New Measurement Sustainable Knowledge Economy
As America grasps for innovative ways to exit the recession, we have forgotten a fundamental business reality: measurement determines behavior. Ask any salesperson if their bonus structure determines which products they lead with or not. The problem with America’s national investments is that they say green, but they shout industrial age thinking. It is time for America to take the lead toward a new measurement policy. As long as we measure the world in industrial-age terms, we will keep trying to re-start the industrial age. It is time to define yardsticks that will measure our progress in the 21st century.
Industrial age measures abound GDP, housing starts, productivity, and retail sales. Those measures focus on the creation and consumption of goods and services, mostly goods. If we are concerned with foreclosures and with sustainable use of natural resources, shouldn’t the measure of housing health by the conversion of foreclosures into homes or something else before we have any housing starts? Shouldn’t the labor and resources employed in housing be redeployed to maintain neighborhoods—to make them attractive, rather than build new houses in new areas, creating more dispersion, furthering stretching the need for consumptive-infrastructure?
Issues with non-farm, non-industrial measurements
Many issues confound economists when measuring non-farm, non-industrial productivity, let alone the question of productivity being the right term for emerging economic models. The World Bank, for instance, has created a knowledge economy index [now discontinued], but it is filled with traditional productivity measures such as technical journal articles per million people, telephone penetration rates, and computers per 1,000 people, along with some rather abstract items like regulatory quality, rule of law, and economic barriers. It says nothing about the utilization of computing, or the value of technical journal articles to a nation’s economy. It simply counts output within a fixed period of time.
New economic models will come in at least two forms: the knowledge economy and the sustainable economy. I would argue that the sustainable economy is a superset of the knowledge economy. Knowledge must be conserved in much the same way as other resources.
In order to move away from our current consumption-based, industrial-age measurements, we must recognize two fundamental differences between industrial age measures, and those of a sustainable economy: time delays in value realization, and the need to measure progress outside of a “productive” process.
Time delays and value realization
Time delays in value realization mean that value cannot ultimately be determined for a good or service at the time of creation or delivery. Imagine a consulting session where a consultant delivers advice about what IT infrastructure to invest in. The consultant is paid, the advice accepted. Two years later, the infrastructure is increasingly incompatible with industry developments. The firm obtaining flawed advice must now spend more money to remedy the situation. If you look at this from either the information consumer’s perspective or from the consultant’s, you can draw the same conclusion: the advice was highly contextual and required other factors to evolve before it could be determined if it is right or wrong. Now, let’s look at the compensation model for the consultant, which is one of utilization. Although quality of advice may have some bearing on the consultant’s compensation, in any given quarter, the quality of consulting advice may be months or years in the future before its value can be ascertained; therefore, utilization becomes the number one item. Consulting is measured, not as a knowledge economy work, but as an industrial age work.
Now let us examine another very common business activity, creating a presentation. With modern software, people efficiently create presentations. If they don’t spend too much time on graphics, they can create a basic presentation with bullet points in minutes; transform that typing into a projection with near-zero transformation or delivery costs. Creating a presentation is highly productive.
Return to our consultant. Her job today is to change the perception of the firm’s capabilities by delivering a thought leadership presentation. She has invested more than a minimal amount of time to capture the message in a presentation deck. She has created infographics, used builds, and included video. That being said, she is still more productive using current software than software from a year ago. The presentation took her 20% less time to create than an equivalent one with last year’s version.
The consultant gives her presentation, walks off the stage to applause, and heads back to her hotel room to check out so she can catch her flight out.
As the consultant leaves the stage she does not know if she has achieved her objective. She knows she delivered a presentation, and she believes it was of high quality, but she doesn’t know if it worked. This situation requires measures outside of the creation process to determine value.
Value and process
Let me first contrast this with a manufacturing process where quality is built into the process. A printed circuit board line, for instance, requires multiple tests to determine if an assembly is working before it is put into a box. The quality of the product can be determined before it has been acquired.
Now consider the consultant. She completed her presentation months ago, put it on a server for the conference staff to integrate into the program. She now delivers the presentation and leaves. There is no test within the creation process to determine if the presentation met its objective. In order to remedy this, a test would need to be devised; these are usually conducted in the form of a survey. In this case, two surveys would be good, one to determine perceptions before the presentation, and another to measure perception shift following the presentation.
In sustainable knowledge work, feedback loops, as in manufacturing, are imperative to determine value, but they cannot be measured within the process unless the definition of process expands to encompass the creation of the presentation, the development of a measurement instrument, the delivery of the presentation and the gathering and analysis of survey results. If the process is not expanded, and the external measure of value introduced, there is no way to understand if the creation of the presentation was valuable or a waste of time. In the utilization compensation world of the consultant, he or she is betting that the investment in the presentation will lead to future revenue opportunities, future utilization, without any way to accurately forecast that revenue at the time of the presentation creation. In fact, the consultant does not know at the time of creation if all of the extra work would create a better outcome or not.
In the end, the consultant was paid for the hours spent creating the presentation, immediately following the creation process. In all likelihood, any revenue generated from a positive viewing of the presentation would not be tied back to the presentation in the compensation or CRM system. And all of this says nothing about an alternative outcome, where the presentation created neutral or negative responses and may have cost the company future revenue. Yet again, the consultant was paid at the time of creation. The lack of feedback loops allowed knowledge to seep from the system unmeasured.
The idea of delayed value and external measurement is not new, but they are not integrated with our measurement systems. If we look at education, arguably the oldest knowledge-sustainable job in the world we see a number of standardized tests that attempt to place measurement inside the process, and to some extent, outside of the process (at a point with SATs or ACTs, however, where any feedback on performance cannot be integrated by either learner or educator).
Making value stick
In their book, Made to Stick, Dan and Chip Heath discuss a new way of teaching accounting through a long case study. They then go on to say:
“So, did the students learn better? At first, it was hard to say. The changes to the course made it hard to compare final exams directly with those of previous years…Over time, however, the benefits of the concrete case study became increasingly obvious. After experiencing the case study, students with high GPAs were more likely to major in accounting. The concreteness actually made the most capable students want to become accountants.”
Now, you can argue if turning people’s career goals toward accounting is good or not, but you cannot argue that within the class itself, there was no way to determine if the case study approach would be beneficial. The brothers then add,
“But the case study also had positive effects on regular students. In the next accounting course—taking an average of two years later…students who had worked through the case study scored noticeably higher on this first exam.”
C students, they report, scored 12 points higher. In the case of C students, it was two years before the new method was proven to be of value. Was the educator recognized for this achievement? I would guess that in some way, perhaps, not systematically. Perhaps they were compensated anecdotally because the system doesn’t measure success over long periods of time at the individual performer level.
This idea of a time delay to realize value is not just constrained to consulting and education. Financial rewards for everything from managing a merger to delivering health care, to investment advice, to marketing and advertising, include the need for time delays as part of their measures. And the true value of the work in those areas, and many others, can be determined only after exiting the processing and using a separate process to understand the impact of those other processes.
We must recognize that determining value over short periods of time, in the industrial-age sense of linear factories, cannot be applied to sustainable, knowledge work. It is still appropriate for its original intent, but it should not be the guiding force for measuring company performance, individual performance, or the performance of a nation.
Toward a New Measurement for a Sustainable Knowledge Economy
As a nation, we are struggling to set our economy straight, but we are doing so within the straightjacket of industrial-age economics. The world, too, suffers from this myopia of measurement. If we don’t start measuring our outcomes, not just our outputs, we will increasingly drive down wages and standards of living. If we take a sustainable, knowledge view of our future, we can reveal pathways forward that create long term wealth rather than short term gains. If President Obama wants to take a true leadership position, I encourage him to start by asking America, and the world, to measure success in ways that don’t lead us backward by applying industrial-age metrics, but rather, lead us forward by recognizing the need to create new, more holistic views of value and progress.
Some of the ideas in this post have been refined and published in our Welcome to the Serendipity report.