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April 23, 2006

Metrics Myths: Miles Per Gallon, or Gallons Per Mile?

A cautionary analogy of measuring value.

Miles Per Gallon (MPG) is an oft-used example of the "bang for the buck" flavor of value. But as we all know, the fine print that comes with it is pretty much of a whopper: mileage may vary. The fine print makes the measurement a lot less reliable until we know a lot more about an additional little factor waiting to be included -- the driver.

That is, with MPG, what we want to think of as the value it describes is often less than what we're really after: the reality is that the independent efficiency of the system it describes (the car) has a relationship with the driver that is the real source of whatever association we want to make between the system and effectiveness. What we're usually really after is effectiveness, and MPG gets us only part of the way there.

If we don't forget that the driver will be involved, miles per gallon is more obviously an indicator about a resource input and the efficiency of its consumption. Yet although we know better, we tend to use it as if we "make" miles with the resource (gas) and the resource must "efficiently" cause more miles to be made. That is, intuitively, the story we want to tell with the MPG measure is one of effective process production. The problem with this is that we don't really make miles with the resource -- instead, we acquire them. As a measure, MPG is actually more a story about "spending" the resource than about process effectiveness.

For process measurement about effectiveness, we have to look at not miles per gallon, but instead gallons per mile (GPM).

Why? Because the Mile is the target achievement unit of the travel (process). Going from point A to point B, we want to cover the necessary miles regardless of what the cost in gallons may be. The cost might change our enthusiasm for making the trip, but the cost does not change the distance to the target (of the trip). Consequently, GPM speaks to a production efficiency that might be indicated by the phrase "gallons may vary" and brings up effective resource consumption.

Summing up the above:
- MPG pertains to efficient resource consumption for effective process production
- GPM pertains to effective resource consumption for efficient process production

So, what's the management difference between MPG and GPM? It's the difference in what kind of value is determined.

Value through GPM is about deciding which type of resource should be committed.
- Gas, electric, or steam?
- People, process, or technology?
- etc.

Value through MPG is about deciding which resource of a given type should be committed, as in from what category should the given type of resource be drawn:
- Basic/premium? Generic/branded? New/legacy?
- Stored vs. just-in-time?
- Standard? Custom?
- etc.

Put that way, such choices for how to change value relate to each other in a fairly straightforward way. The picture below makes this more visible in conventional management terms:

As an example of how this plays out, consider a company's IT operations. According to the framework above, IT has four kinds of value contributions to offer to the business:
- Capacity: through IT Assets (resource efficiency)
- Outputs: through IT Systems composed of assets (process efficiency)
- Options: through IT Services running on the systems (resource effectiveness)
- Outcomes: through Applications leveraging the services (process effectiveness)

The overall discipline of managing the value would be about making choices in all four cases that systematically increase the likelihood of desired outcomes -- meaning the odds of generating "explicit actual value"... As demonstrated by the framework, it need not be confusing to direct the appropriate measurement of value contributions when the important perspectives are both distinct and logically related.

Posted by Malcolm Ryder at April 23, 2006 10:04 PM

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