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Myopic view of business performance…

December 12, 2010 Leave a comment Go to comments

I have always tried to see with interest what story business metrics say… and the recent downturn and its aftermath has shown a different view of how companies mask their actual performance through the metrics they choose.

Look at this scenario… a company growing consistently from 2001 through 2007… at an average annual growth of 10% and then, took a major slump in 2008 and then recovered slowly.
The company proudly states that their year-on-year growth in 2010 is 20% and thereby beating market expectations. This seems to have cleaned all the sins the company had done in the past… and shows that the business is growing and that too pretty well.

However, the missing picture here… because of this short-term view about the past is… that the performance of the company is still far away from the highs it saw in 2007. So, in absolute or even relative terms, if you look at the growth vis-a-vis prior 2-year / 3-year / 5-year levels, the picture is absolutely different.

 

Had they shown performance versus prior year levels, it would have been:
c2008: 14% growth
c2007: 20% decline
c2006: 7% decline

Somehow this seems like the choice of performance metrics is more about convenience than about actual representation of performance. After all, every Chief Executive wants to show a positive view to justify compensation / investments / expenses. This leads to a confirmation-bias and hence complacency in making REAL improvements in business performance. It is high time, companies look beyond temporal measures to just please the market and the financial analysts.

Talking about financial analysts, I have a serious grudge against the whole financial services industry… the way they have made a deceptive business of making money from people’s money without any real value addition to the economy. Perhaps, this is going to be my next post. So, do watch out for this…

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  1. Abdul Mujeeb
    January 19, 2011 at 4:18 am

    Asak Moid Bhai, I have been following your posts for quite a while and its quite a learning for me. Refering to your last paragraph about the financial industry, I have been long waiting for your next post on this topic. As a layman when i look at the financial services industry i get a feeling that the industry is generating lot many jobs (except for recession period) and in turn adding to the economy, also i see lot many financial policies like insurance, mutual funds.. they have investments in most of the companies. I will be glad and very interested to know how such a big industry is not adding real value addition to the economy of a country. Hope you have it posted soon.

    • January 19, 2011 at 10:14 pm

      @ Abdul Mujeeb:

      Great to hear back from you and apologies for not following through with a post on financial services sector. I will definitely write a detailed post on this with substantial information to back my opinion.

      However, at a macro level, my argument is that economic value addition is through wealth creation. This is widely visible in sectors like industrial manufacturing, real estate, pharma, healthcare et al. For example, industrial companies manufacture a marketable product from basic raw materials.

      Shifting gears to financial services, the value being generated is purely monetary. And with net money flow in the global economy being constant, this monetary value is purely by moving wealth between individuals / institutions. It then is purely wealth redistribution and not wealth creation. Therefore, I don’t see this industry as a major economic value add to the company. It is merely a support system to ensure other sectors perform well.

      Please feel free to reach out to me with your opinion on this issue.

      • Abdul Mujeeb
        January 20, 2011 at 1:34 pm

        Moid Bhai I am looking forward to your detailed post on this topic. How ever one question that comes to my mind is;
        Is there a way to transform financial service industry into a wealth generation industry? You can even suggest your opinion question in your post.

  1. May 7, 2011 at 9:27 pm

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