Thursday, October 8, 2009

1,000 Words of Nonesense is Still Nonesense

I really love the good infographics that illustrate the relationship between complex data. A picture really is worth a thousand words. But like good written journalism, good infographic journalism requires some understanding of the subject matter, and an effort to remove bias. Most of my training in critical thinking focused on looking for loaded words in an article; but didn't cover images in much detail, so this is an area that may be ripe for abuse (through malice or incompetence).

Fast Company's article on CEO Pay infographics (the graphics were actually commissioned and ranked by Good Magazine) really illustrates this point. The graphics are very attractive, and do a great job conveying a point. But they don't actually make any sense - they are like a well written article written by someone who has no understanding of the subject.

For example, the first graphic, which was judged best by Good Magazine, and which I agree is the most compelling and information rich image, make no rational point that I can discover. It compares CEO pay with the number of minimum wage employees it could support. Why not compare CEO pay with the number of oranges it could buy? I think it would be just as meaningful. I doubt that anyone really believes that a company could exchange its CEO for a whole pile of minimum wage employees and get the same results, so why compare them?

To me, the only metric that makes any sense for measuring CEO pay, is to ask "would the company be better off if it didn't spend the money?" For example, you wouldn't compare the most expensive machine in a factory to the least expensive machine, and you certainly wouldn't wonder how many of the inexpensive machines you could buy for the price of the expensive one. The only consideration you would have when purchasing a $10M machine is whether the business will benefit by at least (and hopefully more) than $10M.

The second graphic compares the CEO pay to their company's profits. This gets closer to the mark, but of course, since the CEO's actions may take time to benefit the company, you have to consider their pay and the company benefit over time - one year is not nearly long enough. Moreover, you still don't know how the company would have done without paying the CEO, or more practically, by spending half as much on the CEO. If spending an extra $1.00 on the CEO makes the company more valuable by $1.10, this is a good deal, and you should pay as much as you can, until the effect wears off.

Finally, the last graphic is nice for promoting the idea that CEOs are back-room, cigar smoking, old cronies, but it doesn't do a good job of presenting the data - it completely wastes the horizontal axis. The graphic purports to compare age with salary, but it just slaps an age label next to the salary amount - there is no graphical comparison between those two numbers. If, for example, the artist had made the horizontal axis indicate age (the vertical already indicates salary), then we could have looked for a trend or a grouping. As it is, I have to read all the numbers (which are inconveniently written sideways) to determine even the simplest concepts, like does the oldest person make the most money, and does the youngest person make the least? From the data, it appears that there is no relationship between age and salary, although the graphic doesn't highlight this fact either.

I really like good infographics, because they have tremendous power to make complex relationships obvious. I really hate bad infographics, because they give nonexistent relationships tremendous credibility. If we are going to have a contest for the best, we should be judging them on their ability to make the truth apparent, not to make misinformation more appealing. Good magazine is making infographics worse by honoring bad images. Fast Company is making itself look like a business magazine that doesn't understand business when it highlights these as good examples of how to understand CEO pay.

Friday, September 25, 2009

Cool but Useless?

A Voice in the Wilderness sent me this video about a Segway-like unicycle. He thought it was cool, but not very useful. Most of the comments under the video suggest that anyone who rides one of these is just lazy – why can’t they just walk? I disagree.

I think the point of these is not to ride from the parking lot into the building, or to ride from office to office at work, but to enhance public transportation. If I want to ride the subway, I have to walk from my house to the station, then walk from the station to my office. I may also be faced with a walk for lunch(1). Of course, I am capable of walking; I can even walk long distances. But when I am wearing a suit, and carrying a 25lb briefcase (2), and worried about what time I get there, a half-mile is about as far as I want to walk. Lunch during working hours is an even bigger deal, because every minute I spend walking to my destination has to come out of my lunch time, or my work day, or my personal time at the end of the day. That creates a limited circle of places I can go, which limits my choices for lunch – maybe forcing me into the dreaded McDonald's that so offended commenters.

The point of the Segway, and of this similar unicycle device is not to let you be lazy and do less, but to let you go farther and do more. I can walk a mile in 20 minutes. Maybe in those same 20 minutes I can go 5 or 10 miles (and not be exhausted when I get there), or maybe I can travel that same mile in 2 minutes, and create 18 minutes (or 36 minutes, round trip) in my day. If I am a commuter, a device like this can make the difference between being able to use public transportation and preferring to drive my car. The unicycle shown in the video seems much smaller than the Segway, so more practical on subways and buses. (Plus, people apparently won’t laugh at you as much on the unicycle, compared to the Segway -

Finally, for the crowd that thinks I should revel in the walk for fitness sake, I agree with the ideal, but I have lots of goals in my life, including how much work I get done during business hours, what time I leave my family in the morning and what time I get home at night, and how I look (and smell) to the people I work with. For the most part, I get my exercise on my own time (3).

I am not sure what the real limit to the adoption of the Segway was (or is), so I don't know whether a unicycle will fare any better. Technology is making the world smaller, and this helps solve the problem of moving people more efficiently over the last mile between public transportation and their destination.

1. I actually work out of my home office, so I don't commute. But I do face these decisions whenever I travel to a major city with good public transportation - I like to use it, but look carefully at the "last mile" walking distances. This always limits my choices on hotels and restaurants, and often forces me to rent a car.

2. When I was in business school (and traveling as part of my full-time job), weighed my bag at 25 lbs. It typically contained one or two laptops, two or three large books, lots of accessories, and all the miscellaneous junk you need when you are trying to get a lot done while you are away from home, like gum, breath mints, extra batteries, lots of business cards (two versions of mine, plus everyone I have met in the last week or two), etc. It adds up fast, and by the end of the week, you notice which shoulder you have been using the most.

3. And if you think I should quit being such a sell-out workaholic, and become a forest ranger so I can wear shorts, walk around and commune with nature all day long - I'll bet you don't give the same advice to your doctor, or your lawyer, or the airline pilot on your plane. You probably hope those guys are really focused and good at their job. You don't know what I do for a living, but I don't think you would be happier if I stopped doing it well. I know I wouldn't.

Monday, August 24, 2009

Outsourcing - Good or Evil?

All my life, I have heard people talk about off-shoring in very polarizing terms. Depending on who you ask, the feeling was either that you had to outsource to build things at a low cost, or you were an unamerican traitor if you bought something foreign-made.

I always thought that there had to be a more rational approach than that. And I further assumed that people spending a bunch of money on outsourcing were making a well studied, rational decision. I now suspect that there is a lot of politics, emotion, and short-term thinking attached to most of these decisions - on both sides of the issue.

To me, the off-shore / on-shore decision is just an extension of the build vs. buy decision. If I am building a machine, and need a special clamp, do I make the clamp myself, or do I hire a machine shop to do it for me? Do I use my brother's machine shop next door, or do I use one in the next state, because their larger operation lets them make them cheaper? What about using a factory in Mexico? Holy cow - this Chinese firm says they can do it so inexpensively that it makes up for shipping the parts half-way around the world!

How do you make this decision? Well, of course you consider price. The price of the part becomes part of your Cost of Goods Sold, which directly affects your price, which affects the number of units you can sell, your revenue, and your profit. Price is a big deal. By the way, I think quality goes (almost) without saying. I am just assuming that you would never outsource any part to someone who couldn't produce it to your specifications - even if it was your brother.

The next most obvious thing is administrative costs. These may be harder to quantify, but they are easy to imagine. If the parts suddenly start coming out wrong, somehow, do you walk next door, or fly to China? Do you have a translation problem for documents and specifications? It may be hard to estimate these exactly, but it seems obvious that building something farther away will have higher admin costs than something more local. Still, we can use analytical methods like decision trees and sensitivity analysis to determine when it is worth the hassle.

As we move farther away from the per-part issues like price, it gets harder to estimate the effects. In general, we know that a more specialized shop will be able to produce better quality at a lower price, because that is what they focus on. This s one of the ways that society gains productivity, and therefore economic growth. But there are obvious consequences to outsourcing and off-shoring that must be considered.

When you outsource, you give up the expertise of how to make the part well. You also, inevitably, share that knowledge with others. Remember that hard problems are good in business, because that makes solving them valuable. If you hire someone else to solve your hard problem, they own that value. If you outsource all the hard problems, and save only a simple problem for yourself, like final assembly, or retail sales, you are not entitled to keep much of the total value of the product.

None of this says definitively that outsourcing (or off-shoring) is automatically good or bad, it just says that it is a serious business decision that must be made using the best tools and thought processes available. Seeing masses of businesses polarize into the "all manufacturing must be done in China, because it is low cost" or "I only buy American" camps doesn't make me feel good about the thought processes behind the decision.

This guy, on the other hand, makes me feel good. He tried it in China, and it worked for a while, but found the hassles to be too great, and is moving back to a US manufacturer. Not "great because he has come back to the US", and not "great because the US seems competitive", but great because he is making a rational choice, and the decision could have (and did) go either way.

I am not predisposed toward or away from outsourcing (or off-shoring). But I get very frustrated talking to people who think there is only one right answer. In principle, picking heads for every coin toss lets you win half the time. But in business, guessing and winning half the time is the same as loosing all the time. If you think there is only one right answer to the outsourcing question - you are wrong all the time.

Thursday, July 9, 2009

EyeWonder says:

Publishers are looking to create premium placements to sell to advertisers while also keeping ad clutter off their home pages

Translation: Advertisers are desperately looking for more and more annoying techniques to highjack your attention. Contrast this with The DECK advertising network (as seen here, here, and many other places).

I don't have any data on what methods generate more attention, or in the final analysis, more money. But I can tell you which method pissed me off, and which one encourages my interest. There is definitely something to be said for proven results, but I would be very afraid of any advertising strategy that was based on annoying my customers.

Thursday, March 12, 2009

You would think it would be easier

So I finished my MBA program in August 08. Now that I have all this "free" time on my hands, you would think I would write more for the blog. You'd think.