Investment professionals use a term called alpha. Loosely, it's an investment strategy's ability to beat the market — sometimes called the manager's edge. It exists because two funds can hold similar positions in a rising market and both look good, but only one of them is actually skilled. Alpha is the attempt to isolate that skill from everything the market was doing anyway.
Most of us aren't running money on Wall Street. We're running businesses, growing them in zip codes far from New York. But apply that same concept to your own situation and the implications get interesting fast.
Picture two companies in the same industry — same relative size, same type of customer base, similar levels of debt. You'd expect them to be valued about the same. But what if one sells for a lot more, and is a lot more attractive to a buyer? How much of that gap comes down to a higher-performing management team?
Some of it definitely would. Quite possibly a significant amount. That's alpha.
Why this matters before you own the outcome
Push this concept forward and it becomes an argument for diagnosing your leadership team fast. If you bought a company, or you're leading one, you want to know the current state, find the gaps in your management team and your management system, close them as quickly as you can, and then give that team time to actually grow the investment. Waiting a year to find out your team can't execute is a year you don't get back.
There are three things to focus on to get that diagnosis fast.
1. Clarity of roles. Every leader on the team is absolutely clear on who owns what. No room for questions, no room for a gap in accountability. It has to be clear to them, and to everyone around them, who is doing what.
2. Visible weekly measurement. Every system in the business gets checked weekly to see if it's on track or off track. That visibility tells you who on the team is driving success and who needs help — before it shows up as a bad quarter.
3. A narrow set of priorities for the quarter. Focus all the team's effort on the handful of things that will actually move the needle and add value to the business, not the twenty things that feel urgent.
Create that environment and culture, and the challenges, frustrations, and capability gaps on your team surface quickly — on their own, without you having to go dig for them. You get real insight into what needs to change. And then you can change it.
Isolating the team's performance from the market's
The part that takes discipline is doing this in a way that isolates the controllable performance of the team from everything else that's moving the numbers. A fast-growing market can make an average team look excellent, simply because the business is matching its peers. A market that starts favoring one segment over another can move your numbers for reasons that have nothing to do with anything your management team actually did.
With my clients, I assess this using what I call the Performance Alpha Index. It weighs quarterly performance against internal revenue and profit targets, how well the team executed against its stated priorities, and a read on organizational health. The goal is a model that ties higher scores on this index to stronger overall performance and growth over time. It's early days — but the direction is right.
To be clear, management performance and business performance are connected. This isn't an attempt to pretend otherwise. What you're after is understanding how much of your performance is being created by the team, and how much by the environment around them.
Because markets change. Tailwinds become headwinds. Great conditions eventually get tougher. And when that happens, you want to already know how much alpha your management team can actually create — not find out the hard way, in a quarter when the market stops carrying them.