Think:Act Magazine "Performance: Faster, Higher, Stronger"
Making your numbers
How much meaning do metrics hold when measuring your business performance?
by Bennett Voyles
Photos by Felix Schöppner
Read more on the topic “Performance”
Watching your performance improve is all about measuring the numbers, right? But maybe there's more to improving performance than simply analyzing the figures and managing them.
The concept of managing by metrics is simple: set your strategy, find a key ratio to help you execute it, focus your team on moving that number, then stand back and watch performance improve. The metric is such an accepted management tool that people often quote Peter Drucker as saying, "If you can't measure it, you can't manage it." But there are problems with this idea, which may be why Drucker, in fact, never actually said that.
Metrics can definitely be useful. "CEOs need marching songs," says Eric Abrahamson, a professor of management at Columbia Business School and an expert on business fads. Often, he says, a new methodology is a good way to focus an organization on a particular concern. The CEO might say: "The problem is that we haven't been stressing quality in this firm." Such initiatives don't have to be a bad thing, Abrahamson says – focus on quality in the 1980s and 1990s, for example, really did help raise the quality of American products. But metrics also have limitations, he notes.
The biggest limitation of metrics is confusing the numbers as absolute truth, Abrahamson says. "A firm is a rich array of different performance elements – potential future clients, and so on – but it gets reduced to a few metrics," he says, adding that in turn may move the price of the stock. "The number is supposed to measure something, but it actually shapes the thing it's measuring." Such myopia is one of Jerry Z. Muller's gripes with metrics. A professor emeritus of history at Catholic University of America in Washington D.C., and author of The Tyranny of Metrics, Muller likes to quote an old teacher of his, the sociologist Robert K. Merton, "‘A way of seeing is also a way of not seeing: If you focus on Object A, you miss Object B.’"
One case in point: General Electric's adoption of Six Sigma. In the nineties, CEO Jack Welch became extremely enamored with this methodology for increasing efficiency by reducing errors. At first, the program worked and when Welch retired in 2001, GE had outdistanced other nineties giants. But by then it was a new millennium – and the competition would soon be Google and Apple. Six Sigma seems to have blindsided other companies too: A 2006 study noted that of 58 large companies that followed in GE's Six Sigma footsteps, 91% trailed the S&P 500 in stock performance after adoption.
This isn't unique to Six Sigma. Popular metrics often wear out, Abrahamson notes, and if you have been focusing on the same numbers as everyone else, you're less likely to create a competitive advantage. Other times, metrics are used as a way to avoid a judgment, according to Muller. For example, when Elon Musk took over Twitter, he told all his engineers to send him the number of lines of code they had written over the past year and he would lay off the least prolific. "The fact that there are other elements of human relations and learning and so on that might be relevant to one's professional task doesn't seem to register with him," Muller says.
It's easy to become so fixated on a particular ratio that you lose sight of the original goal. Wells Fargo, for instance, saw the numbers of accounts held by a single customer as a key proxy of customer stickiness – a conviction that became so strong that some bank employees began signing up customers to new accounts without their permission, a transgression that ultimately cost the firm $3.7 billion in fines, and a lot of credibility with consumers.
Bill Tayler, a professor of accounting at Brigham Young University's (BYU) Marriott School of Business, calls this kind of number idolatry surrogation: a human tendency to focus entirely on the metrics rather than the strategy the metric was supposed to help support. "Once we put a label on it, I started to see surrogation everywhere," Tayler says. "I'll have a kid come home with straight As and I'm really excited. When in fact, if you look a little closer, it might be that a straight A student is taking classes that are too easy and I should be excited for a B student because they're being pushed."
People seem hardwired to focus so much on their numbers that they forget about the objective the original metric was supposed to support. Tayler says his research has also shown that while incentives exacerbate this effect, surrogation doesn't depend on it entirely. In fact, later research showed that even when there was no incentive connected to the metric, people will still focus on the number once they understand it's being collected.
Try following four or five metrics at once. Having to follow several numbers seems to keep the brain from becoming too focused on one.
When it comes to metric fads, executives can go one or two ways: either surf the trends, changing the names as the styles change, or take the less risky approach and adapt the methodology to fit your firm's idiosyncrasies.
You can also get your co-workers involved in strategy development and ask them what measurements are missing. "What sorts of things do you think our current measurements are not measuring or assessing that we ought to think about more?"
Look for metrics that are being adopted slowly but steadily. Ideas that are adapted very quickly tend to be overhyped at first only to lose support just as fast when people find out they are not so great after all.
Tayler and his team experimented with BYU neurologists who conducted scans to see if surrogation could be observed in the brain. The electrical activity they observed supported Tayler's theory: The part of the brain where people focus on numbers turns out to be different from where they think about strategy – which he says also explains why it's so hard to talk people out of a political position even when you have the facts on your side. The brain needs more electrical activity when people don't surrogate than when they do. Simply: It takes less energy to watch the number move than to think about why you want it to move.
Yet despite metrics' potential for abuse, Tayler isn't entirely opposed to managing by numbers. "I'm a big believer in the use of metrics," says Tayler. "You won't hear a good accountant say measures are bad. But it is important to understand how measures can lead to problems – predictable, systematic problems."