Performance Perspectives Blog

From what perspective?

by | May 12, 2010

Almost 40 years ago I came across a “management test” (of the faux variety) which presented a variety of scenarios which required the “test taker” to respond to. For example:

You’re at lunch with your largest client when for some reason the subject of Michigan comes up. You remark that “only two things come out of Michigan: football players and hookers.” Your client calmly mentions that his wife is from Michigan. Do you
  1. ask what position she played,
  2. ask if she’s still “working the streets,”
  3. begin to speak incoherently, or
  4. fake temporary amnesia?

At this point you’re probably wondering what this has to do with performance measurement, and I must confess I’m confused, too. Oh, yeah, perspective! In this scenario, the character’s attitude shifted quite a bit once his perspective changed, yes? When it comes to performance reporting, one must always be conscious of the perspective in which the information is being presented.

I was in a conversation earlier this week with a prospect who is thinking of having us review their performance measurement system and processes, something we often do. The prospect mentioned that they held some private equity assets which are difficult to value, and therefore perhaps the internal rate of return (IRR) should be used. I commented that it’s a matter of perspective. Since this firm isn’t a private equity manager but simply an investor in private equities (i.e., a limited, not general, partner), they are not obliged to follow, for example, the GIPS(R) (Global Investment Performance Standards) requirement for since-inception IRR. And therefore, they need to know if they’re reporting “how the client did” or “how the firm is doing.” In the former case, time-weighted returns are probably best, since the manager chose to invest in these and we want to eliminate (or reduce) the impact of cash flows. In the latter, the IRR would be best, since the client controls the cash and so why would we want to eliminate its impact?

Always consider the perspective of the person who is seeing the reports in order to know what to show and how to calculate the returns.

p.s., I’m obliged to mention that the use of Michigan was by no means intended to suggest anything improper about this state; it was done simply at random, I’m sure. Some of my best friends are from Michigan. And while they have great football, I’m unaware that there are any hookers living there. Should I stop grovelling now?