Eureka Moments for Metrics

Finance

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Finance executives and managers suffer the same problem that all of us with Internet connections constantly grapple with in our personal and work lives: information overload.

There are so many easy ways to get metrics that we often gorge ourselves on numbers, yet remained hungry for actionable information. Metrics mean nothing unless there’s some understanding as to what the underlying cause and effect are.

Gaining that understanding during planning and forecasting activities feels like a Eureka! moment.

UCLA Professor Ed Leamer enjoyed a similar Eureka! moment when he looked at payroll and payment solutions provider Ceridian’s unit that manages payment cards for trucking companies. Leamer realized that by monitoring diesel fill-ups among 7,000 different truck stops throughout the Interstate Highway System, he could keep tabs on inventory and finished goods volumes that reflect industrial production in the U.S. Thus, the Ceridian-UCLA Pulse of Commerce Index (PCI) was created, as Daniel Gross outlines in this article.

In effect, Leamer argues, the PCI allows us to know sooner than the Fed would tell us how industrial production is going, Gross writes. But when an economy starts to run into trouble, the goods sector – not the service sector – tends to go south first.

The PCI plummeted in the first half of 2008, when many economists remained in denial that the recession was taking hold.

What Leamer and his team discovered – a measure that provided reliable information about performance trends – is exactly what we seek to integrate into our forecasting and planning processes. Increasingly, these Eureka! moments occur when corporate finance folks look ahead at performance indicators (especially those that come from the sales and operations folks).

The interesting part of this story is that this work never stops – organizations and their financial planners always need new Eureka! moments because conditions, and indicators, change. Leamer’s team realized as much when soaring energy prices caused companies to greatly increase fuel efficiency. Giant retailers, like Wal-Mart, reduced the consumption of diesel fuel in their trucking fleets.

Over time, as services grow and more goods become digital, Gross concludes, the relationship between trucking miles and [gross domestic product] will grow more distant.

For similar reasons, corporate planning should be continuous in nature.

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