Optimizing proxy measurements for you and your business | MBA Learnings
First-year student Rohan Rajiv is blogging once a week about important lessons he is learning at Kellogg. Read more of his posts here.
In our Operations Management class, we discussed how Wilson tests the durability of its tennis balls. It does so by subjecting them to pressure and checking for signs of contortion in the shape of the ball.
It isn’t possible for Wilson to put each ball through hours of tennis hitting and then confirm it is ready for sale. So, it works with a proxy measurement. It is unclear if customers can tell the difference between a tournament standard ball and a non-tournament standard ball. Perhaps professional tennis players can.
There isn’t necessarily an issue with this proxy. It seems to have largely worked out OK for them. But, it is a proxy measurement nevertheless. And, it is foreseeable that there might come a day (if it isn’t already here) when the distance between the proxy and the needs of the customer grows and Wilson fails to adapt simply because it is optimizing for the wrong thing.
Proxy measurements such as the Wilson durability test are critical in Operations. Proxy measures are critical in our life’s operations, too. They’re our attempt at simplifying a complex world and making our lives easy to navigate.
Venture capitalist Fred Wilson had an incredibly insightful post on his excellent blog around entrepreneurs using valuations as a scorecard. In Fred’s words:
“When you set out to build a great company, it’s hard to know how you are doing along the way. There does come a time when you know you’ve done it. Apple, Google, Facebook, Amazon, Salesforce, Tesla, etc. got there. We know that. And the founders of those companies know that too. But two years in, three years in, four years in, it’s hard to know how you are doing. The market moves quickly. Customers are fickle. Competition emerges. Trusted team members leave. Your investors flake out on you. And so on and so forth. So entrepreneurs want something they can hang on to. They want a scorecard. A number. Validation that they are getting there.”
He notes that valuation is that scorecard. This idea is perpetuated even more so these days when financing and the valuations are reported every day as the most important news items in the tech blogs. And then, he describes the dark side from decades of experience as a leading venture capitalist:
“This obsession with valuation as the thing that tells you and the world how you are doing has a dark side. And that is because valuation is just a number. Unless you sell your business for cash at that price, valuation is just a theoretical value on your company. And it can change. Or you can get stuck there trying to justify it year after year all the while doing massive surgery to your cap table to sustain it.
And the markets can move on you and one day you are worth $2 [billion] and the next day your are worth $500 [million]. Did you just mess up by 75%? No. The market moved on you.
The message of this post is don’t let yourself get sucked into a world where a number is your measure of self worth. Because you don’t control that number. The market does. And some days the market is your friend and other days it is most decidedly not your friend.
Measure yourself on whether your employees are happy. Measure yourself on whether your customers are happy. Measure yourself on how much free cash flow your business is generating. Measure yourself on how your brand is known and appreciated around the world. Measure yourself on how your spouse and children feel about you when you come home from work each day. You control all of those things, at least to some degree.
But please don’t measure yourself on valuation. It might make you feel good today. But it won’t make you feel good every day.”
Fred’s post beautifully illustrates the issues with proxy measurements. It is easier to treat income and a job title as a measure of success or a valuation as a measure of our self worth. It is much harder to identify and measure the things that actually matter – happiness, love, and so on.
But beware what you measure. Because what you measure will be what you optimize for … and the worst outcome is a life spent optimizing all the wrong things.
Rohan Rajiv is a first-year student in Kellogg’s Full-Time Two-Year Program. Prior to Kellogg he worked at a-connect serving clients on consulting projects across 14 countries in Europe, Asia, Australia and South America. He blogs a learning every day, including his MBA Learnings series, on www.ALearningaDay.com.