Anyone familiar with large organizations has probably heard the phrase "you can’t manage what you can’t measure." For most of my management and consulting career, I took this as a truism. Not anymore.
A recent client engagement and a review of the latest research have taught me the dangers of relying too heavily on metrics, especially bad ones, to spur better business results. This is not to say that metrics have no role; far from it. However, leaders should use them sparingly and consider alternative motivational tools.
Take, for example, work we recently did with a financial services institutions, which had historically earned above industry returns. Since 2009, it faced two significant headwinds: first, mounting customer churn that marketers believed traced to product issues; and, secondly, shrinking margins, driven by steadily increasing costs and a perceived inability to raise prices. Not surprisingly, employee engagement scores were also floundering. The company was looking to understand what was really going on and improve operational performance. After undertaking a root-cause analysis, we discovered that many of the problems stemmed from the poor choice and management of newly established metrics. Our fix was relatively simple (though a challenge to sell through parts of the organization): get rid of some (but not all) of the new metrics and focus on a few key performance indicators (KPIs).
CEOs looking to improve corporate performance without damaging employee engagement should heed the following lessons. They include:
1) Metrics mask problems
Companies often use a metric without understanding what they are trying to improve. For example, our client added a new metric, customer satisfaction, without thinking through what the internal and external drivers of the higher churn were. The first two customer surveys were telling: satisfaction went up but so did churn. After a deeper analysis, we found that the churn traced primarily to poor service and communication of the product’s value not product performance, which the new metric was based on. This blunt metric led management to focus on the wrong things.
2) Metrics create conflict
Very often metrics are used in functional or divisional silos, with little consideration paid to how they negatively impact other group’s performance and results. For example, a procurement department’s metrics around cost reduction can put it into direct conflict with the manufacturing group, which is measured on just-in-time raw material supply. Manufacturing managers would understand that paying higher prices is necessary to achieve their objective.
3) Managers become overly focused on metrics and not performance
Many employees focus their efforts solely on the metrics by which they are measured on. However, their actions may not be congruent with what’s best for the business. This misalignment can be illustrated by the attention paid to measurement systems like scorecards. Many of my client’s managers spent upwards of 20% of their valuable time managing around scorecards — collecting data, positioning the numbers and lobbying their ‘story’. Their efforts would have been better spent on other (non-measured) corporate goals like innovation and coaching.
4) Metrics lack credibility
Some common measures like brand image and employee engagement lack sufficient credibility to motivate many workers and trigger improved performance. These metrics are often viewed as disconnected from everyday reality, obtuse or too blunt to be practically influenced. This metrics-induced "credibility gap" contributed to the client’s low employee engagement scores.
5) Metrics can lead to unintended consequences
Unexpected things happen when organizations focus on some metrics. The pursuit of revenue goals led some members of the company’s sales and service teams to do things that were inconsistent with company values, teamwork and ethical behavior.
Where do we go from here?
To reiterate, metrics are not bad per se. Bad metrics are bad. We recommend firms take three steps to reduce metric madness:
Know thyself
Really understand your business and customers, and what drives performance. Make sure existing metrics reflect these key drivers. Furthermore, create new Key Performance Indicators (KPIs), if necessary, that can act as proxies for many essential activities. For example, a ‘ship on time, in full’ KPI illuminates a lot of information about a firm’s production, logistics, service and inventory management performance.
Less is more
There should be no more than four to five organization-wide (not siloed) measures that encompass all facets of the business. Take care not to over-manage these through scorecard creation and reviews. However, changing metrics may require the organization to revamp its compensation and performance measurement systems.
Manage people not numbers
It’s people who generate value, not metrics. This fact may be inconvenient or difficult for some managers but it is a prerequisite for higher performance and engagement. Changing a status quo that benefits many people and is part of a legacy culture is tough. Leaders need to be bold and stick to their guns. It is well worth it.
Mitchell Osak is managing director of Quanta Consulting Inc. Quanta has delivered a variety of strategy and organizational transformation consulting and educational solutions to global Fortune 1,000 organizations. Mitchell can be reached at mosak@quantaconsulting.com