Use the art of Moneyball to make your business unfair

by | Jan 20, 2021 | Blog, Company

In pretty much all lines of business from the smallest startup to the biggest corporate, we spend too much time focusing on boosting our financial performance numbers – yet we spend very little time considering the meaning behind them. The business world we have constructed demands an objective way to measure performance, and black and white (sometimes red) financial figures universally give us that. They also allow us to compare and benchmark against other similar organisations. But we go from quarter to quarter without focusing on what caused those results in a quantifiable way.

We often see them at their face value and move on. We must remember that these financial figures are a result, and a by-product, of successful drivers within your business. The static, moment in time numbers we look at every couple of months ultimately represent the scorecard we care about… but they do not help us understand how to score.

Introducing the Moneyball concept

Just in case you’re not a Brad Pitt or Jonah Hill fan and haven’t seen Moneyball (or read the book), here is a quick summary.

The story is of Oakland Athletics manager Billy Beane. Oakland Athletic are a small market team in the MLB with a small budget who aren’t really going anywhere. Rather than relying on the gut instincts of old-time scouts – as was the standard practice since the game was created – Beane brought in a data-driven approach. He used statistics to determine which players possessed undervalued skills, and how he could acquire players that could win on differentials.

Beane knew that the club couldn’t compete against the giants of baseball who had a blank cheque book to build whatever squad they wanted. He spotted that the system was broken and there were strong biases that made little sense; be it age, appearance or personality, that distorted the market.

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It’s all about evaluating skills and putting a price on them. Thirty years ago, stockbrokers used to buy stock strictly by feel. Let’s put it this way: Anyone in the game with a 401 (K) has a choice. They can choose a fund manager who manages their retirement by gut instinct, or one who chooses by research and analysis. I know which way I’d choose.

Billy Beane

Interestingly, the concept was mainly driven by a single advanced statistic – on-base percentage (OBP). OBP is a number that, in effect, measures a hitter’s chances of reaching base in any given at-bat through either getting a hit or by drawing a walk. Until the Oakland A’s started winning A LOT no-one even considered this a valuable measurement of success or seemingly important to quantify value.

Their success exploded the concept of advanced metrics not just in baseball, but throughout sports. It is now used heavily in pretty much every professional setting as an essential method of trying to gain an advantage for a team or individual. The below graph illustrates the evolution of data and statistics (this case in basketball).

Ultimately for everyone in sports, there is more data, more decisions made based on that data, and more evidence of what works…winning.

 

What should business learn?

As I’m writing this piece and even thinking about the landscape, I often wonder why the business world hasn’t adopted some of the techniques that are a constant now throughout sports – particularly when it comes to quantifying performance.

Firstly, I want to make clear that I’m not an accountant or a numbers whizz, but… generally, business financial reporting provides the key indicators on the health of that business. Financial reporting is a way of following standard accounting practices to give an accurate depiction of a company’s finances, including:

  • Revenues
  • Expenses
  • Profits
  • Capital
  • Cashflow

When we begin to understand who this information is important too, it comes down to the below. Obviously, the bigger the organisation, the more eyeballs that are on them, and the more scrutiny they come under when they release their financial performance. CEOs of public companies are often judged and held accountable to the performance of the share price, which is so much driven by the bottom line.

company diagram

So where do you begin?

One of the key points to note is that our current business world generally isn’t set up to worry about the long term. The biggest businesses are compelled to look at their business in quarters and see everything through the lens of the share price. Often a weakening share price leads leadership teams to announce a realignment within their workforce, which would often mean a reduction of people and ultimately reducing costs. This is a somewhat necessary step to jolt and stabilise the share price, but a jolt that is often not sustained. Headcount and salary can be immediately quantified within the business on the balance sheet but can result in reduced engagement among remaining employees. This is just one example, but time and time again leadership teams do what is necessary to stabilize the business in order to appease investors and stakeholders.

But the majority isn’t always right. At its very core, entrepreneurship is all about breaking the mould and being fresh with ideas. In 2020, this adaptability and fresh thinking was rewarded as we were forced to dramatically change our outlook on the the way that work happens.

Pre-pandemic can you imagine how long a work from home strategy would take for a leadership team to pull off…a year, a decade? Genuinely, how long do you think?

When overnight strategies were altered to get everyone working from home a lot of companies quickly realised that they could do it and that large office cost on the balance sheet didn’t look as essential.

As with the Moneyball concept, 2021 will see businesses unable to blindly follow the rest, or even listen to their advisors. There isn’t a blueprint or track record to follow. This is completely new territory for everyone and instead, they will be forced to forge a new path and look for a new way to do things to create better results.

Oh… and as for the Oakland A’s and the entire Moneyball concept, they didn’t actually win the championship. They did do so much more though. By re-evaluating their strategy in this way, the 2002 Athletics, with approximately $44 million in salary (less than the cost of the movie), were competitive with larger market teams such as the New York Yankees, who spent over $125 million in payroll that season… they finished with the same number of wins (and tied 1st place in the league). It allowed Oakland A to compete on a level unimaginable previously and showed the world that it only takes one moment for people to look at something differently and realise they have missed the whole picture.

What are you trying to discover?

The data is only as good as the question you ask it. So many changes within businesses are designed and instigated from the top of the organisation without the full insight as to where a company is. This is quickly followed by realisation that they’re unable to understand what success looks like. For example, I have spoken to so many businesses recently who tell me that when it comes to learning and development the holy grail is being able to quantify the success of certain activities.

It’s never been more important to remember that every person in the organisation, throughout the C-Suite, managers, gig workers, and your part-time intern will have a different lived experience of 2020, professionally and personally. The tools and comms you provide them becomes the interface and will play a huge part in that, especially while remote working prevails. It is therefore essential that leaders strive to identify what unique impacts they bring – and to whom. It’s not good enough to look at potential office reduction as a reduced cost, but fully understand the impact good and bad it will have.

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The ability to gather, organize, interpret, and act on data and analytics will be the defining competitive differentiator of our lifetimes. Companies that embrace it will have an edge.

McKinsey, 2020 Reimagining the post-pandemic organisation

You should strive to boost your organisation by taking advantage and utilising all the data that you have in your organisation, but also don’t undervalue the employee’s voice. You can then make the most informed decisions that can only drive improvement and unleash the undervalued potential.

The game has changed and will change again throughout 2021. What are the new insights you can identify for your business to take it to the next level?

Originally posted on Jazz’ LinkedIn here.

Contact us to see how Workbench can help you gain clarity on your organisation beyond the money.

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