“You can’t manage what you can’t measure” is a quote often incorrectly attributed to Deming. However, he taught the opposite. Deming said;
“One cannot be successful on visible figures alone… the most important figures that one needs for management are unknown or knowable, but successful management must nevertheless take account of them.”
His point is that the “most important figures” often cannot be measured, but to be successful we still must account for what is happening there. What we find is that this is ignored and we manage our organization on “visible figures alone”. Why? Because we can.
It is like the story of the man looking for something he has lost on the ground. When a friend comes to help she asks, where did you drop it?”. The man replies, “over there, but the light is better here”. Much has changed since Deming’s day the Internet, Smart Devices, the explosion of Apps and the Internet of Things, all of which is making some of the unknowns now knowable.
But we are still measuring what we can, that is where “the light is better”. This is the left hand side of the Alignment Diagram, the internal world. Our measurements are driven by how the financial systems are setup, revenues, costs, details about products and operational statistics. These are all things to do with our immediate past. This is why Deming says “you cannot be successful on visible figures alone”, managing our organisation by historical numbers is often compared to trying to steer the boat by watching the wake.
The other problem is because these measurements are vertically aligned, they don't measure our progress against our mission of delivering customer outcomes. They tend to measure historical internal activity; how many sales calls did we make today, what were our production numbers, did we stay within expense budget. Jacob Stoller explains the issue of using standard cost accounting in his book, The Lean CEO, through the thoughts of Art Byrne CEO and Orest Fiume CFO of Wiremold;
"The problem Byrne and Fiume had with standard cost accounting is that it drives decisions on the basis of past information, the proverbial managing through the rearview mirror approach. Furthermore, because it is driven by algorithms rather than real data, it often instills the wrong kind of thinking and, even worse, the wrong kind of action."
Byrne provides the example of manufacturing producing more products to hit their monthly numbers even when there are not the required sales booked. The result is surplus inventory which is tying up working capital, however manufacturing's "measurements" are in green.
Today the measurements we rely on to manage our organisation tell us what we did, but not why and not where are we going. We need all three. As Jim Collins, in his book “How the mighty fall”, explains the first stage of decline for an organisation is what he calls, “the hubris of success”. It is when “what” replaces “why”.
“The rhetoric of success (“We’re successful because we do these specific things”) replaces understanding and insight (“We’re successful because we understand why we do these specific things and under what conditions they would no longer work”).
If we don't measure the right things, we can't detect when the market is changing and that our current tactics will increasingly miss the mark. Because we have no visibility of what our customers really want, we find it harder to innovate, adapt and change. What we need are the balancing measurements from the right hand side of the Alignment Diagram, outcomes customers want, and intrinsic measures; customer satisfaction, employee engagement. We also need all measurements to be vectors and not scalars. Vectors have two metrics, the current rate and the direction in which it is heading. Scalars only have the current rate; that is we know the score but we don’t know if we are improving or declining. With vectors we can tell if we are heading in the direction we want or if we are off course.