My sister is an ophthalmologist and when I was talking to her recently; I learned something interesting and new to me: “You can't actually have a myopic and hyperopic eye; but you can be nearsighted and farsighted.” The scientific explanation from ophthalmology perspective was a good learning for me, but more important than that it introduced me the following question which I spent some time thinking: Can a business review be both nearsighted and farsighted too, if so how and why? Yes, it might be and might be more common than we assume. Here is one likely reason: It is all about how we define performance metrics and success for any business evaluation.
Let's assume a fresh marketing campaign results announcement: “The marketing campaign ABC created X leads with a total $ Value of Y, which is Z% greater than the last marketing campaign DEF”. Or a new product initiative: “We introduced our new product ABC to the market which is available in X stores selling Y units during period Z”. Or a performance review discussion with one of your employees: “I did this activity ABC and reached out X customers and Y partners and have a total pipeline coverage of Z%” These performance statements are quite common in today’s business meetings. And they all share one common point which is quite problematic for any initiative. They are overly focused on Outputs and focus less on Inputs/Activities and Outcomes/Impact.
Here is my hypothesis: If you evaluate performance and success on outputs mainly and less on inputs & outcomes; you will have a business initiative that is both nearsighted and farsighted. A balanced evaluation of any business, initiative or employee should incorporate all three stages (Inputs-Outputs- Outcomes) rather than overly focusing on one.
Let me start with a quite simple mathematical view. Outputs (Y) are a function of Inputs (X). And Outcomes are a derivative of Outputs(Y). In this overly simplified model though, there are a couple of things I observe repeatedly that we fail to consider.
- In a function of Y = f(X), there is always a factor of ε, we can quite fast omit extra error (ε) which enters in from the myriad of factors you do not account for. You always experience some degree of uncertainty as to how well your controlled actions produce their desired or expected result, hence Y = f(X) + ε
- What portion of the product or process situation’s output (the Y) can you attribute to the critical input factors (the X’s), and how much remains in the uncertainty or error (ε)? How well did you define all X’s that are critical for the output? (Multivariable) Did you have a good evaluation of all X’s that are critical for success?
- Causation vs Correlation: Most probably this is the most common mistake I observe in any performance discussion, whether for overall business or individual performance evaluation. Are input factors X driving the output variables Y, or are some of X just correlated with Y? So which sub variables of X are driving Y?
- Output to Outcome Derivative: When we are looking at the outcomes we want to achieve from the outputs, are we considering a total derivative or partial derivative? What do I mean: A partial derivative of a function of several variables is its derivative with respect to one of those variables, with the others held constant. So how do assess the other variables when assessing overall Outcome?
The intention here is not to give a full mathematical perspective (and not to be fully correct with Calculus), but just to make it clear that only looking Y (Outputs) is completely missing the big picture (and introducing errors) and hence requires a deeper discussion of Inputs, Outputs and Outcomes. Otherwise, we are bringing both nearsightedness and farsightedness to the organization.
Now let's look at the problem more from a business perspective beyond high-level mathematical view and go deeper, starting with Input to Output relations. As companies grow, metrics became more important in any business and employee evaluation, however sometimes Input metrics and Output metrics are mixed, or there is a higher tendency to look the output metrics which might bring wrong signals or lack of ability to see key trends. The book of “Working Backwards” of Bryar and Carr gives an exceptionally good overview how you need select and define the Input metrics you need to measure. An excellent choice of metrics will deliver clear, actionable guidance, a poor choice will result in a statement of the obvious. The flywheel concept in Jim Collins’s book Good to Great describes nicely the model how the controllable input metrics drive a key output metric in a closed loop system in which you inject energy into core elements, the flywheel spins faster. Looking Amazon retail example as mentioned in the book “Working Backwards”, Customer Experience is an input. Better Customer experience leads to more traffic. More traffic attracts more sellers seeking those buyers. More sellers lead to wider selection. Wider selection enhances customer experience, completing the circle. The cycle drives growth, which in turn lowers cost structure. Lower cost leads to lower prices, improving customer experience and the flywheel spins faster. Here is the question then. Growth is an Output but is it more important to just discuss Output metric as a percentage or Input metrics in detail which drive the Output metric. And consider there is more than one Input metric which needs to be discussed, hence just looking Output gives us a very minimal picture of what is really happening, might be not insightful or even worse misleading. Donald Wheeler in the book “Understanding Variation” nicely clarifies this: “Before you improve any system… you must understand how the inputs affect the outputs of the system. You must be able to change the inputs to achieve the desired results.” In summary, any performance discussion overly focused on Outputs without detailed consideration of Inputs is not complete. Start defining the Input Variables first, do a deep dive of them before talking Outputs. It will be much more insightful.
Now it is time to look at the relation between Outputs to Outcomes. Outputs are a good measure to see how things are at Time 0 when initiative has been completed. But the real benefits are accrued over a longer time period. Hence the first variable to consider is timeline. How will the benefits of the initiative drive long term success? The second one is people. You might have achieved initial results, but will these be enough to be sustained and continued through your people, so will the change/initiative stick or will fade away? The third one is perspective. Outcomes are what your customers are experiencing, outputs are what you are seeing. So, do you look internally for your achievements, or do you look from your customer’s perspective and their success? (Here customers might be internal customers or external customers). These are just some variables whether you are experiencing a watermelon effect: Your outputs (activities) might meet defined targets, but the outcome is not achieved. Looking at the previous examples at the beginning of the article, are marketing campaign leads connecting to sales and customer satisfaction, does the activity performed by your employee reaching out X customers and Y partners create the right impact for the organization, team, and customers or is it just a transient output with limited real impact?
"Input", "Output" and "Outcome" are all very important. If you forget one or do not have a connection between "Input", "Output", "Outcome", it will impact success. And you won't be able to assess the performance of any initiative holistically if you do not have a balanced perspective of assessing the inputs, outputs and outcomes. Looking at Inputs, Outputs and Outcomes together gives us the complete picture of why we are going succeed, what we have achieved and how we will sustain and grow the transient results. If you miss this complete picture, chances are likely you might end up both nearsighted and farsighted.