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Measure the Value of What You Are Doing as Carefully as Warren Buffett

Dec 27, 2007
Master investor Warren Buffett, CEO of Berkshire Hathaway, has a simple test for making an investment: Would he buy and hold the whole business at that price for the next several decades? Using careful measurements of what a private investor would pay for such a business, he makes a judgment of whether there's enough of a bargain compared to the business's value to warrant an investment.

That approach has allowed Mr. Buffett to become one of the wealthiest people on Earth.

What can measurements do for you in creating breakthrough business solutions?

A breakthrough solution is any way of accomplishing 20 times more with the same time, effort, and resources.

How do you develop such great improvements?

Follow these steps:

1. Understand the importance of measuring performance.

2. Decide what to measure.

3. Identify the future best practice and measure it.

4. Implement beyond the future best practice.

5. Identify the ideal best practice.

6. Pursue the ideal best practice.

7. Select the right people and provide the right motivation.

8. Continually repeat the first seven steps.

In this essay, I'll focus on the first step.

Measurements Help Erase Complacency

Most people view the measuring process too narrowly. Here's an example: A corporate planner went to a seminar given by corporate strategist Peter Drucker.

The planner asked Drucker to pick the best single measure of corporate performance. Drucker replied, "My dear sir, you obviously know nothing. There is no single measure of corporate performance that is any good. Use them all and try to develop new ones, and each will teach you something you need to know."

Drucker's point was that measurements are highly subjective and imperfect. Would-be stallbusters are going to need lots more measures.

I'd Rather Not Know That!

One CEO tells another Peter Drucker story about measurements. Drucker had presented a seminar on personal improvement to the CEO's U.S. Air Force group years earlier. Each man was instructed to measure in great detail how he spent his time for a week.

The CEO found this task to be a life-changing experience. The measurements revealed all of his bad habits and put the CEO on guard to avoid those bad habits. Unfortunately, this CEO's example is rarely followed.

Try this exercise for yourself. Measure how much time you spend each week on the telephone, doing each routine task, commuting, watching reruns on television, and so forth. Then look at how much you accomplished. You will see that measurements can help redirect your efforts into more productive activities.

A Perpetual Measuring Machine

Visitors to the finance and data processing staffs of a large company were astonished to note that each cubicle's walls were literally covered with performance measurements. The idea was to encourage more focus on expanding productivity.

Almost all of the measurements had been developed by the workers for their own use. By looking at each others' measurements, staff members could see how well they were doing in comparison. People pitched in to help lower performers improve so that everyone could earn department-wide, performance-based bonuses.

How did they do? Personal productivity gains of 25 percent were not unusual. Furthermore, corporate productivity in these same areas grew by a similar degree. By comparison, most organizations shoot for 2 to 3 percent annual productivity increases. Those low targets telegraph to everyone that they can take it easy.

End Results Versus Causes

Management of a luxury hotel chain learned that guests were dissatisfied because it took too long for room service breakfast orders to arrive. The chain jumped in to solve the problem. It added more room service waiters. It even added more kitchen staff.

But the situation got worse, not better. Finally, they looked at how long it took for a waiter to make a delivery and return to the kitchen.

Wait! Here was something. The round trips took much too long. Management asked the room service waiters why. The bottleneck was quickly spotted. The waiters were delayed by as much as eight minutes by slow elevator arrivals at the kitchen and the guest room floors.

What was going on? Housekeepers were delivering a day's worth of clean sheets and towels at the same time. Since housekeepers had to unload large amounts of linen on each floor, they usually stopped the elevators while the unloading occurred.

Understanding the cause, linen deliveries were rescheduled to another time. Room-service complaints dropped to near zero.

With enough of the right measurements to find the causes of your performance, you'll soon be working on the right things, too.

Almost Perfect Is Often Not Good Enough

After many American manufacturers found that their quality badly lagged non-American competitors in the 1980s, quality improvement became an obsession. Soon, many companies were bragging that they performed at Six Sigma levels (hardly any errors per million activities).

Closer examination suggested that some of these companies had missed the boat. They had only achieved being nearly perfect in delivering outmoded offerings. Motorola, for instance, the renowned Six Sigma innovator, saw its profits evaporate in the 1990s when the company fell behind Nokia and others in delivering new digital technologies to the market.

Some companies also didn't know how to measure their performance. They broke down every process into hundreds of aspects. Each aspect was measured for performance.

Sure enough, almost all aspects were done perfectly more than 99.9 percent of the time. Everyone was smiling . . . except the customers. As measured by what customers cared about, deliveries were deficient almost half the time.

What was going on? It turns out that those little errors across hundreds of aspects compound and can cumulatively hit the customer hard. The firm should have been primarily measuring its ultimate performance for customers and then looking selectively into detail to locate where large strides could be made.

A key business lesson is that excellence is a moving target. When you satisfy the customer in one area, you need to move your attention to other wellsprings of dissatisfaction. Many organizations forget to move on to the next area of concern.

In the unending mantra heard in many organizations to serve customers better, it's easy to forget that there are other stakeholders. Be sure to check how you are doing for them, too. If employees hate working for you, customer service won't be very good either.

Be cautious in your measurements. Small experiments may work simply because of the Hawthorne Effect: Performance may improve simply because you've made a change, rather than because of what the change is.

Stop making changes, and performance will often drop off again. Now, management pros understand that you have to check your tests to be sure that improvements will be lasting.

Feedback Nourishes Learning

It's not enough to measure. You also have to learn from what the measurements tell you. Then, when you can access information that competitors lack, you can sneak ahead.

Here's an example: Dell Corporation leads in personal computers and gains its orders through direct sales over the telephone and the Internet. Its competitors sell through wholesalers, value-added resellers, and stores.

Dell is learning moment by moment what features its customers most want. Competitors have to use indirect, after-the-fact measurements to estimate what Dell already knows.

Dell can be out testing a new insight from daily measurements long before the competitors even know about the new customer need. With each iteration of this feedback, Dell's knowledge moves further ahead of competitors.

As a result of learning based on powerful measurements, Dell was able to steam ahead of all its well-known global competitors despite Dell's humble beginnings in Michael Dell's college dormitory room.


Use Measurements to Improve Your Personal Effectiveness

Ask yourself the following questions to better allocate your time and efforts:

-How could I avoid having to do the least productive tasks at all and get better results?

-How else could I have gotten these tasks done to get better results in less time?

-How could I delegate these tasks to others for better results?

-How could I inexpensively automate these tasks and meet my purposes?

-When was I effective?

-Why was I effective then?

-When was I ineffective?

-Why was I ineffective then?

-How much time am I spending on time wasters?

-How could I better spend the time I use on time wasters?

-What will be the benefits to me and others of spending my time in these more productive areas?

Use Measurements to Improve the Effectiveness of Others

After you have acted on the answers to your personal improvement questions, you will be prepared to be credible as a helpful coach to others, especially with the answers to the following questions:

-How can you interest other people in measurements?

-How can you help others set up and use helpful measurements?

-How can the message about the value of properly using measurements be spread even further?

Start making your efforts count!
About the Author
Donald Mitchell is coauthor of six books including The 2,000 Percent Squared Solution, The 2,000 Percent Solution, and The 2,000 Percent Solution Workbook. Read about creating breakthroughs through 2,000 percent solutions and receive tips by e-mail by registering for free at

http://www.2000percentsolution.com .
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