How to Measure Anything: Finding the Value of Intangibles in Business
Author: Douglas W. Hubbard
How do we measure risk or return with such “soft” project components as advertising and marketing results, new product initiatives or new hires? Enter Douglas Hubbard, author of How to Measure Anything (John Wiley & Sons, 2007). Hubbard has made an esoteric subject interesting and accessible, by writing in a clear and concise manner and using real-life examples to make his concepts stick.
Hubbard defines measurement as a set of observations that reduce uncertainty where the result is expressed as a quantity. His paradigm requires the use of best guesses, educated estimates or ranges of possibility in the absence of certainty when it comes difficult to measure items. When creating measurement, he says we should hold four assumptions:
- Our problem is not as unique as we think
- We have more data than we think
- We need less data than we think
- There is a useful measurement that is much simpler than we think.
These assumptions create a starting point, but generating factual, relevant numbers requires doing research, looking at data and assembling a team to answer numerous questions regarding the soft or less tangible components.
The key to putting the concepts in this book to work is to make sure that your team is “calibrated” for range estimates. Hubbard points out that most people are unwilling to “commit to a number.” But most people can commit to, or project, a range of numbers, i.e., sales will increase between £3 million and £5 million if we put a qualified new person in the field; the additional cost will be between £80 K and £100K for that person; gross margin should be between 45% and 50%. Hubbard terms the process of agreeing upon these ranges with confidence–team calibration.
Hubbard takes a great deal of time and care in providing the reader with an explanation of team calibration, and a process for developing ranges with 90 percent confidence. A 90 percent confident range is relatively straightforward—90 percent of the time the outcome will fall into the range project.
The range development process begins with questions such as:
- What are you trying to measure? What is the real meaning of the alleged “intangible?”
- Why do you care — what’s the decision and where is the “threshold?”
- How much do you know now — what ranges represent your uncertainty about this?
- What is the value of the information? What are the consequences of being wrong and the chance of being wrong, and what, if any, measurement effort would be justified?
- Within a cost justified by the information value, which observations would confirm or eliminate different possibilities? For each possible scenario, what is the simplest thing we should see if that scenario were true?
- How do you conduct the measurement that accounts for various types of avoidable errors?
The answers to these questions help to quantify value ranges. Once range values are established they then must be plugged into complex equations. Spreadsheet software, such as Excel, can perform the equations and ultimately provide measurements. In some cases you may need the help of a statistician or someone highly adept at math to help create equations and spreadsheets.
Hubbard’s approach offers solutions to situations I previously felt I could not measure.