In ‘Leading by Cause’, an article on Quality Digest, strategic advisor and executive coach Dave Coffaro makes an interesting reference to the article below, written by CFO Services' Alexander Van Caeneghem and Jean-Marie Bequevort. “Why”, Mr. Coffaro wonders, “do business leaders focus so heavily on analyzing their numbers. Why do they focus "on effect instead of the cause”?
Leading by cause offers an alternative: it is about using “results to understand activities, effectiveness, and efficiency in context of the organization’s vision and strategy.”
As such, it can help to avoid the unappealing “metric-ocracy”, being the subordination of people to a quantitative imperative, and to focus on what really matters. As we explain in our book 'Zo maak je carrière in Finance', what really matters is really very clear: the growth of people. All the rest will follow.
Article by Alexander Van Caeneghem & Jean-Marie Bequevort
Felix Fox, an ambitious car salesman in the post-financial meltdown society where valuable resources are scarce, looks enviously at people who are personally quoted on the human stock exchange. The evolution of their stock, which reflects the value of their life, is being tracked on a continuous basis with a rate watch. When Felix becomes quoted (he’s in urgent need of money), he initially enjoys the thrill, until he starts to fall apart under the transparent tyranny of the metrics.
Felix Fox, as you might have guessed, does not exist: he is a comic book character in the French sci-fi series Human Stock Exchange. But the storyline is not as far-fetched as it seems. In fact, there are some analogies with managers’ lives in today’s organizations. The quest for financial performance and the pressure to measure can corrode organizational cultures, narrow the focus of leadership, reduce intrinsic motivation, and support unethical behavior. Swamped with metrics, people typically either find creative ways of coping, or simply disengage from the process altogether. Let’s look at three real-life cases we have seen as management consultants.
Case #1: A Service Start-Up: Surviving the ‘torture’
In a fast-growing service start-up, we witnessed the implementation of a data-driven culture, along the lines of what famous technology CEOs were glorifying in the media. The regional business managers had to log on to a “business review” call at 2 p.m. every Tuesday, where they were “interrogated” by their bosses and colleagues on the drivers of financial and operational (under)performance.
A finance leader had ambitiously thought, “Through metrics we can push people to systematically identify opportunities and focus on the right things.” But soon the managers were spending all of Monday and Tuesday morning going through piles of numbers in the (vain) hope of surviving the “torture” and getting away unscathed.
Being able to scroll up and down efficiently through almost 50 (!) metrics and looking good on the call became more important than actually improving business performance. The results were disastrous. Attrition exploded, the stock price collapsed, and a manager moaned, “This place is a sweatshop.”
Case #2: An International Software Company: 'Hello, mum?'
In the Belgian branch of an international software company, the sales cycle was measured by metrics on call time, the number of new accounts, revenue, margin, and pipeline. When the initial rapid growth started to slow, the local finance director had analysts examine the data. They detected a clear correlation between call time and revenue: every hour on the phone brought in €4500 of revenue. “All we need to do is have them call more and add a component to the scorecard,” the finance director boasted.
This led to the quarterly sales bonus of the internal sales reps being linked to a key performance indicator of, at least, three hours daily spent on calls. A new trend emerged: call time went up significantly … but revenue growth was inexistent. Amid the general confusion, a senior rep confessed, “How can I call three hours every day? I only have so many accounts.” When asked what he was doing on the phone, he admitted: “I call my mother, a friend, or the speaking clock.”
Case 3: An Eastern European Industrial Group: Manu-facturing
An Eastern European industrial group had built a state-of-the-art performance management system in its production facility. The initial setup was changed after only a few months because measurement not only increased the drive to perform above standards but also fostered a silo mentality. People refused to perform work that was not directly related to their own performance objectives. “Sorry, NMO” – “Not My Objective” — became a retort when turning away work. By including an objective that reached beyond individual performance objectives — the extent to which people helped others to reach their performance objectives — they managed to break that trend.
However, the new metric turned out to be hard to quantify and subsequently implement. The performance management system was dealt a fatal blow when finance management admitted they couldn’t consolidate the different objectives: they made sense individually but didn’t tie in with each other. It became clear that the results were doctored. “Do you honestly think finance understands what we are doing?” one production manager was quoted as saying. “When the graph fails to indicate my good results, I lend it the hand it so desperately needs.”
Metrics are subject to unintended consequences and manipulation, as people tend to act on the expected impact.
The Good Metric
Listing the potential downsides is easy. Metrics are subject to unintended consequences and manipulation, as people tend to act on the expected impact; they risk promoting tunnel vision; they can provide the illusion of control, while many things are barely controllable; they are prone to disregarding what can’t easily be measured, while most things are not as simple as we hope; and humans behave unpredictably. Most importantly, metrics can make people lose track of what really matters.
Nonetheless, many companies measure many things. In fact, management trends like Peter Drucker’s Management by Objectives in the 1950s and Kaplan and Norton’s Balanced Scorecard in the 1990s were built on the idea that whatever gets measured, will actually get done. Setting well-defined and well-chosen objectives will improve employees’ performance. By tracking progress and showing the impact of what people do on what they want or need to achieve, measurement can indeed facilitate things getting done — if you don’t try to measure too much.
More importantly, good metrics can provide a useful lens for examining how managers handle the complexity associated with running a business. By looking at the way managers use metrics, we can assess their ability to focus on a sound strategy, the way they deal with people, and their care and attention when testing and validating new business ideas.
Good metrics can provide a useful lens for examining how managers handle the complexity associated with running a business.
Three ways to use metrics in a useful way
# 1: Reduce complexity.
A corporate dashboard or scorecard that focuses on too many metrics is doomed to fail and will demotivate people. Such a framework should help managers to focus on strategy execution. After all nobody can focus on 50 metrics or goals. Five critical metrics will cater for success.
Avoid purely internal financial metrics like revenue, earning per share, or return on capital, but focus on tangible enablers of corporate performance.
People will connect to a net promoter score, the percentage of sales coming from new products, the number of active users, or the percentage of out-of-stock products. These aspects determine the long-term success of the company.
# 2: Engage employees.
A major source of corporate disengagement, potentially leading to “a miserable job” is rooted in the inability of people to link their own contribution to the bigger picture.
Rather than replicating a standard corporate dashboard at every layer of the organization, ask each team to come up with maximum three team-level metrics that they believe will contribute to achieving the five goals set at corporate level and have them comment on that contribution. Each team can build and track different metrics — standardization or the imposition of formats is irrelevant. The aim is to use the correct data, and to have people align with the broader corporate goals, assimilate them, and take ownership. Assuming you have the right people on the bus, they will care about things — use that penchant.
# 3: Drive innovation.
Whatever you do, do not tie metrics to bonus payments. Also, do not use metrics to assess, judge or punish people, but rather to experiment with the impact of new ideas.
That’s the mindset behind A/B testing, as is being used by new tech companies: let people try a new idea, a new process, or a new control in a tiny part of the business and establish a metric to track the impact and a timeline. If it’s a success, push it forward and expand; if not, pull the plug, don’t blame anyone, and let people explore new ideas. Metrics can be a great learning tool. The ultimate judge of the idea is the metric, not politics or hierarchy.
Avoid the Metric-ocracy
Where can it all go wrong? Well it’s not in “data” or “measuring,” but managing and making decisions based on the wrong observations or only on quantitative observations, while ignoring all the rest: there’s the rub. And beware: the worst is yet to come. Beyond the quantified self and people analytics, the quantified workplace is emerging. However, the image of the “metric-ocracy,” the subordination of people to a quantitative imperative, has little sustainable appeal, as it arises. Real progress is a more nuanced narrative — that’s yet to be written. The future belongs to those who manage to use the new technology instruments and reduce management complexity, liberate people’s talents, and, ultimately, focus on what really matters.
This article was previously published on CFO.com.
Read 'Leading by Cause' by Dave Coffaro on Quality Digest
