In part two of the Communispace Client Index series, Eric Porter explains the methodology behind the Communispace Client Index. Read part one for the interpretation and implications of the Communispace Client Index.
When doing any sort of analysis, there are always decisions and trade-offs about what is and what is not included in the analysis. This discussion of methodology explains those decisions and trade-offs and should clarify the process behind the creation of the Communispace Client Index.
Understand, on average, how publicly traded companies that engage in an ongoing collaborative relationship with their customers perform relative to other companies.
A company’s “performance” or “success” can be measured in a number of ways – maybe a company with a history of image problems in the marketplace would define success by increasing its Net Promoter Score (NPS) or by a measure of employee happiness or number of job applicants. Perhaps a municipality defines the success of its local companies by the number of jobs created or tax revenue growth. A sales manager likely defines success by top line growth, while an operations manager might focus on increasing the bottom line. We needed a readily available, standard measure that is also generally reflective of many different company metrics. A company’s price per share of stock fits the bill, given that in our capitalist free-market system stock price efficiently reflects a company’s financial standing.
We selected the 25 publicly traded companies that had the largest partnerships with Communispace each year, as determined by contract size. These 25 companies constituted the Communispace Client Index.
We looked at the last five years to ensure that we were equitably comparing our service offerings. Communispace services continue to evolve as we continuously develop new and better ways of engaging clients’ customers; we wanted to be sure to compare offerings that aren’t too different. Additionally, we included the mid-2008 crash in our timeframe, to see how our clients who engage with customers fare when times are tough relative to the general population of public companies.
The S&P 500 is a well-respected, price-based index of large publically traded companies which are seen to be representative of the US economy as a whole, and of large companies, in particular. Given the diversity of industries represented by Communispace clients (e.g., pharmaceutical, financial, consumer packaged goods, technology and media), the equally diverse S&P 500 index is great yardstick against which to compare the Communispace Client Index.
We wanted these results to be easily understood and measurable in the future. There is no “funny math” or weighting going on. It’s a simple average (arithmetic mean) of change in stock value (price) relative either to the index start date of January 1, 2008 or to when the company qualified to be a client on the Communispace Client Index list, whichever is earlier. That way, we’re only counting a company’s performance when they’re a top 25 client and not counting their performance when they’re not on the list.
To keep it simple, these are non-inflation-adjusted nominal values; if we were to account for inflation, the results would be even more pronounced. We used “adjusted close” to account for splits so, for example, if a stock at $60 a share split to two shares at $30 each, we did not count that as a 50% drop. We used monthly data, supplied by Yahoo! Finance.
In this post, I aimed to strike a balance between readability and too much detail. If there’s something you’re curious about, feel free to ask any additional questions in the comments section below and I’ll answer in the comments.