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Year over year versus Year of Peers

by Mark P. McDonald  |  May 23, 2019  |  Comments Off on Year over year versus Year of Peers

Perspective matters, but it really matters in times of change.  How you see yourself and measure your progress either opens or closes your perspective and context.  This has never been more important for technology executives than it is right now.

The technological and economic foundation of high tech products has moved from on premise to cloud, from server to edge device, from business process centric to information centric.  These transitions present real challenges to high tech firms and their customers.  They also present significant growth opportunities.  This is where the matter of perspective comes into play.

Technology companies are experiencing strong growth.  The total revenue for the global top 100 IT vendors (G100:IT) grew 12.4%, and 42% of the top 100 grew more than 10%, according to Market Insight: Gartner Global Top 100 IT Vendors in 2018.

Growth is always important. The issue of how you think about that growth becomes important when growth is broadly across the tech industry.  Firms that report and manage growth on a year over year basis (YoY) are adopting an insular view, one that is based on making progress against the past.  There is nothing inherently wrong with this view.  However, in an environment where everyone is growing, the YoY perspective is incomplete.

Year over year growth measures presumes that the company is competing primarily against itself and its past performance.  This can lull companies and their executives into complacency or even a type of defensiveness.  While firms will continue to measure their progress year over year, they need to manage to another comparison – one that takes a broader perspective.

Year over Peers (YoP) measures growth relative to the average growth rate for your industry.  Incorporating this measure focuses on the competitiveness of the firm in addition to YoY measures that tend to grow out of executing a strategy.  Year over Peers or performance accounts for the ‘rising tide lifting all boats” effect.  It is a measure competitiveness.

The two measures are symptomatic of how the organization sees itself.  YoY firms benchmark themselves against their past and look to make progress.  We did our job, we delivered on our commitments are characteristics of this view.  It is a view akin to the way a regulated Utility looks at its regulated business.

YoP firms concentrate on their competitiveness and making progress to take market share and innovate.  We beat the competition, defined a new market, created more value are sentiments of firms that benchmark themselves against their peers. It is a more aggressive view and a hallmark of a commercially oriented company.

While growth is valuable, the markets recognize and value the two levels of growth differently.  Year of Year growth is valued, but often at a lower multiple.  Year of Peers growth is valued at a higher rate as it is indicative of accretive growth whose increased share creates a future platform for more growth.  This last point is critical in technology as many of the technology markets are increasingly governed by power laws.

So how do you measure your success, who are your reference points – the past or plan or peers and competitors.  The concept is not new, however its implications in tech are more important as technology transitions will create revenue for everyone, and raise the possibility of false comfort for companies that grow, but grow below their market averages.

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Mark McDonald, Ph.D., is a Vice President and Fellow Emeritus in Gartner for General Managers Program.

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