponsors measure success solely in terms of how quickly the new initiatives generate profit. When profits do not materialize quickly, such operations are considered failures and thus abandoned, much to the delight of the start-up company pursuing a similar path—with more realistic expectations.
The next debate comes with the transition to the second stage, which must focus on market penetration, breaking into the mainstream marketplace, an act that is resisted by anyone with vested interests in the status quo. Here the focus should be on dominating a niche market as quickly as possible, thereby a) legitimizing the new paradigm, b) creating a secure base for further expansion, and c) transforming the company into a self-funding enterprise. Not dominating a niche leaves the fledgling paradigm floating ambiguously in the ether—promising and interesting to be sure—but unsecured, and hence, subject to those familiar apocalyptic horsemen: Fear, Uncertainty, and Doubt. This so-called FUD is actually promoted by the status quo who know that new market entrants can be stopped in their tracks if they are viewed by a nervous market as risky.
Recognizing this, the savvy management team makes segment share its key metric, along with a complementary metric called time to segment dominance. The key anti-metric—and here is where the debate starts—is total revenue and overall market share. To focus on the latter is to encourage the company to take a major deal totally outside its target domain, just to make the numbers. This deal, however, far from increasing the equity value of the firm, actually decreases it, as it misdirects precious resources and slows, not speeds, time to segment dominance. Nor does taking the deal decrease the company’s perceived risk, since it must be recorded outside the niche thereby diluting the importance of the win. This was the fate of document management software vendor, Documentum, until a new management team took charge and focused it on solving problems associated with pharmaceutical companies attempting to win regulatory approval in the USA.
The third stage of technology adoption is proliferation. The new paradigm has achieved the status of “safe buy,” and is now experiencing hypergrowth, a massive rise in demand during which the “mainstream market” seeks to emulate their peers. Within a remarkably compressed time, these new customers make their first purchases, thereby committing to their chosen vendor purchase and/or brand loyalty. Winning these new customers for yourself, and keeping them away from your competitors, is the essential market objective. Now, the key metric is market share. The key anti-metric, reversing our previous assertion, is segment share. As counter-intuitive as it may seem, customer satisfaction may also take a back seat as well. Currently, many e-commerce businesses like eBay, E*Trade, and so on, are pushing the limits of these principles, and are under severe pressure for so doing, but their strategy is essentially correct, albeit perhaps a bit over the top. There is nothing that hypergrowth will punish more than ceasing to focus on acquiring new customers.
The final stage of adoption is assimilation and variation, where the core technology submerges from view, and the market now focuses on “surface-level” modifications to tune the offer to particular user wants or needs. This is the era of one-on-one marketing via mass customization, where profit margins are earned not by engineering but by marketing. Here is the key metric is profits, for we are in that phase of a product life cycle that we call the “cash cow” phase. To secure these profits, one must not plow them back under in a never-ending escalation of technology—remember, its value has been submerged from view—and so the key anti-metric, bringing us full circle, is design wins. This leads to a delicate dance with one’s installed base, as the teams managing the HP 3000 and the IBM AS/400 can testify.
How can you use this column? The most important thing to do is revisit your performance-based compensation programs in light of the life-cycle imperatives your managers should be operating under. If you have a portfolio of products, it likely means different imperatives for different teams. One size does not fit all for strategy, and therefore will not fit all in the domains of motivation and rewards. If you try to force-fit one anyway, you can be sure that incentives do work—they’ll just be working against your best interests instead of for them.
