This past year, my thinking has been significantly influenced by Jerry Z. Muller’s ‘The Tyranny of Metrics’. We are, by nature, a company that measures. We track ROIC, organic growth, cash flows, and numerous operational details within our BUs. Muller’s work, however, serves as a potent reminder of the perils that can accompany an over-reliance on, or misapplication of, metrics.

Muller compellingly argues that while metrics can be valuable tools for assessment and improvement, they can become counterproductive when they are ill-conceived, poorly understood, or when they become the sole focus of reward and punishment. He highlights the phenomenon often encapsulated by Goodhart's Law: "When a measure becomes a target, it ceases to be a good measure." The very act of targeting a specific metric can incentivize behaviors that improve the metric itself, but not necessarily the underlying performance or long-term health of the entity being measured. Indeed, it can lead to gaming, "creaming" (focusing on easy wins), and a neglect of important, but less quantifiable, aspects of a business.

This resonated with me because, at Constellation, we strive for a culture of intellectual honesty and long-term value creation. Yet, the temptation to simplify complex realities into neat numbers is ever-present. What is not easily measured – the quality of a BU manager’s judgment, the depth of customer trust, the morale of a team, the long-term strategic positioning of a product – is often far more critical to enduring success than a short-term blip in a specific KPI.

I recall a situation a few years back in one of our newly acquired BUs. The previous owners had instituted a bonus system heavily weighted towards new customer logo acquisition, a metric that, on its face, seems indicative of growth. The sales team, quite rationally, responded by offering deep, unsustainable discounts and promising features that were still on the distant roadmap. They hit their logo targets, and bonuses were paid. However, the aftermath was a cohort of unprofitable, quickly churning customers, a strained support team, and a development backlog distorted by rushed commitments. The metric, elevated to a primary target, had actively damaged the long-term health of that business. Our subsequent challenge was to recalibrate incentives and focus towards sustainable, profitable customer relationships, even if it meant slower, more deliberate "logo" growth.

Conversely, I think of another BU manager in a very mature, niche vertical. If one were to look solely at high-level organic growth metrics, one might deem the business stagnant. However, this manager possesses an almost artisanal understanding of his customer base. He focuses intently on customer retention through exceptional service, makes small, incremental product improvements that deliver genuine value, and occasionally acquires tiny, local competitors at very sensible prices, integrating them seamlessly. His BU generates consistent, high-margin cash flow and has built an almost unassailable moat through deep customer loyalty. Chasing a high organic growth number in that specific market might have required a radical, risky product overhaul or an expensive sales expansion, both of which could have jeopardized the existing, highly profitable core. His wisdom lay in understanding what truly constituted success in his specific context, rather than conforming to a generic "growth" metric.

Muller’s work reinforces my belief in the vital importance of decentralized judgment. Our BU managers, steeped in their verticals, are generally best placed to understand which metrics are truly indicative of health and progress for their specific business, and how to balance short-term demands with long-term imperatives. While we at Head Office and the Operating Groups provide frameworks, share learnings (like the PAR process), and enforce capital discipline, we must be cautious that these tools don't devolve into rigid, centrally-imposed metric targets that stifle local ingenuity or distort sensible decision-making.

The challenge, then, is not to abandon metrics – they are indispensable for transparency and accountability – but to use them wisely. This means:

1. Contextual Understanding: Recognizing that a good metric in one VMS niche might be misleading in another.
2. Balancing Quantifiable and Qualitative: Supplementing numbers with deep, qualitative understanding of the business, its market, and its people.
3. Long-Term Focus: Prioritizing metrics that reflect enduring value creation over those that capture fleeting, short-term gains. Our long investment horizon is a natural defense here.
4. Awareness of Incentives: Continuously examining how our metrics and reward systems might be shaping behavior, for better or worse.

"The Tyranny of Metrics" is a call for humility and wisdom in how we measure and what we value. For a company like ours, built on the aggregation of many distinct businesses, it underscores the need to trust and empower our local leaders, who are closest to the realities that numbers can only partially represent.

As always, our primary challenge remains the intelligent deployment of the capital our businesses generate. Finding a sufficient number of VMS businesses at sensible prices that meet our hurdle rates is a task that grows no easier, and no single metric can fully capture the diligence and judgment required in this endeavour.

These exceptional, sustained results are compelling evidence that their unique, contrarian business model is not just different, but remarkably effective over the long term. The central puzzle is the 'how'. How has this been achieved by embracing radical decentralization and autonomy? How do deep vertical focus and permanent ownership create such a powerful competitive advantage? How do they foster disciplined capital deployment and organic growth within this seemingly 'inverse' structure?