In the months leading up to the NFL draft, there was a dizzying amount of predictions and strategy discussions underway. When it comes to businesses that rely on metrics, the NFL is a contender for first round pick.
It’s not just the big data of player and team stats at work. The draft itself is an impressive numbers game along with interviews, the NFL combine, player stats, and months of scouting activity — all with the lofty goal of trying to forecast the ten-year potential of a given player.
For added complexity, draft rules have changed constantly since the draft began in 1936. Perhaps the most crucial of these draft rules, however, is the one that assigns the order of picks based on a team’s performance. A first-round pick for a team in desperate need of talent could help, well, level the playing field. Choosing the best pick in each round, regardless of position, is not uncommon.
So why would a team like the second-to-dead-last 49ers — one in desperate need of a quarterback — consider trading their option on a second round pick? If sports analysts are correct on this one, a trade gives the struggling team a better shot at multiple positions they need in the mid-rounds. It will be better for the team overall. And, more importantly, the strategy leaves the QB gap to be filled from next year’s draft class that offers more promising QB candidates for development.
In other words, San Francisco opted for a long-term strategy. The Niners are playing to win in 2018.
Playing the long-game with your metrics
Big data isn’t just for offensive lines, says Sean Van Gundy, Managing Director, C2FO Working Capital Advisory.
“When we think about metrics there are necessary evils. The buzzword is big data. In the world we live in now, we tend to think of that big data and those metrics as the gospel truth,” he says.
“While having the data is great, and we can make more informed decisions with the data, we’ve lost the art of putting our business experience with the data and determining this is the way we move forward.”
One of the metrics that can prevent your business from playing a long-term strategy says Van Gundy, is the cash conversion cycle. For a decade since the recession, businesses managed to this metric with the goal of cash conservation, a safe pick for the balance sheet.
But the economy doesn’t stay fixed any more than the line up on an NFL team. As interest rates rise, it may be time to think like the Niners — and rethink your team’s long-term strategy for 2018 — starting with the cash conversion cycle.
Goodhart’s Law and the value of fifth-round picks
Cash conversion cycle was a good short-term play. But, your business is more complex than a single metric. If you focus on that alone — like a first-round draft pick — you may miss the other players that build a better bottom line.
“The reason you get a target like cash conversion cycle is that it wasn’t considered before. So, managing to a single metric works for the first year or two to course correct, but you cannot pass up opportunities for growth, and shareholder value because the metrics say otherwise,” explains Van Gundy.
Managing to that single metric, he continues, can create a significant opportunity cost for an organization as well. That cost can show up in those deeper metrics like supply chain risks and missed revenue.
“It’s just not a hard black and white number when you consider all the things that go into it. The biggest mistake I’ve seen people make is relying on just what a metric calculates. In reality, a lot goes into those metrics, and we should understand the complexity behind them — especially when we’re attaching them to people’s incentives and expecting performance,” says Van Gundy.
Van Gundy’s long-term strategy coaching tips include focusing on your entire business game plan over a single metric:
- For companies in a good position, understand that a dollar of EBITDA is more important to investors than a dollar of cash on the balance sheet
- Be less obsessed with cash conservation
- Expand your strategy to put the cash on the balance sheet to work in ways that offer a return on investment and supply chain health
Whether it’s football, manufacturing or retail, Goodhart’s law holds; when a measure itself becomes a target, it ceases to be a good measure. As an economist, Goodhart understood the hazards of managing to a single metric versus the larger outcome for an organization.
If he were on the San Francisco coaching staff, Goodhart probably would have drafted more positions across the lineup, too.
When personal incentives cost the team a goal
Some of the complexity in the NFL draft is due to salary caps. The caps were designed to create more competitive teams across the league. But the limits also created performance bonuses and salary accelerators.
For example, Peyton Manning took a $4 million pay cut to join the Broncos. He earned that income back with $2 million for playing 70% of offensive plays and another $2 million for the Superbowl 50 win. For the Broncos, incentivizing a key player paid off. The right incentives benefit an entire organization.
But not all incentives contribute to a winning season.
Some fans and critics of the game argue that performance bonuses distort the last week of regular season play. Or, bonus criteria like percentage of play time may influence a player to ignore an injury in pursuit of financial gain or incentivize a player to make poor on-field decisions that cost the team a win.
Business isn’t much different than football in this respect. Finance leaders often have incentive pay tied to a single metric such as the cash conversion cycle or days payable outstanding goals.
“We had decisions where treasury could deploy millions in cash to make a better return. More than once we had to reduce the amount of cash to do that, or not do it at all because deploying the cash conflicted with personal incentives for DPO,” says Van Gundy of his prior corporate treasury experience.
Long-term strategy requires team players
Months before the draft, the 49ers and all the other NFL teams were busy scouting this year’s NFL class. While the scouts looked at things like stats, 40-yard dash times, and season performance, they also check medical history and interview up to 30 of the candidates in person. Some even do background checks on potential draft picks all the way back to elementary school.
It seems excessive, but the coaching staff has a vested interest in knowing if a draft pick will have the right attitude to be a team player — on the field and off.
Team players are just as critical to business. The best “picks” are the ones who care more about the team’s season than individual performance. Ultimately, that kind of culture comes from the top down.
“You have to get leadership involved and get them to see that there are other objectives involved,” explains Van Gundy. “Remember that personal incentives drive results. Wrong incentives give poor results. Be sure that the metric pursued and all the related outcomes drive you towards the end goal.”
Learn more about personal incentives and metrics
In our recent webinar, Sean Van Gundy and Gil Villacarlos, Treasury Strategist, share their experiences and insights for finance strategy and setting the kinds of goals that help organizations win long-term. View the archived webinar.