Yahoo and The Danger of Irrelevant Benchmarks

Morgan Stanley says that relative to Facebook, Yahoo is fat. Well…Relative to Usain Bolt, we are all slow.

Morgan Stanley has posted a report on Yahoo that urges Yahoo’s CEO to cut 1,400 jobs to keep earnings flat.

The driver?

Yahoo’s revenue per employee is sub-par relative to a list of other seemingly similar “names.”

Here’s a link from Business Insider that outlines the situation.

The insight

This is not a post about Yahoo, even though the pursuit of cost cutting there seems to be required, and the process seems to be misguided, I’ll leave that to another post.

This is a post about knowing your benchmarks.

Morgan Stanley produced this exhibit to show that Yahoo’s revenue per employee is out of whack.

What I see is a list of “tech” names.  That’s easy enough.

What I also see is a list of companies with vastly different business models.  Amazon is a conglomeration of retail, digital, and media.  Priceline sells travel.  PayPal is a financial services company.  I actually have no idea what AOL does these days (okay, that’s a bit tongue in cheek, but still.).

The implication…

The point is this:  If you are a shotputter, it’s irrelevant how fast you run compared to Usain Bolt.

We are all slow compared to Usain Bolt.

Morgan Stanley is committing an analytical sin here, and it’s an easy one to commit:  That of the inappropriate first order comparison.

Inappropriate first order comparisons tend to come up with executives and analysts when they are either ill-informed (actually less common) or just looking for simple (or lazy) comparisons (actually more common).

If I have a company in the tech sector, it seems simple to compare myself to another company in the tech sector; but the reality is much more complex.  Business models are highly divergent, even within the same “sector” like tech.

That’s not to say that a company shouldn’t look to others to compare its business model and think strategically about change; it is to say that simply doing mathematical benchmarks without considering business model differences is a loser’s game.  

So What? 

Morgan Stanley looks at revenue per employee and says “cut employees.” We could just write that off to the naivete of a Morgan Stanley analyst who has never run a business.

But…

…A lot of executives manage by spreadsheet in this manner.

A better way is to do a second order scrub for business models, scrutinize the business model, then execute.

The reason is this:  Trying to take a “square peg” business and benchmark it against a bunch of “round peg” businesses can lead to demoralizing results.  The demoralizing results usually hit the organization in the near term–and those can be papered over by savvy executives.  The demoralizing results hit the shareholders at a later date.  The crackpipe of layoffs-as-an-accounting-measure, once given to the market, investors, or–and I hope this isn’t your company–executives, is hard to get away from; and done (as Yahoo seems to be doing) without rhyme or reason, it can kill companies.

Ask Al Dunlap.  Well, no, don’t ask him.  Ask people who worked at Al Dunlap’s companies.

Never let a false comparison drive you to manage by math.  Never let an “easy” index comparison let you get away from the fundamentals of whether that index actually fits your business.

Beware false benchmarks. They can destroy you.