The Effective CIO

My Dear Aunt Sally August 7, 2009

The recent Cash For Clunkers program neatly demonstrates a grave problem facing this country.  No, not the auto industry, global warming, or appropriate levels of government intervention in free markets.  I’m talking about something much more important: simple arithmetic.

Cash For Clunkers set aside a billion dollars to buy back certain vehicles in trade for newer, more efficient ones.  Each trade-in would qualify for either $3,500 or $4,500 in credit, depending on the model.  The program began in late July and was expected to run through November.  It lasted all of a week before running out of funds.  How could that happen?

Easy.  No one can do math in their heads anymore.

Let’s run the numbers. To make things simple, say each trade-in gets $4,000 from the fund.  With a billion dollars available, that allows for 250,000 trade-ins.  There are 23,000 car dealers in the US, each anxious to sell as many cars as possible.  That’s an average of 11 cars for each dealer.  Now ask yourself, how long would it take for each car dealer in the US to sell 11 cars that offer an additional $4,000 discount?

If you guessed “four months,” you have a potential career in Congress.  If you guessed “four days,” you are demonstrating a good grasp of basic market analysis.  In fact, some dealerships sold more than 11 cars in just one day; the only thing that slowed their pace was that the government web site for registering all these sales collapsed under the load, clearly designed with a “four month” mind set.

I’m not presenting this to start a political discussion. I’m here to lament that the average person can no longer solve this problem in their head. (Some people cannot solve it with pencil and paper, either.)

If you seek to run a successful business, or an organization within a business, you’ll need to make many rapid decisions based on numerical analysis.  If you cannot run those numbers in your head, you will not make good decisions.  Pricing, licensing, system loads, capacity planning, leasing terms, scheduling, manpower loading, you name it: quick, accurate math skills are the cornerstone of effective management.

I have sat in many presentations where outlandish claims were made without a murmur of dissent by those attending.  Running the numbers in my head allowed me to question the claim and get a better answer.  We see advertisements every day that cannot stand the scrutiny of simple math, yet many people take them as verbatim truth.  Why won’t people do the math?

In many cases, doing the math leads you to a result that strains your credulity.  In the Cash For Clunkers analysis, you’re left wondering if it would take four months to sell eleven cars.  More typically, you may instead be looking at outrageous monthly lease payments, or unrealistic average network latency, or some other metric that makes no sense.  But if you didn’t do the math, you’d never get to the simple number that makes you say “Wait a minute!”

A big part of leadership is knowing when to say “Wait a minute!” Quick arithmetic skills can play a big part in honing that skill.  Almost all of us can do simple arithmetic, but how many of us use those skills every day to increase our odds of success?