You get what you measure

EBITDA is not really something I’m qualified to talk about but Warren Buffet is and he does here. Excoriatingly so too.

Earnings before interest, taxes, depreciation and amortization (or EBITDA) is a financial indicator that has become somewhat fashionable in recent years. In essence, it focusses on the measurement of income and excludes all expenditure.

This is distinct to measuring net income which, is sales minus the cost of goods sold, general expenses, taxes, and interest. Thank you Investopedia.

In very simple terms, net income is your household income after the mortgage, utilities and groceries etc are paid. EBITDA is your household income before all those things.

So what could the consequences be of measuring and perhaps, unduly focusing on EBITDA?

Let’s consider two potential investments, Investment A and Investment Z.

Investment A is an innovative, business case driven investment with significant commercial benefits. It will make a healthy contribution to EBITDA.

Investment Z is a regulatory “must do” investment to ensure that the business is compliant with upcoming regulatory controls.

Any assessment of the impact on EBITDA is going to mean that investment A is preferred over Investment Z. In fact, it could mean that an organisation is deterred from undertaking Investment Z. It may simply be unable to secure a mandate to mobilize it. Yet.

In the meantime the business is busy with Investment A (and B, C, D etc)

Sooner or later (and probably much later), risk and compliance stakeholders identify Investment Z (or rather, the multiple imminent regulatory breaches) as an existential threat to the business. Finally, Investment Z is about to have its day.

Inevitably, the time available to the business to implement Investment Z has sharply diminished.

On top of that, the portfolio is now full of in-flight discretionary (albeit commercial) projects so all the delivery capacity available to the business is fully committed (potentially with board sponsorship) to other projects.

At this point, Investment Z is distressed. While sponsors might suggest otherwise, it’s the deepest shade of red. It’ll be late starting, underfunded, under-resourced and unloved. The scope will not just inevitably be cut to the bone, it’ll be undergoing multiple lobotomies. Anything resembling a lasting legacy will be under threat.

Following on from Warren Buffet, organisations that measure EBITDA over (or instead) of net income will be less compliant and risker. It’s not just inevitable, it’s by design. Sooner or later, regulators will realise this too.

How can Omnivisto help with this?

Does your business publish a single view of every mobilised and planned project or programme? If it does – you’re in a minority. Maybe the PMO dusts off a slide or two for quarterly board meeting but that’s not quite what’s needed.

A single, up-to-date view of all investments, current and future, funded and approved AND just those that are currently going through a feasibility assessment. That’s going to give the board, risk and compliance practitioners, the PMO and in fact, everyone, visibility of a dynamic and up-to-date forward schedule of change.

As a project manager myself, I’m frequently assessed by my clients on the quality and completeness of my plans. It’s long overdue that the physician took a healthy dose of their own medicine. It comes in a round bottle, it has no side effects and it’s blisteringly good value for money.