The Delta Index provides a single metric for apples-to-apple comparison of how you are growing (or shrinking) in value created relative to “Big Picture” targets.
The Confusion of Mixed Metrics
Yesterday the US Bureau Labor Statistics released January’s monthly Job Report. The unemployment rate went down from 6.7% to 6.6% (that should be a good thing). The number of new non-farm jobs created was 113,000 (creating jobs is better than losing them). However, the number of jobs created was lower than the “economist expected value” of 180,000 jobs.
So (leaving political interpretation aside), is this good news or bad? Did the US job market grow (jobs were created) or shrink (i.e., did job growth keep up with population growth)? Did unemployment really go down or did people simply leave the labor market? It can be hard to answer these questions when you report using a basket of metrics, each of which are based on vastly different scales
The same thing happens a lot in business. A media site’s daily average user (DAU) and page view counts go up, but bounce rates and SEO-driven bot scans also go up. Did the site’s viewership truly increase or not? Are these changes a true reflection of growth or simply a reflection of seasonality?
Things can get just as confusing (and exciting) in the startup world, where weekly rates of change are often the same as quarterly rates of change for Fortune-500 companies. Your startup’s orders went up 10% last week? Is that good enough? If so, is this growth more a function of organic growth or marketing spend?
Cutting Through This Confusion with the Delta Index
Just looking at these three examples reinforces the adage that one can use statistics to prove anything. So, how do you cut through the confusion and get the metrics you need to manage effectively?
We like the use something we call the Delta Index. The Delta Index provides a single metric to measure how you are growing (or shrinking) in value created relative to “The Big Picture.”
The Big Picture varies by industry. In mainstream business, The Big Picture is usually a corporate growth target. In startups, The Big Picture is based on Hockey Stick or Viral Growth patterns vital for investor return. In public policy, the Big Picture is linked to macro economic or demographic indicators. You can use a single Delta Index for your enterprise or use Delta Indices for each market segment, product, service or department. The choice is yours.
Because the Delta Index is based on a 100-point scale, it is easy to measure how you are doing relative to target without a calculator. A Delta Index value of 100 indicates you are on-target. A value 110 means you are 10% ahead of target (while 90 means you are 10% behind). Delta Indices can be negative—this is very bad, as a negative index indicated loss of value rather than a slow-down of value creation.
Getting to the Delta Index in 3 Steps
Step 1: Select Actionable Metrics
Five years ago in his book The Lean Startup, Eric Ries illustrated the importance of focusing on “actionable metrics.” Actionable Metrics measure the levers for value creation.
To determine the right Actionable Metrics for your enterprise, look at how you create value, and then ask what you should measure to determine value created. Sometimes this is easy: a store can measure the dollar value of orders placed or the US Labor Department can measure the total number of Jobs in the US economy. However, you will often need to build a composite Actionable Metric from a few smaller metrics. For example, an online media site may measure value by Total Audience Engagement (like Upworthy does). This will combine visitors and visit duration (and subtraction of SEO-driven bot traffic).
Step 2: Determine Your Absolute Actionable Growth Rate
Once you have your actionable metrics you in place you can measure the absolute value you are creating. However, to measure growth you will need to look how you much the value you are creating is changing over time.
You will typically want to look at this from two points of view: your Running Actionable Growth Rate and your Annual Actionable Growth Rate. To get your Running Growth Rate, find the ratio of your Actionable Metric from your Current Period to your Last Period. Traditional organizations will do this Monthly and Quarterly. Faster organizations like startup will need to do this weekly.
Step 3: Determine Your Growth Rate Relative to Target (the Delta Index)
Thanks to books like The Lean Startup, more and more organizations are: 1) using Actionable Metrics to measure value, and 2) measuring the change in absolute value week-over-week, month-over-month, and year-over-year. The critical next step is to measure your rate of growth relative to your target. For the US economy this could be a 3.3% annualized growth rate. For a Fortune-50 company this could be a 15% growth rate. For a Series-A startup this could be a 7% weekly growth rate. Many organizations skip this last step, masking critical growth insights.
People all across the US see this monthly with interpretation of the Job Report. Some people argue the numbers are good, others bad. If we shared a Delta Index that measured the growth (or loss) of jobs over the growth in the labor market size and indexing this to our target economic growth rates we would have a clear understanding of whether job growth was on-target or not. Using data from Federal Reserve Bank of Atlanta, January’s Job Report Delta Index would be 73 (if we wanted to get to a target Phillips’ Curve Structural Unemployment Rate of 5% within two years).
People in the complete opposite end of the spectrum, fast-moving startups can fall victim to this as well. Lets say you have a weekly top-line growth rate of N orders (an absolute growth value of 10%–which looks amazing). When you combine this with your marketing spend growth rate you find that your real Actionable Growth Rate is 5% per week. This still looks pretty good (5% per week at 52 weeks compounded is 1164% year-over-year growth). However, if you look at this relative to a “fast growing Series-A 7% weekly growth target” you realize you only have a Delta Index of 71.
The Delta Index provides two major benefits. First, it cuts through the confusion of trying to measure growth by comparing apples to oranges (e.g., the apple count went up but the orange percentage went down). Second—and more importantly—it unambiguously normalizes your actionable growth against target. This enables all to quickly understand the difference actual and desired (or required) performance in a manner that virtually any can understand. It also lets you compare performance across departments, product lines in a simple apple-to-apples manner.
Note: You will notice that we did not provide calculations for the Delta Index for these examples. The reason is simple. Few growth targets are linear. Seasonality, holidays, life cycle release plans, and many other factors routinely make them non-linear. We did not want to trivialize Delta Index calculations by over simplifying business, operational and public policy target calculations.