Cost is NOT a simple construct … but without fully understanding cost, then almost every decision made in the socio-economic arena is likely to be sub-optimum, if not completely wrong.

In a system of metrics that is founded on value rather than money cost, money revenue and money profit … cost is the consumption of value and revenue is the creation of value.

The example of cost of a savings account being a fee, a bribe, a minimum balance to be kept … and the costs of isolation, costs of culture, etc is totally valid. All of these costs are important … all of these constraints may be reflected in the “value” that exist in the society … in these examples with the “value” being negative. In money accounting the balance sheet has both assets (positive) and liabilities (negative). In the community “state” balance sheet there are positive values and there are negative values.

In Community Analytics (CA) we use standard values … and we can add up standard values. Because the standards are new and evolving, the adding must be done with caution. It will take some time before the standards are corrected to reflect reasonable reality … maybe around 6 iterations of use.

What is a meaningful measure? In CA a meaningful measure is one that helps to get good decisions made reliably … and usually good measures are ones that relate to reality. The modern world has a proliferation of simple to understand indexes that are absolutely useless for decision making … we need help in getting closer to the cause and effect so that small good decisions can be made at a local level without the intervention of experts a world away.

What is qualitative rigor? Statistical methods enable small amounts of questionable data to be converted into some derivative that masquerades as reliable sound qualitative analysis. It is not. Rather it is nothing more than sophisticated expensive GIGO.

Anecdotes are great … but they need to be organized … they need to be validated. An accounting transaction is a very small anecdote … which is then treated in a very disciplined way and incorporated into financial reports together with all the other accounting anecdotes (transactions). CA is a system that treats anecdotes as if they are accounting transactions … with the internal check to sort out what is valid and what is not. CA is not PR, where a suitable anecdote is used to sell something. CA has data … including anecdotes … that aim to be neutral, rather than being in support of any hypothesis.

CA comes at the problem from a different place … from the perspective of society rather than the perspective of the organization, the activity, the program or project. CA reports with the community as the reporting entity. An organization working in the community produces value for society or it does not … and this is very visible when looked at from the perspective of the community. Einstein addressed this issue in his work … I believe.

Financial services add something to a community … financial access adds something … but probably not very much compared to, for example, something that enables the farmers to triple their production and get their product to market. Hard infrastructure probably adds much more value through improved productivity than financial services ever will … people in financial services (and the development experts) need to get real about where value is created, and how value is destroyed.

Sadly as there is muddling along … there is very little learning. Most of the issues talked about today were talked about 30 and 40 years ago! But there can be learning if the metrics are designed so that they will help.

The phrase “granularity” has been used to describe what is needed, and I think I understand what this is … my view is that a data system aggregates or rolls up in a logical way … and there is also drill down to more and more useful data. This is how corporate accounting works … but the ideas of this have been applied in such a slipshod way by economists for society that the data are almost meaningless … and I therefore share frustration.

Take GNP for example … why are health costs in the GN Product when the product (a value) ought to be good health. Why don’t we have GNC … GN Cost as somewhere for the costs that now constitute the US health sector to be put!

And then … why does profit become a cost … which of course it does unless there is serious value chain analysis that breaks out real costs from money profits.

And why does risk disappear when a financial instrument hides it …

And why does someone get rich merely by owning the same house for fifty years … same house …

I am fascinated by what I refer to as the “behavior of costs” and the “behavior of value” … understanding this will help us make good decisions.

I can go on … I am trying to get all this sorted out and organized into a comprehensive system of Community Analytics (CA) … and will be using the malaria health sub-sector as the first sector case for CA deployment.

Sincerely

Peter Burgess

Cost and value are ultimately what we should be measuring.
However, how do we go about doing so? Let’s start with cost: a relatively simple economic metric, correct?

However, cost is as a measurement has proven time and time again as an elusive target. What exact cost are you referring to?

If you’re referring to savings deposits, is it the fee to open an account? Is it the bribe you need to pay the agent to open one for you? Or is it the minimum deposit or balance you need to open an account—which might never count as a “cost” but remains a significant barrier to financial access to the poor. And if those actual financial measurements weren’t difficult enough to reconcile, how do you account for geographic isolation? Or even more damning, how do you account for women lacking access in, say, Morocco, because of cultural barriers and because their husbands legally can bar them from economic activities outside of the house?

Financial access and lack of it remains a complex and multifaceted puzzle. These numbers can’t simply be “added up” into a simple cost.

So how do you account for these things and still have a meaningful measure? To aggregate these various, non-compatible measures into some sort of simple to understand metric—an index—would be ideal… but would involve, inevitably, some degree of arbitrary assignment of weights—something that I hesitate to do, as those weights rely on our soft, qualitative stories and accounts about the financial situation in a country.

What value is qualitative rigor if its underlying methodology is backed primarily by anecdotes?

If as “simple” and solidly quantitative a concept as cost is so fraught with difficulty, how will we possibly measure value?

I have the unfortunate answer here: we can’t.
The plague of aid agencies and “double-bottom line” organizations everywhere, value has proven to be an impossible measure, loaded with preconceptions and moralistic weights when actually “measured.”

Even if we walk away from the amorphous concepts of “making lives better,” or whatnot and restrict ourselves to “financial access,” what exact services add the most “value” to the lives of the poor? Is it credit? Is it savings? Is it insurance? Can you answer this is a definitive and uncontroversial fashion?

Right now, the policies of the rich world and its NGOs, MFIs, and alphabet soup of agencies work with preconceived or assumed expectations about what services will provide the most value.

The reality is, no one knows what provides the most value. We muddle through and learn as we go along.

As for us, with our expensive and, individually, rather meaningless measures, we are also muddling through. However, if we are to understand something this complex, which has eluded armies of researchers and policy makers’ best attempts at simplification, there has to be some degree of vagueness.

What is the exact significance of that client number for Nigerian insurers or those depository rates in Indian banks? Individually, they do us little good, and to be honest, are rather meaningless measures that give us little to nothing in terms of causality.

However, together with many other metrics—breakdowns of financial access between rural and urban, information about the friendliness of financial regulation towards mobile banking… we begin to paint a picture of financial access and what goes into it.

Ultimately, it is a hazy picture with many questions answered in an unsatisfyingly vague manner—and even more simply not answered at all.

In the end, what we would have created is an “anecdote” of sorts, in and of itself. However, the realities on the ground, as we strive towards the lofty goal of lifting up the poor from their poverty, cannot be captured with any sort of richness of detail without this story-telling quality. We are using proxies for financial access, necessarily, as the “value” of these activities can never be perfectly captured by any single number, even if we could observe it.

The urge to boil all of this complexity into a few simple metrics, cost, value, and the like, is extremely tempting. And if your company intends to embark upon the task of doing so, I wish you the best of luck and do sincerely hope you will find something truly meaningful—however, I’d venture that even if you come with the true number for some sort of “cost” (however you end up defining it), it will mean just as little, if not less, than the number of those insured in Nigeria.

Best regards,

James Wang

“When we’re simply sifting through reams of data looking for what appear to be insignificant metrics, it often becomes difficult to appreciate the true significance of what we are doing. After all, these metrics we are researching are, when put on a page, just numbers. How important is the exact number of clients this insurer in Nigeria has, anyway? What possible significance can there be in the depository rates of Indian rural banks?”

Good question … for which I have a terrible answer. Most of the metrics being researched are a total waste of time and very expensive … and while a lot of work is being done doing rather useless research some really important key questions cannot get answered.

I want to know for every socio-economic activity: (1) What is the cost? and (2) What is the value?. I want to know how the aggregate of socio-economic activities adds up for the community and if the community is successful. I want to know how the activities add up for the organizations and whether they are profitable and sustainable. These are pretty key questions … but nobody is doing much work on them as far as I can tell. We are putting these together as a System of Community Analytics … a paradigm shift for people who are interested in the role of socio-economic metrics.

Sincerely

Peter Burgess
Tr-Ac-Net Community Analytics