It’s a simple truth almost nobody disagrees with—the measurements and rules you use drive the decisions and actions that determine the performance of your business. If you are not very careful measure problems can quickly drive your business in the wrong direction. It happens a lot more than most people realize and it’s probably happening right now in your business.
More than a few business guru’s have weighed in on the critical role of measurements in driving behavior and decisions in our businesses.
One of my mentor’s, Eli Goldratt, was fond of saying “tell me how you measure me and I will tell you how I will behave.” W. Edwards Deming famously said “94% of problems in business are systems driven, only 6% are people driven”. And Peter Drucker is credited with saying: “what gets measured gets done.”
It’s such a critical issue and often misunderstood, so I have decided to devote a good bit of my attention to it on this blog. Today let’s focus on the warning signs of problem measurements, because half the battle is realizing you have an issue.
The Role of Measures
Before we drive into the warning signs of problem measurements, it’s helpful to quickly clarify the role measurements should play in the first place. The essential role of measurements is to help us better achieve our goals. If you are a for-profit business your goal is obviously to “make more money, now and in the future.”
So, measurements should assist and guide the people in your company to make the best decisions and take the right actions to help the company make more money.
That’s it, that’s the reason we have measurements.
Good vs. Bad Measures
What makes a measurement good or bad?
And how can we tell if our measures are good or bad?
It comes down to this. A good measurement is one that assists and motivates people to take actions/ decisions that result in the company making more money. A bad or problem measurement is one that either:
- Does not provide us the right information for determining actions/ decisions, or
- Motivates people to do things or make decisions that do NOT get us closer to the goal
To recognize problem measurements, the first thing you need to do is to identify any situations where people are doing things or making decisions that are not helping you make more money—or are causing you to make less money. In almost every case you’re likely to find there is some rule or measure that is CAUSING that behavior. “Bad people” is very rare to find. Bad measurements is very common.
Seeing Problem Measurements
Identifying problem measurements and rules is not as easy as it may seem. We are not knowingly going to run our business using rules that drive people to do the wrong things. There are several common signs that can help you to see problem measurements.
- Mis-alignment. The performance that matters is the performance of the company as a whole, not any single department or function. So measures that cause mis-alignment between functions and departments reduce the effectiveness and efficiency of the team as whole.
- Poor or improper focus. Every organization has a limited amount of resources and time. Measurements and rules that cause behavior that is not focused on the most important areas takes people and resources away from the more critical areas where performance matters the most.
- Short-term benefits. Sometimes measurements and rules can drive people to optimize things in the short-term (month, quarter, year) and do things that hurt the company in the long term.
Mis-Alignment
Measurements that cause mis-alignment are probably the most widespread of problem measurements. Any company that complains about “silos” probably has mis-alignment in their measurements. Silo behavior is when one function or department of the business takes actions that make its local measures look good, but in doing so, creates problems or obstacles for the rest of the business. That’s why they’re called silos, because people are doing things without regard to anything outside their department or function (see Breaking business Silos).
In most companies purchasing is measured one way or another based on buying goods for the lowest price. This motivates them to seek better prices. Unfortunately this can also drive buying inferior goods, dealing with less-reliable suppliers, and/or having to buy large quantities to secure the lowest price. Often these decisions create significant problems for the rest of the organization: driving manufacturing costs up, delaying the shipment of customer orders, increasing working capital, etc.
If you have silo behavior in your organization, try to find the measurement that is driving people to behave in that way. What is the measurement that is motivating it.
Poor Focus
Another form of problem measurements occurs when we try to measure too many things. We all know the old saying, “Just because you can measure it, doesn’t mean you should.” Whenever I see a company with more than a handful of key metrics that they use to run the business, I know there is a focus problem.
Most companies have dozens of measures. I have seen more than a few proudly displaying their 57 key performance indicators. The 80-20 rule reminds us that not everything is equally important so any time there are lots of measures being used in the company to evaluate performance and make decisions, they are, by definition, unfocused and missing opportunities to improve their results. How many measures does your organization use? To find if you have a focus problem, look for behaviors that cause people to work on the small issues and not the truly important ones.
Short-term Benefits
Another common sign of a measurement problem is people taking short-sighted actions or decisions. Rules and measurements often motivate people to take actions to get results in a given month, quarter or year. Striving for short-term results can very often cause long-term failure.
We don’t have to look any further than the recent sub-prime mortgage crisis for an extreme example of this. Wall Street’s measures of quarterly earnings and its annual bonus cycle paid managers enormous bonuses while they took on huge risks in the name of short-term profits by re-packaging sub-prime mortgages. As a result the top 5 investment banks either went bankrupt, had to be bailed out, or were acquired at fire-sale prices. And it sent shock waves through the global economy that we are still dealing with today.
Of course it wasn’t just the measures in Wall Street: Mortgage companies across the country got rewarded for writing shaky loans in the name of short-term profits, Home-buyers were encouraged to assume excessive levels of debt, and the investment ratings agencies had incentives to put their stamp of approval on dubious investment products. Do you see short-term thinking and decision making in your company? It’s likely there’s a measurement at work rewarding such behavior.
Understanding the behavior that your measurements and rules are creating is a critical first step to getting better performance in any business. If you don’t change the underlying metrics and rules, you will continue to see the same actions, and get the same results.
In future articles I’ll discuss more about the critical role of measurements and how you can re-think your measures to create better alignment, sharpen focus and avoid the pitfalls of short-term thinking. I’d love to hear about your experiences with measures. What examples have you seen of measures driving the wrong behavior? What damage did it cause?
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