By Richard Tyson
I’m a diehard baseball fan. I’ve loved the sport for as long as I can remember. As a little boy, my parents had a hard time getting me to come home for dinner on long summer days; I was just too busy playing baseball with the neighborhood kids.
As I got older, I played organized baseball, and as an adult, I’ve loved coaching kids to hit, pitch and field. Although I have never played or coached at the professional level, I have been an ardent student of major league baseball. I have followed the emergence of the Society of American Baseball Research (SABR). Its name gave rise to the term “sabermetrics,” which was coined by Bill James, a devoted baseball analyst and statistician.
Bill’s career focus has been on determining why baseball teams win and lose games. While many outside of baseball have never heard of Bill, he has revolutionized the game, and his influence has reached well beyond the sport. In fact, in 2006, he was named one of the 100 Most Influential People in the world by Time magazine.
One might ask, “Why does this baseball guy have such influence? Is baseball really that important?”
The answer is that Bill discovered through research and statistical analysis the key factors that led to successful baseball teams. Remember, major league teams are businesses. The teams that win are far more financially successful than those that lose. His discoveries began with baseball, but they provide insights for virtually every enterprise.
What Bill learned from studying reams of baseball statistics may seem surprisingly simple: The teams that win score more runs than their opponents. However, Bill then focused his attention on what creates runs. The answer was runners: players who got on base.
This is where his research created controversy. Old-school conventional baseball wisdom is that the team with the most players with high batting averages and home runs win. The data, however, showed that the players who walked or were hit by the pitcher, often got on base more often than the hitters. On-base percentage became the key performance indicator (KPI) for an increasing number of teams in the 1990s, including the Oakland A’s (featured in Michael Lewis’s book, Moneyball) and the Boston Red Sox (who hired Bill James).
This KPI has evolved today to on-base percentage plus slugging (OPS).
Management and each player are focused on hits plus walks plus the number of times a player is hit by the opposing pitcher divided by plate appearances PLUS the number of bases the player gets on each hit (single: 1, double: 2, triple: 3, HR: 4) divided by his number of at-bats.
This is undoubtedly more interesting to baseball nuts like me than to others, but there’s an essential leadership concept here: Every organization should determine the KPI that drives its success. And it should consistently track and share that metric as the focal point for its enterprise.
Let’s move from baseball to the corporation. In 1993, John Case coined the term “open book management” (OBM). The underlying premise of OBM is to share all relevant financial information that employees need to successfully do their jobs and deliver desired company outcomes.
While Case’s concept stresses financial KPIs, it can —and should — include operational KPIs. In baseball, we can see the correlation: OPS leads to runs, runs lead to wins, wins lead to championships and champions make the most money. Moneyball, to be sure!
As a business coach, I have learned the value of studying client businesses to discover a focal point that will deliver desired outcomes. In that endeavor, one client determined that the KPI they would track and share was gross profit (revenue less cost of goods sold) divided by operating expense, which they stated as GP/OE. This ratio became the open-book target metric for the company.
Initially, they hoped to achieve a ratio of 1.0, or breakeven. Over time, however, they saw this ratio rise consistently.
Why did this happen? For several reasons:
• Sales personnel focused on increasing revenue, while maintaining their price and margins.
• Plant personnel focused on improving their “lean” practices and reducing cost of goods sold.
• Administrative employees focused on expense control.
The combination of these served as the driving force for increasing profitability. Just like getting on base creates runs, focusing on GP/OE created profits.
So what drives your success? Every leader should zero in on this, develop an overarching KPI and share that metric liberally with their team. Then start scoring runs!
Richard Tyson is the founder, principal owner and president of CEObuilder, which provides forums for consulting and coaching to executives in small businesses.