A Source of Confusion – Variance and Variation

I was recently asked about the difference between what is meant by variance vs. variation.  As most should do when asked a question such as this, there is a need to understand context and operational definition.  Since this has come up a few times with same context, I thought it would be worth a post.

The use of variance s typically used in the context of  variance from budget.  For example, “did I meet or exceed budget” describes the variance from budget.  This is often described in monetary or percentage terms.

On the other hand, you have variation which to many of us describes a statistical term.  Variation has been descibed in a previous post titled Service Metrics – What You Need to Understand (take a minute to read).  Data taken from organizations will display common cause variation or between the limits.  Unusual events lie outside the statistical limits and are often referenced as special or assignable causes.

The key point is that variance and variation have little to do with each other.  In fact, they couldn’t be any more different.  Budgets with all their hope to be objective and scientific are little more than best guesses and variance drives dysfunctional behavior in organizations.  All the reports that follow are really wasteful.

The normal amount of variation in financial or any other set of numbers can tell us more about how common the variation is or identify any special causes allowing one to ask better questions.  Variance does not help us understand anything except that we don’t know how to improve performance.

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Make the new decade a profitable and rewarding one, start a new path here.  Download free from www.newsystemsthinking.com “Understanding Your Organization as a System” and gain knowledge of systems thinking or contact us about how to get started at [email protected].  Reach him on Twitter at www.twitter.com/TriBabbittor LinkedIn at www.linkedin.com/in/trippbabbitt.

Tripp Babbitt is a columist (Quality Digest and IQPC), speaker, and consultant to private and public service industry.

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