How to Measure Anything

Finding the Value of Intangibles in Business

Douglas W. Hubbard

• Publisher: Wiley
• Year: 2014
• ISBN:
  9781118836446
• Edition: 3
• Topic: Economics
• Subtopic: Statistics for Business & Economics
• Index: Economics

Now updated with new measurement methods and new examples, How to Measure Anything shows managers how to inform themselves in order to make less risky, more profitable business decisions

This insightful and eloquent book will show you how to measure those things in your own business, government agency or other organization that, until now, you may have considered "immeasurable, " including customer satisfaction, organizational flexibility, technology risk, and technology ROI.

• Adds new measurement methods, showing how they can be applied to a variety of areas such as risk management and customer satisfaction
• Simplifies overall content while still making the more technical applications available to those readers who want to dig deeper
• Continues to boldly assert that any perception of "immeasurability" is based on certain popular misconceptions about measurement and measurement methods
• Shows the common reasoning for calling something immeasurable, and sets out to correct those ideas
• Offers practical methods for measuring a variety of "intangibles"
• Provides an online database (www.howtomeasureanything.com) of downloadable, practical examples worked out in detailed spreadsheets

Written by recognized expert Douglas Hubbard—creator of Applied Information Economics— How to Measure Anything, Third Edition illustrates how the author has used his approach across various industries and how any problem, no matter how difficult, ill defined, or uncertain can lend itself to measurement using proven methods.

PART I
The Measurement Solution Exists

CHAPTER 1
The Challenge of Intangibles

When you can measure what you are speaking about, and express it in numbers, you know something about it; but when you cannot express it in numbers, your knowledge is of a meager and unsatisfactory kind; it may be the beginning of knowledge, but you have scarcely in your thoughts advanced to the state of science.

—Lord Kelvin (1824–1907), British physicist and member of the House of Lords

Anything can be measured. If something can be observed in any way at all, it lends itself to some type of measurement method. No matter how “fuzzy” the measurement is, it’s still a measurement if it tells you more than you knew before. And those very things most likely to be seen as immeasurable are, virtually always, solved by relatively simple measurement methods. As the title of this book indicates, we will discuss how to find the value of those things often called “intangibles” in business. The reader will also find that the same methods apply outside of business. In fact, my analysts and I have had the opportunity to apply quantitative measurements to problems as diverse as military logistics, government policy, and interventions in Africa for reducing poverty and hunger.

Like many hard problems in business or life in general, seemingly impossible measurements start with asking the right questions. Then, even once questions are framed the right way, managers and analysts may need a practical way to use tools to solve problems that might be perceived as complex. So, in this first chapter, I will propose a way to frame the measurement question and describe a strategy for solving measurement problems with some powerful tools. The end of this chapter will be an outline of the rest of the book—building further on these initial concepts. But first, let’s discuss a few examples of these so-called intangibles.

The Alleged Intangibles

There are two common understandings of the word “intangible.” It is routinely applied to things that are literally not tangible (i.e., not touchable, physical objects) yet are widely considered to be measurable. Things like time, budget, patent ownership, and so on are good examples of things that you cannot literally touch though they are observable in other ways. In fact, there is a well-established industry around measuring so-called intangibles such as copyright and trademark valuation. But the word “intangible” has also come to mean utterly immeasurable in any way at all, directly or indirectly. It is in this context that I argue that intangibles do not exist—or, at the very least, could have no bearing on practical decisions.

If you are an experienced manager, you’ve heard of the latter type of “intangibles” in your own organization—things that presumably defy measurement of any type. The presumption of immeasurability is, in fact, so strong that no attempt is even made to make any observation that might tell you something about the alleged immeasurable that you might be surprised to learn. Here are a few examples:

• The “flexibility” to create new products
• The value of information
• The risk of bankruptcy
• Management effectiveness
• The forecasted revenues of a new product
• The public health impact of a new government environmental policy
• The productivity of research
• The chance of a given political party winning the White House
• The risk of failure of an information technology (IT) project
• Quality of customer interactions
• Public image
• The risk of famine in developing countries

Each of these examples can very well be relevant to some major decision an organization must make. The intangible could even be the single most important determinant of success or failure of an expensive new initiative in either business or government. Yet, in many organizations, because intangibles like these were assumed to be immeasurable, the decision was not nearly as informed as it could have been. For many decision makers, it is simply a habit to default to labeling something as intangible when the measurement method isn’t immediately apparent. This habit can sometimes be seen in the “steering committees” of many organizations. These committees may review proposed investments and decide which to accept or reject. The proposed investments could be related to IT, new product research and development, major real estate development, or advertising campaigns. In some cases I’ve observed, the committees were categorically rejecting any investment where the benefits were “soft.” Important factors with names like “improved word-of-mouth advertising,” “reduced strategic risk,” or “premium brand positioning” were being ignored in the evaluation process because they were considered immeasurable.

It’s not as if the proposed initiative was being rejected simply because the person proposing it hadn’t measured the benefit (which would be a valid objection to a proposal); rather, it was believed that the benefit couldn’t possibly be measured. Consequently, some of the most important strategic proposals were being overlooked in favor of minor cost-saving ideas simply because everyone knew how to measure some things and didn’t know how to measure others. In addition, many major investments were approved with no plans for measuring their effectiveness after they were implemented. There would be no way to know whether they ever worked at all.

In an equally irrational way, an immeasurable would be treated as a key strategic principle or “core value” of the organization. In some cases decision makers effectively treat this alleged intangible as a “must have” so that the question of the degree to which the intangible matters is never considered in a rational, quantitative way. If “improving customer relationships” is considered a core value, and one could make the case that a proposed investment supported it, then the investment was justified—no matter the degree to which customer relationships improved at a given cost.

In some cases, a decision maker might concede that something could be measured in principle, but for various reasons is not feasible. This also renders the thing, for all practical purposes, as another “intangible” in their eyes. For example, perhaps there is a belief that “management productivity” is measurable but that sufficient data is lacking or that getting the data is not economically feasible. This belief—not usually based on any specific calculation—is as big an obstacle to measurement as any other.

The fact of the matter is that all of the previously listed intangibles are not only measurable but have already been measured by someone (sometimes my own team of analysts), using methods that are probably less complicated and more economically feasible than you might think.

Yes, I Mean Anything

The reader should try this exercise: Before going on to the next chapter, write down those things you believe are immeasurable or, at least, you are not sure how to measure. After reading this book, my goal is that you will be able to identify methods for measuring each and every one of them. Don’t hold back. We will be talking about measuring such seemingly immeasurable things as the number of fish in the ocean, the value of a happy marriage, and even the value of a human life. Whether you want to measure phenomena related to business, government, education, art, or anything else, the methods herein apply.

With a title like How to Measure Anything, anything less than an enormous multivolume text would be sure to leave out something. My objective does not explicitly include every area of physical science or economics, especially where measurements are already well developed. Those disciplines have measurement methods for a variety of interesting problems, and the professionals in those disciplines are already much less inclined to apply the label “intangible” to something they are curious about. The focus here is on measurements that are relevant—even critical—to major organizational decisions, and yet don’t seem to lend themselves to an obvious and practical measurement solution.

So, regardless of your area of interest, if I do not mention your specific measurement problem by name, don’t conclude that methods relevant to that issue aren’t being covered. The approach I will talk about applies to any uncertainty that has some relevance to your firm, your community, or even your personal life. This extrapolation is not difficult. For example, when you studied arithmetic in elementary school, you may not have covered the solution to 347 times 79 in particular, but you knew that the same procedures applied to any combination of numbers and operations.

I mention this because I periodically receive emails from someone looking for a specific measurement problem mentioned by name in earlier editions of this book. They may write, “Aha, you didn’t mention X, and X is uniquely immeasurable.” The actual examples I’ve been given by earlier readers included the quality of education and the competency of medical staff. Yet, just as the same procedure in arithmetic applies to multiplying any two numbers, the methods we will discuss are fundamental to any measurement problem regardless of whether it is mentioned by name.

So, if your problem happens to be something that isn’t specifically analyzed in this book—such as measuring the value of better product labeling laws, the quality of a movie script, or the effectiveness of motivational seminars—don’t be dismayed. Just read the entire book and apply the steps described. Your immeasurable will turn out to be entirely measurable.

No matter what field you specialize in and no matter what the measurement problem may be, we start with the idea that if you care about this alleged intangible at all, it must be because it has observable consequences, and usually you care about it because you think knowing more about it would inform some decision. Everything else is a matter of clearly defining what you observe, why you care about it, and some (often surprisingly trivial) math.

The Proposal: It’s about Decisions

Why do we care about measurements at all? There are just three reasons. The first reason—and the focus of this book—is that we should care about a measurement because it informs key decisions. Second, a measurement might also be taken because it has its own market value (e.g., results of a consumer survey) and could be sold to other parties for a profit. Third, perhaps a measurement is simply meant to entertain or satisfy a curiosity (e.g., academic research about the evolution of clay pottery). But the methods we discuss in this decision-focused approach to measurement should be useful on those occasions, too. If a measurement is not informing your decisions, it could still be informing the decisions of others who are willing to pay for the information. If you are an academic curious about what really happened to the woolly mammoth, then, again, I believe this book will have some bearing on how you define the problem and the methods you might use.

Upon reading the first edition of this book, a business school professor remarked that he thought I had written a book about the somewhat esoteric field called “decision analysis” and disguised it under a title about measurement so that people from business and government would read it. I think...