FT: Mania for measuring will send you off target

Mania for measuring will send you off target

By Stefan Stern

Published: July 23 2007 17:59 | Last updated: July 23 2007 17:59

Imagine if this column operated like a public company. Would I feel the need to offer editorial guidance, just as companies give guidance on future earnings, in advance of each article? It’s not clear to me what I could usefully tell you – except that, encouragingly, the finishing line will be only about 850 words away.

But if I did provide readers with this guidance, I would then face the next horrible challenge: meeting expectations. Would I be punished in the market if I failed to do so?

Earnings guidance is such a flawed, misleading and counter-productive activity that I wonder why corporate leaders are still prepared to spend any time on it. Why bother offering up these guesstimates that only help short-term traders make more money, and that expose your share price to greater volatility?

Nervous executives who fear even more punishment at the hands of investors should they stop giving out this guidance can take heart from two recent reports, both produced by a body of distinguished authors.

In the middle of last month the American Aspen Institute published “Long-term value creation: guiding principles for corporations and investors”, followed two weeks later by the (also US-based) Committee for Economic Development’s “Built to last: focusing corporations on long-term performance”.

Both reports criticised the practice of offering earnings guidance and urged corporate leaders to conduct more grown-up, substantial conversations with their shareholders about the long-term aims of their businesses.

But it’s not just the short-termism ethos of the guidance process that is troubling. Managers who place so much faith in dodgy forecasts are fundamentally misunderstanding how organisations really work, and how they can be made to work better.

Let’s track back a bit from those quarterly earnings guidance figures. What are they based on? Essentially, the best guesses of divisional leaders, who are trying to anticipate future demand and future performance. And how do managers try to ensure that these forecasts are hit? Performance targets are set, based on either an optimistic assessment of the recent past, or hopeful expectations about the future.

Either way, uncertainty and inaccuracy are piled upon each other, leading to guaranteed error. Companies either surprise or disappoint the markets, and just occasionally meet the arbitrary expectations they have created. Not for nothing has management by forecast been compared with driving a car by looking only in the rear-view mirror.

But surely measurement is everything in business? “What gets measured gets managed,” runs the old saw. Yes – and what gets measured gets manipulated.

Targets distort people’s behaviour, and rarely, in the long term, for the good. Look at former chief executive Bob Nardelli’s introduction of Six Sigma disciplines at Home Depot, the DIY chain, in the US. “Facts are friendly,” he declared, and urged vigorous target-setting for all sorts of activities.

But staff eventually complained that so much time was being given over to measurement that there was little left to devote to customers. Home Depot hit all its efficiency targets but became the least popular major retailer in the country. Mr Nardelli quit the company in January.

One of the most forthright and persuasive critics of the targets culture is John Seddon, managing director of UK-based consultancy Vanguard. He argues that there is no reliable way of setting targets. And targets drive waste into the system. What does “doing 10 per cent better next year” mean if your current way of doing things is hopelessly wrong? You have to change the system, not burden the existing (and faulty) one with more targets. Instead of learning how to do your job differently, and better, people simply adapt their current behaviour to meet their new target.

While some big goals – such as, in the UK, cutting waiting lists to see senior doctors – have helped focus minds, they have dealt with only part of the problem. And fixing part of a struggling system places more strain everywhere else.

Mr Seddon says managers should only use measures that are derived from the work that needs to be done. These measures will be meaningful, and will focus attention on activity that actually creates value.

While the UK government, under the former premier Tony Blair, seemed obsessed by targets – such as waiting times in a hospital’s accident and emergency department (but with little regard to “patient outcomes”), or pass rates of exams (no matter how easy they were to pass) – under the new prime minister, Gordon Brown, things seem to be changing.

Last week cabinet minister Andy Burnham announced that of the 110 key performance targets introduced by the government in the past 10 years, only about 30 will survive.

Perhaps the wisdom of HL Mencken, the American journalist, has finally been heeded. Targets are a simple solution for complicated problems. And, as Mencken said: “For every complicated problem there is an answer that is clear, simple – and wrong.”

Copyright The Financial Times Limited 2007

Comments

[pendolino]

this was a very thought provoking article for anyone involved in managing a business. worth learning from