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This is an excerpt from Douglas Hubbard's "How to Measure Anything". You can read  the first two chapters of the book here, or on Google Books

The Challenge of Intangibles

When you can measure what you are speaking about, and express it in numbers, you know something about it; but when you cannot express it in numbers, your knowledge is of a meager and unsatisfactory kind; it may be the beginning of knowledge, but you have scarcely in your thoughts advanced to the state of science.

—Lord Kelvin (1824–1907), British physicist and member of the House of Lords

Anything can be measured. If something can be observed in any way at all, it lends itself to some type of measurement method. No matter how “fuzzy” the measurement is, it’s still a measurement if it tells you more than you knew before. And those very things most likely to be seen as immeasurable are, virtually always, solved by relatively simple measurement methods. As the title of this book indicates, we will discuss how to find the value of those things often called “intangibles” in business. The reader will also find that the same methods apply outside of business. In fact, my analysts and I have had the opportunity to apply quantitative measurements to problems as diverse as military logistics, government policy, and interventions in Africa for reducing poverty and hunger.

Like many hard problems in business or life in general, seemingly impossible measurements start with asking the right questions. Then, even once questions are framed the right way, managers and analysts may need a practical way to use tools to solve problems that might be perceived as complex. So, in this first chapter, I will propose a way to frame the measurement question and describe a strategy for solving measurement problems with some powerful tools. The end of this chapter will be an outline of the rest of the book—building further on these initial concepts. But first, let’s discuss a few examples of these so-called intangibles.

The Alleged Intangibles

There are two common understandings of the word “intangible.” It is routinely applied to things that are literally not tangible (i.e., not touchable, physical objects) yet are widely considered to be measurable. Things like time, budget, patent ownership, and so on are good examples of things that you cannot literally touch though they are observable in other ways. In fact, there is a well-established industry around measuring so-called intangibles such as copyright and trademark valuation. But the word “intangible” has also come to mean utterly immeasurable in any way at all, directly or indirectly. It is in this context that I argue that intangibles do not exist—or, at the very least, could have no bearing on practical decisions.

If you are an experienced manager, you’ve heard of the latter type of “intangibles” in your own organization—things that presumably defy measurement of any type. The presumption of immeasurability is, in fact, so strong that no attempt is even made to make any observation that might tell you something about the alleged immeasurable that you might be surprised to learn. Here are a few examples:

• The “flexibility” to create new products
• The value of information
• The risk of bankruptcy
• Management effectiveness
• The forecasted revenues of a new product
• The public health impact of a new government environmental policy
• The productivity of research
• The chance of a given political party winning the White House
• The risk of failure of an information technology (IT) project
• Quality of customer interactions
• Public image
• The risk of famine in developing countries

Each of these examples can very well be relevant to some major decision an organization must make. The intangible could even be the single most important determinant of success or failure of an expensive new initiative in either business or government. Yet, in many organizations, because intangibles like these were assumed to be immeasurable, the decision was not nearly as informed as it could have been. For many decision makers, it is simply a habit to default to labeling something as intangible when the measurement method isn’t immediately apparent.

This habit can sometimes be seen in the “steering committees” of many organizations. These committees may review proposed investments and decide which to accept or reject. The proposed investments could be related to IT, new product research and development, major real estate development, or advertising campaigns. In some cases I’ve observed, the committees were categorically rejecting any investment where the benefits were “soft.” Important factors with names like “improved word-of-mouth advertising,” “reduced strategic risk,” or “premium brand positioning” were being ignored in the evaluation process because they were considered immeasurable.

It’s not as if the proposed initiative was being rejected simply because the person proposing it hadn’t measured the benefit (which would be a valid objection to a proposal); rather, it was believed that the benefit couldn’t possibly be measured. Consequently, some of the most important strategic proposals were being overlooked in favor of minor cost-saving ideas simply because everyone knew how to measure some things and didn’t know how to measure others. In addition, many major investments were approved with no plans for measuring their effectiveness after they were implemented. There would be no way to know whether they ever worked at all.

In an equally irrational way, an immeasurable would be treated as a key strategic principle or “core value” of the organization. In some cases decision makers effectively treat this alleged intangible as a “must have” so that the question of the degree to which the intangible matters is never considered in a rational, quantitative way. If “improving customer relationships” is considered a core value, and one could make the case that a proposed investment supported it, then the investment was justified—no matter the degree to which customer relationships improved at a given cost.

In some cases, a decision maker might concede that something could be measured in principle, but for various reasons is not feasible. This also renders the thing, for all practical purposes, as another “intangible” in their eyes. For example, perhaps there is a belief that “management productivity” is measurable but that sufficient data is lacking or that getting the data is not economically feasible. This belief—not usually based on any specific calculation—is as big an obstacle to measurement as any other. The fact of the matter is that all of the previously listed intangibles are not only measurable but have already been measured by someone (sometimes my own team of analysts), using methods that are probably less complicated and more economically feasible than you might think.

Yes, I Mean Anything

The reader should try this exercise: Before going on to the next chapter, write down those things you believe are immeasurable or, at least, you are not sure how to measure. After reading this book, my goal is that you will be able to identify methods for measuring each and every one of them. Don’t hold back. We will be talking about measuring such seemingly immeasurable things as the number of fish in the ocean, the value of a happy marriage, and even the value of a human life.

You can read the rest of this excerpt here, or on Google Books. Only the first two chapters are part of the core curriculum for the EA Fellowship, but the rest of the book is also good!

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