The old cliché that you get what you measure, is right. You want more of something, make it a KPI, measure for it, and the chances you will get it are dramatically improved. The corollary is that you need to ensure that what it is that you are measuring is really what you want.
This obvious cause and effect is sometimes called The Lucas Critique, after the economist Robert Lucas, who in a 1976 paper, articulated the obvious fact that economic policy when implemented, drives changes in the outcomes that were inconsistent with the assumptions made when the policy models were developed. This is because the assumptions remain fixed, insensitive to the changes in the behaviour the policy drove.
It put a mathematical framework around the better known Goodhart’s law, which simply stated is: ‘When a measure becomes a target, it ceases to be a good measure’
Therefore, choosing measures is a task of vital importance. You have to adopt measures that calibrate the drivers of outcomes, not the outcomes themselves, or you risk getting a lot of something you do not want, or need.
As a young product manager, I worked for a business that had sales volumes as the driving KPI for the sales force. Not unusual, and pretty well balanced, as the marketing function set the prices and therefore had nominal control over gross margin. However, sales personnel had control over promotional expenditure, which was budgeted as a percentage of sales.
Towards the end of the financial year when volumes were behind budget, an additional incentive was put in place. If sales budgets were achieved, the annual sales and marketing conference would be moved from the usual haunt just down the road in a dingy hotel, to a resort in the Whitsundays, and partners were to be invited.
The sales force went all out, and in the last 2 months of the year significantly over-achieved the sales budget, and we all went to a terrific location and had a holiday. However, the holiday came to a shuddering halt as the sales for the first few months of the following year came in. The sales force had achieved volume targets by stacking the retailers warehouses with product in the last two months of the previous year, boosting booked sales revenue, but delaying the timing of promotional expenditure to the new year. There was never a chance of catching up and achieving either the volume or net profit budgets in the following year. However, we did have a great time at the ‘conference’ .
You will get what you measure, just make sure it is what you want.
