Moderately
sophisticated security investors are familiar with the alpha and beta risk
ratios. The beta coeficient is supposed to gauge the volatility of a specific
security when compared (over the long run) to a benchmark (most often a market
indicator such as the S&P 500). If the market as a whole has a beta
coeficient of 1, fractional betas indicate securities that are less risky (but
also return less over the long run) whereas a beta coefficient over 1 indicates
a higher risk / reward ratio. The fundamental thing to understand is that beta
is measuring the so called 'market' risk. A certain set of characteristics
determines this volatility. Two identical competitors in the same market will
have the same beta coefficient because their business volatility should be the
same (they are subjected to events in the same way). Alpha on the other hand
measures deviations that can be attributed to managers skills (or other
aspects).
How does this help
knowing your team? While the comparison isn't perfect, and measurements might
be hard to accomplish, it might be useful to think about analyzing teams by
trying to divide performance variability in its alpha and beta components. Why
are some teams overperforming whereas others and underperforming? If one could
establish a reasonable benchmark for performance, either across a large
organization or across an industry, then the team's beta would be the ratio
between cost to performance. Projects under a high flying startup (or a
skunkworks type of inner organization) able to attract the brightest talent
should perform better than the ones in an established organization. From that
perspective, the high performing teams would have a higher than 1 beta, whereas
the established ones would have a lower than 1 beta. If one is able to
adequately determine the beta coefficient for one's environment, then the
deviation from that is each individual's team alpha. A positive alpha over the
long run will be correlated with well performing managers / well run projects.
A negative alpha - with poor managers.
So how does this
help? In assessing teams, instead of looking for absolutes - e.g. project was
under / over budget, one can look at the teams' beta and alpha. The latter are
much more actionable. Consistently negative project results might point to an
organizational problem rather than to team performance. Teams might actually be
overperforming and still come short of unrealistic expectations. Shrewd
executives would sometimes use setting unrealistic goals as a motivation
technique. Thus, when looking at team performance retroactively, it would be
more accurate to look at their alpha / beta coefficients instead of how they
measure against often arbitrarily set project metrics.