Rose Report: Issue 20
Business Bracketology: Lessons from March Madness
As sportswriter John Feinstein pointed out in the Washington Post, March Madness has become an American tradition: “Once the brackets go up everyone from big-bucks TV pundits to kindergartners who will make their picks based on their favorite color will start making sage predictions.”
For the NCAA selection committee deciding who gets into the tournament, it’s more complicated than favorite colors. As most college basketball fans know, the selection committee uses a formula called the Ratings Percentage Index (RPI) to pick which teams are invited to the annual bacchanalia known as March Madness. A team’s RPI is determined by the number of games it won and lost as well as the strength of its schedule. Specifically, it takes into account a team’s winning percentage (25%), its opponents’ winning percentage (50%), and the winning percentage of those opponents’ opponents (25%). Using this complicated matrix as a guide, the selection committee hopes to determine not only which 68 teams are the best in the country, but how those teams should be ranked so that the best schools earn the top seeds.
Companies can take a cue from this data-driven approach to determine if they are on the path to success. Just like the RPI is used to determine a team’s quality, companies can use key performance indicators (KPIs) to assess themselves. KPIs vary across organizations, depending upon their individual goals and definitions of success. Common KPIs include gross revenue, number of full-time equivalent employees, profits, gross margins, and the number of leads and prospective projects in the pipeline. KPIs can also be unique to an organization. A telemarketing business likely keeps track of the number of calls that result in sales each month as a KPI. A university obviously keeps close tabs on its graduation rate. A nonprofit might keep track of how many people it has helped in a given time period.
Like a team’s RPI, a company’s KPI can provide guidance but not definite answers. If RPIs were sure predictors of a team’s success, then Warren Buffet would not be teaming up with Quicken Loans to offer $1 billion to anyone who can correctly pick the winner of all of the tournament games!
Why is it so hard to predict the winners? As a team works its way through the tournament, it meets new challenges from teams it has never played against before. For example, it may play a team from a different division that plays a style of basketball it has not encountered all season. The ground is constantly shifting below the team’s feet; each round presents a new set of challenges to adapt to in order to survive.
Similarly, as a company grows it must change to face off against new and different types of competitors, such as software or technology companies that are inventing new ways of doing business. Moreover, as a company grows, its clients may begin to look for different things—the factors that were important last year may not be as important this year. But keeping an eye on KPIs helps to evaluate your performance going forward—and ensure that you have the best possible chance at success.