Blog:

Bob Sutton explores how Billy Beane, the talented general manager of baseball's Oakland Athletics, is applying the scientific method to innovate his talent portfolio while still maintaining a profitable business. Beane is doing so well that he's even garnering the respect and admiration of the investment community.

Bob, whose blog I recently discovered and is fast becoming one of my favorites, writes:

There are many signs that the system works, for example, Oakland's cost per win in 2005 was $450,000 in salary, while the New York Yankees paid 1.4 million. The 2006 payrolls (when Oakland had a better season than the Yankees) were about 60 million for the A's and about 200 million for the Yankees. Bean and his staff do impressive analysis to make decisions that gain them cost advantages and increase their odds of success. For example, they stay away for star players that are coming out of high school and prefer college graduates because only 5% of baseball players drafted straight out of high school are in the major leagues in three years, while 17% of college graduates that are drafted make it to the majors.

Also, Bob references one quote from a recent Financial Times article that I particularly like that well summarizes Beane's philosophy to risk management:

So Beane and his statisticians invested their energy in analyzing defence, which is still by far the hardest aspect of the game to categorise numerically. Their efforts resulted last year in what was by common consent the best fielding team in the league. Fielding was under-priced, so once Beane and his team could find a way to measure it, they went out and bought it. “If I can’t measure it, I’m not going to invest in it. The intangibles – personally I don’t believe in it, but that’s just my opinion.”

The ability to quantify and positively react to risk better than one's competitors is clearly a major competitive advantage. The importance of defining success metrics to compare risk is something that I continually try to achieve in my own work, but it's easy to become dependent on predefined or "industry standard" metrics rather than developing new ones. My takeaway: differentiate yourself from others by applying creativity to metrics.