By Mike Willis and Michael Smith     Posted on May 2, 2008

Mike Willis was Founding Chairman of XBRL International and is a partner with PricewaterhouseCoopers. Michael W. Smith is a vice president at Gartner Research. In this first of a two-part post, they describe how baseball’s front office is using an objective-evidence approach (known as “sabermetrics”) to win more ballgames – an approach they believe business managers would do well to emulate in their own operations. In part two, they will look at how Enhanced Business Reporting (EBR) coupled with XBRL-GL can help realize for businesses what sabermetrics has achieved for baseball.

Springtime, hot dogs, and those famous words “play ball” are hallmarks of America’s favorite pastime: baseball.  ERA, pitcher’s wining percentage, batting average, RBIs are traditional baseball metrics… but do they actually measure the performance outcomes that matter?  Bill James, a former night watchman at the Stokely Van Camp Pork and Beans plant in Lawrence, Kansas, believes that many of these statistical measures are simply nonsense.  But who is Bill James?  And for that matter, who cares what he thinks? And what does any of this have to do with your company’s performance?
 
Let’s first look at some of baseball’s traditional metrics and how James sees them.  (See also this 60 Minutes article and 60 Minutes video for additional information.)

A pitcher’s won-loss record does not tell how good or how bad a pitcher is. “The most accurate thing is to focus on the strikeouts, the walks, the home runs allowed. And to evaluate the pitcher on that level,” James explains.

Batting averages are considered THE way to measure a hitter’s effectiveness; however, James believes that players who get a lot of walks and wear down pitchers are overlooked. So he created a new more telling statistic, the “on-base percentage.”

James also disputes the notion that pitchers prevent stolen bases.  He proposes that it is really the catcher.

But his opinions are not just about players. His analysis of Boston’s Fenway Park (with its famed left-field wall, the Green Monster) shows that it favors left-handed hitters rather than right-handed hitters as commonly assumed. 

Many baseball fans have never heard of Bill James, even though his objective-evidence-based statistics have literally changed the way that the game is played.  James was hired by the lowly Oakland A’s in 1997.  Subsequently his insights led to a lineup of young, underrated players that put the A’s in second and first place in the American League West in 1999 and 2000, respectively. 

In 2004, another long-time hapless team, the cursed Boston Red Sox, hired James away from Oakland.  James’s objective-evidence approach to baseball statistics, commonly referred to as “sabermetrics,” tipped the scales on the curse and led in part to the Red Sox World Series championships in two of the past four years after the historic 86-year drought.    

So, who is Bill James?  He is Senior Advisor for Baseball Operations for the Boston Red Sox.  Many in baseball say that he has moved the management style of a lot of General Managers from one of gut instinct to a more systematic approach based on hard evidence; in so doing, he fundamentally changed the way the game is played.

At the core of James’s approach is a deep analysis of how baseball games are won and what factors most influence this outcome (i.e., cause and effect relationships).  This has led to a more detailed analysis of game results and the identification of new performance metrics that are predictive of these results.  This approach is very similar to the objectives of corporate performance management, and CFOs should take notice.

James truly understands the end-state objective and how the parts contribute to that objective. In baseball, the objective is winning games and the parts are the players/coaches, ballparks, and equipment. In business, the objective is to maximize the net present value of all future cash flows (not just for the next 30 days, 90 days, or twelve months, but for the entire life of the firm); the parts are resources and related business processes, people, and technology used to generate cash flow.

James has always seen baseball from this simple perspective — winning and how the parts contribute to winning. He is not distracted by individual accomplishments and truly sees the whole as being much greater than the sum of the parts.

Business executives, retail investors, and regulators can learn a lot from James. It starts by having a clear understanding of the end state value objective — maximizing the net present value of all future cash flows. Next, it’s understanding what affects the ability of the company to generate future cash flows, namely the parts (i.e. internal people, processes, and technology). To measure the effectiveness of the parts, management must have timely and cost effective-information on:  

• operating margin and unit information on specific products and services;
• relationships between specific employees, process enhancements, technical capabilities, and skills;
• insights on process status measurements;
• supplier and customer delivery expectations.

Understanding and measuring the cause and effect of how these parts contribute to the whole is sabermetrics for business, and it is long overdue — unless of course, you prefer the 86 year curse.

Traditional corporate performance metrics include EPS, gross revenue increases, current ratio and others, but these are lagging indicators of performance.  Company managers are becoming increasingly aware of the need for predictive measures of business performance, and they are seeking to learn more about these measures to assist in their operational decision-making.  Many financial managers can quickly identify growth via revenue increases; however, the sources of this growth go undetected.  For example, increases in product units, product mix, and related specific product margins are often more difficult if not impossible to obtain in a timely or cost-effective manner, leaving managers flying blind for days, weeks, and often months. Its “batting with a blindfold,” to use a baseball analogy.

There are two standardization efforts that are useful to management in implementing more effective information processes for decision making.  One is the extensible business reporting language (XBRL), which is an international information standardization language that can be used to articulate, access, manage, and analyze the granular levels of information and data necessary for more effective objective and evidenced-based decision making.  The second is the Enhanced Business Reporting Consortium (EBRC); as discussed in a post on this blog by Robert Eccles, it is a market-based collaborative standardization effort that has developed an information framework for a broad range of value-oriented concepts and predictive performance indicators.  

EBRC is collaborating with other similar market oriented efforts in the US, the EU, Japan, and Australia to create a robust reusable international standardized framework and related predictive performance indicators for consideration, expansion, and adoption by company management.  

There’s an old business school idea called managing by objective.  EBRC makes this idea work by clarifying the relationship between the actions that a manager might take and the objective that the manager wants to achieve.  In other words, EBRC helps the manager concentrate his efforts to achieve their priority objectives; after all, what you measure does impact performance.  This is true for baseball and for corporate performance.   The question is:  Are you measuring the right things to achieve your desired performance objectives?

Both XBRL and EBRC are market collaborative consortia, open to all supply chain participants, and specifically designed to address the problems of information access and evidenced-based predictive measurements.  Management should consider engaging in these efforts to ensure that they are leveraging the most advanced delivery methods and performance measurement criteria, rather than relying on outdated delivery and performance decision process enablers.   

While the great American pastime is baseball, the most popular American pastime is making money.  Understanding the cause and effect of business performance measurements is critical to sustainable corporate economic growth, and value creation is a critical skill for any all-star manager worthy of Hall of Fame consideration. 

And for all you Yankees fans, we understand that they have developed their own approach to sabermetrics!

Add to Del.icio.us | Digg this

This entry was posted on Friday, May 2nd, 2008 at 9:40 am and is filed under General, . You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.