Numbers are at the foundation of understanding both science and business. Both fields rely on translating real world events into data points which are then used to answer questions and generate insights.
Coming from a health and science background I am familiar with looking at health data and being able to gain insights to make decisions. However, as I transitioned into the business side of science, I came across a new set of numbers and vocabulary to describe these numbers that were unfamiliar to me. These numbers were used to describe the health of a business or industry, to identify trends, or point out top performers. To help me understand these new numbers I use analogies based on my initial training to help me understand a new industry.
For context, in an academic research lab a primary investigator in coordination with a team consisting of technicians, graduate students, and a lab coordinator will write a grant to apply for funding to conduct research. If they get funded, they can perform the research, write up their results in the form of a manuscript and then try to get the manuscript published in a scientific journal. This process usually takes years from generating an idea for a research project to getting the findings published. The more interesting and impactful the research the more likely it will be published in a top tier journal with more readers.
Looking at this same scenario from a different perspective, each research lab might be viewed as a small business or a start-up. They have an operating budget based on the amount of their grant. They have to use their resources (e.g. people, money, time) to generate new knowledge, publish that knowledge, and get more funding based on their previous success. The more papers they publish and the more impactful the publications, the greater the value one could consider having been created from the grant funding. The productivity of a researcher can be evaluated using an index such as the h-index. In business, productivity and performance is often measured using financial ratios that can be used to compare firms across the industry.
All industries use numbers and metrics to describe performance, measure trends, and allocate status. Some actions that help me to understand numbers in a new industry include:
- Putting the numbers into context
- Understanding the calculations
- Using the metrics for decision making
1. Putting the numbers into context
The first step to understanding a new set of metrics is to put them into context. By adding a reference point one can better understand the impact and significance of the metrics.
Four different ways to put a number into context include:
- Historical – What has the metric done over the past year? 3 years? 5 years? 10 years?
- Competitors – How does the metric compare to direct competitors?
- Industry averages and norms – Is the metric on par with industry averages?
- Company goals – Is the change in the metric planned?
Each of these techniques can be used independently or in combination to provide structure and anchor the metric in a way that provides a reference point.
For example, a baby can triple his or her birth weight in about a year, yet if an adult were to triple their weight it would be cause for concern. Similarly, if a startup doubled its revenue it would be much less surprising than a large corporation doubling its revenue.
2. Understanding the calculations
The next step is to get more granular with the metrics by understanding how they are calculated and what factors are accounted for (and which are left out) in each metric.
The following questions can help assess the rigor of a metric:
- Is the metric well established and widely adopted in the industry?
- Is the metric calculated using an appropriate quantity and quality of data?
- Are there any assumptions being used in the calculation?
Gaining a deeper understanding of the inputs of the calculation for a given metric can help you to understand the correct situation to apply the metric and to understand its limitations. This will help you to select the appropriate metric for the question at hand.
3. Using the metrics for decision making
The ultimate purpose of a metric is to take lots of data from the real world and simplify it into something that is simple, measurable, understandable, and trackable and which can be used to drive decisions.
When making decisions based on a target metric one needs to understand if the target is a hard cut off or if it has an acceptable range. If you are a start up with a 6-month runway (hard cutoff) it’s very different than having a growth target for a new business unit in a large cooperation (acceptable range).
When tracking a metric use appropriate benchmarks to assess performance, identify progress, and make necessary adjustments. For example, factories often have performance standards that allow a certain number of imperfections, however if the production line exceeds this number then changes will need to be made to some of the inputs, to the production process, or in some other respect.
Indicators are useful tools to simplify a complex process. For example, the cost of sequencing the human genome has dropped from $100,000,000 to $1,000 per human genome. The cost of launching a payload into space has decreased from $54,500 to $2,720 per kilogram. There are many complex factors involved in reducing the cost but an indicator can help to demonstrate progress and ideate around potential tipping points once the indicator hits a certain value.
Taken together it is important to identify, evaluate, and implement the use of metrics in making business decisions.
Final thoughts
As you move into new industries or conduct a market research project, it will pay to remember that the metrics for performance will be unique to each industry. You can quickly understand the numbers by putting them in context, getting to know how they are calculated (including any key assumptions), and using the numbers to drive your decisions by setting targets and comparing against appropriate benchmarks.
Andrew Kuczmarski is a PhD candidate at the University of Delaware whose passion lies at the intersection of science and business.
Image: Unsplash
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