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Colin Montgomerie (“Monty”) is one the best golfers of all times. During his active career, he played over 500 European Tour events and won 31 competitions. In addition he owns several records in European professional golf: most wins in one season (6), number of hole-in-ones (8) and he has been chosen to European Tour Golfer of the Year four times. While he never won any Majors, he very recently guided Team Europe to an unforgettable victory over USA in 2012 Ryder Cup.
By March 2009, Monty had played 499 European Tour competitions and won total of €23,639,775. Someone counted all the strokes he took over the years (121,525) and got an interesting average: every time Monty hits a ball, he earns on average €194. Every single time. Every drive, every putt; every 5-iron from rough, every single bunker shot. Every time when club contacts a ball in a competition he gets almost 200 euros.
Cost-per-head, on the other hand, is a business measure. It shows how much salaries and side expenses cost on average (including social security costs, retirement funds, premises and equipment). Cost-per-head tells, on average, how much it would take to increase number of people (or “head-count”) in a given location.
Cost-per-head is widely used in companies that are doing knowledge work: work that requires very little raw materials and practically all of the value is created by people doing thinking (e.g. programming) or providing services (e.g. call center).
Wait a second. Why am I talking about Monty’s €194 per shot and outsourcing to India in a same blog post?
It is about decisions based on measurements. And how terribly wrong things go, when a seemingly relevant measure is actually horribly misguiding.
Success in professional golf is measured by earned money. Winning a competition is measured by number of strokes (shots) a player takes during rounds. So, “euros per stroke” should be a perfect measurement, right?
Of course it is not. Let’s imagine Monty wants to increase his earnings in a competition. Looking at this measure, instead of 285 shots (about par -3) he should shoot 290 or even 300 (par +12). Adding 15 strokes would give him a hefty €3000 extra in a competition.
Everyone who knows anything about golf understands right away that hitting the ball more is completely stupid. If a golfer wants to increase earnings, he should shoot less.
Success in business is measured by profit. Profit is earnings subtracted by costs. Since most of the costs in knowledge work are people, then cost-per-head should be a perfect measurement to optimize the equation.
Let’s imagine a company knows its cost-per-head is 20% less if off-shored and company wants to increase its earnings. Looking at this measure, instead of X people in current location it could have 25% more people with same cost. Wow, 20% saving leads to 25% more resources!
Everyone who knows anything about knowledge work understands right away that having more people is completely stupid. If a company wants to increase earnings, they should find the right competencies and create flow of work — not look at number of resources.
Unfortunately, costs are often on the driver’s seat. Companies are looking for quick improvement by getting rid of costs and overlooking the bigger picture: how do we actually create value.
As Russell Ackoff said: “Getting rid of what you don’t want does not guarantee you get what you do want“. Reducing cost does not bring earnings.
Test your measures: What if we make decisions based on this measurement, what would customer see? If the answer is “nothing” or you start to speculate a lot, then you are probably measuring a wrong thing.
 Colin Montgomerie’s official homepage: http://www.colinmontgomerie.com
 For collection of Monty’s golf stats, see for example http://www.boards.ie/vbulletin/showthread.php?p=59548477