By what measures do you perform?

Measured on the iron bed
 

In Greek mythology, Procrustes was a blacksmith who lived next to a busy road. In his house, he had an iron bed, in which he invited passers-by to spend the night. If they were too short for the bed, he would stretch the visitors with his tools to fit the bed. If the guest was too tall, Procrustes would amputate the excess length. But why was he doing this? Perhaps his was a small business that was operating with one simple performance measure; how well does the customer fit the bed?

Do you have the right measures?

Everyone in business, from start up to global market leader, knows that performance measures are necessary: you get what you measure. But sometimes we forget that they drive wrong behaviour and sometimes we inadvertently choose the wrong measures.

There are some key questions to ask when setting objectives or devising metrics:

• What is really important to the customer? How exactly do they measure value?
• How does this objective relate to the creation of value for the customer?
• If you measure something, what are you going to do with the result? What decisions will you make? If the answer is ‘don’t know’ or ‘nothing’, then ask yourself if you really need to divert energy or resources to measurement. Just because you can measure it, doesn’t mean you should.
• If you look at all the goals and targets I have, can I immediately tell what is most important and what can be relegated to a secondary role? To borrow a powerful military concept: have you got a Schwerpunkt; a point of main effort?
• What behaviour will your associates display? Is this what you want?

Single metrics (often) cause problems

Whilst we can all smile at the story of Procrustes, such disconnection between performance measures and results has similarly unfortunate consequences today. The ‘NHS Plan’, the UK Government’s blueprint for the future of the National Health Service, insisted that “by December 2004 all patients will have access to a primary health care professional within 24 hours and a GP (family doctor) within two days.”

The intention was of course to reduce waiting times for patients. In the UK, doctors typically own their businesses, as individuals or in small groups of partners, so could implement the metrics in their own way. It became common when trying to book an appointment to be told: “In order to meet Government guidelines we have changed our system. You are not able to book more than 24 hours in advance.” It seems that to meet the targets, many doctors chose to not accept bookings more than 24 hours in advance, thus ensuring that no patient had to wait more than the target time between booking and seeing a doctor. Patients had to call back every day and hope there would be a free slot; often there wasn’t.

Predictably there was an incentive attached to the targets. The 24 hour target was part of a wider system, which in its first year saw doctors across the country average a 90% score, triggering bonuses of £1 billion. A well-intentioned central initiative unfortunately drove a drop in patient experience, as well as an increase in costs.

Measures that target the wrong thing are not confined to the public sector. Bob Lutz, ex CEO of General Motors, tells a story about paint quality. He observed GM cars had dull, almost grainy, paint. Manufacturing told him, “You’re totally wrong. We have the best paint in the entire industry. In JD Power surveys we have the lowest number of paint defects per car of any company, Toyota included”.

Lutz makes the point that a restaurant that advertises the lowest incidence of food poisoning doesn’t necessarily serve the best food; the absence of complaints does not equal excellence. On further digging, he found that GM was deliberately reducing the sheen of their paint, so that minor defects were much less visible. So, whilst complaints were few, the paint was just ‘OK’, bringing little joy to the customer.

Towards multiple and more balanced objectives

Obviously single metrics can cause problems; hence the need for multiple and more balanced objectives. In GM the VLEs (Vehicle Line Executives) were very powerful people, usually engineers, who were responsible for individual vehicle programmes from sketch to production. Many of their objectives resulted from benchmarking Toyota; cost, investment, quality, warranty cost, assembly hours per vehicle, percentage of parts reused from previous model and, especially important, time to launch. Interestingly, ‘being appealing to customers’ was not on the list.

Bob Lutz tells a story of a meeting with a VLE who had bought his scorecard to a project review. “He had met or beaten every target; it was solid green with no yellow or red. He deserved, in his opinion, a big juicy chunk of that special VLE compensation fund.” “How’s it selling?” I asked. “Well, really not that well; the press on it was lousy and the public unenthused. But, I can’t be held accountable for that. My goals were signed off by everybody, and if I make them all, that’s success.” Lutz described this as the tyranny of process over results, and committed thereafter to hold VLEs accountable for the success of the vehicle. Indeed, the idea is to give objectives that require the responsible people to balance the important metrics (e.g. sales objective and margin objective; efficiency objective and quality objective).

Poor measures destroy value

It is not just customers that are at risk from process dysfunction; suppliers and partners can suffer too. There are purchasing departments that are measured, and rewarded, on the reduction they can negotiate on an initial offer from a supplier. Again, the intention is fine; reduce costs and engage people in enhancing the bottom line.

The reality is rather different. When the supplier knows what is happening, it can adjust the initial offer upwards in the expectation of having to take a cut. It is possible that the end result is actually a higher price, whilst the purchasing manager gets a bonus for a solid percentage reduction. Not only is value destroyed, but trust and the relationship can be tarnished by the game-playing.

This article is not meant to be a polemic against measurement; metrics are a necessary and constructive tool if used carefully. The graveyard is littered with companies that would do anything for the customer, but had no internal discipline and made a loss on every widget they produced. Many of them were taken by surprise when they went bust, because they were not measuring cash flow. History tells us that the poor use of performance measures has the potential to destroy value and undermine relationships in start ups, scale ups and global corporations.