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book excerpt

The aim of this book is to reveal the hidden and potentially misleading nature of measurements that can make or break a business. It shows how to measure accurately and precisely so that the measured information businesses depend on is reliable. It shows how to determine which measurements and indicators can be trusted, and which mislead.

The stakes are enormous. Measurement problems lurk behind the daily headlines.

Many of the decisions that led to the 2007-2009 Credit Crunch were based on faulty measures of risk in the banking industry — measures with the allure of scientific precision. The banks invented a measure called "value at risk", and then used it as an indicator of their risk exposure. They were misled. They lost billions.

In one study, 94 per cent of the stock ratings of firms that declared bankruptcy indicated that investors should buy or hold shares right up to the day they filed for bankruptcy.

Nations around the world began retooling their economies to prevent global warming when scientists measured the global mean temperature and showed it shooting up. Mainstream scientists, media, politicians and others attacked the credibility of scientists who proposed alternative ways of measuring the global mean temperature than those used in official reports and that contradicted official findings. Then the computers at the Climatic Research Unit were hacked and e-mails were leaked with phrases like "trick" and "hide the decline."

Governments regularly change the way they measure inflation; some independent estimates of inflation peg it as much as 6 per cent higher than government measures.

Today managers are more reliant on measurements than ever before. Commerce is increasingly conducted through electronic transactions rather than personal relationships. Enterprise software that collects measurements and produces indicators is proliferating. Meanwhile, business professors, consultants, accountants and authors are continually devising new methods of measuring business performance. As we shall see, many of them grossly mislead.

If your measurements mislead you'll mismanage

There is a common saying that "if you can't measure it you can't manage it." Many people mistakenly think the reverse is true, that if they can measure it, or something they call "it," they can manage it. What they ignore is an old lesson from some of the greatest scientists—just because you can obtain numbers from measuring does not mean the thing you think you are measuring actually exists. What then are you managing? Businesses measure and create all sorts of indicators without asking whether they indicate what they think they indicate. Often they do not.

What is a misleading indicator? It is a measurement from which an unreasonable, unwarranted, or plain wrong, inference is made, explicitly or implicitly.

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Reprinted with permission from misLeading Indicators: How to Reliably Measure your Business by Philip Green and George Gabor, 2012, published by Praeger

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