Don’t Let Metrics Undermine Your Business

Here is an excerpt from an article written by Michael Harris and Bill Tayler for Harvard Business Review and the HBR Blog Network. To read the complete article, check out the wealth of free resources, obtain subscription information, and receive HBR email alerts, please click here.

Credit:  Mike McQuade

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Tying performance metrics to strategy has become an accepted best practice over the past few decades. Strategy is abstract by definition, but metrics give strategy form, allowing our minds to grasp it more readily. With metrics, Ford Motor Company’s onetime strategy “Quality is job one” could be translated into Six Sigma performance standards. Apple’s “Think different” and Samsung’s “Create the future” could be linked to the amount of sales from new products. If strategy is the blueprint for building an organization, metrics are the concrete, wood, drywall, and bricks.

But there’s a hidden trap in this organizational architecture: A company can easily lose sight of its strategy and instead focus strictly on the metrics that are meant to represent it. For an extreme example of this problem, look to Wells Fargo, where employees opened 3.5 million deposit and credit card accounts without customers’ consent in an effort to implement its now-infamous “cross-selling” strategy.

The costs from that debacle were enormous, and the bank has yet to see the end of the financial carnage. In addition to paying initial fines ($185 million), reimbursing customers for fees ($6.1 million), and eventually settling a class-action lawsuit to cover damages as far back as 2002 ($142 million), Wells Fargo has faced strong headwinds in attracting new retail customers. In April 2017, it reported that first-quarter credit card applications were down 42% year over year, with new checking-account openings down 35%. Meanwhile, more revelations about unauthorized mortgage modifications and fees, improper auto loan practices, and other missteps surfaced throughout 2017. In the fourth quarter the bank had to set aside a $3.25 billion accrual for future litigation expenses. In February 2018 the Federal Reserve prohibited Wells Fargo from growing its assets any further until it strengthened its governance and risk management. This was followed in April by a joint $1 billion fine from the Consumer Financial Protection Bureau (CFPB) and the Office of the Comptroller of the Currency (OCC), which led Wells Fargo to increase its litigation accrual by $800 million. While press releases from the CFPB and the OCC tie the agencies’ action only to mortgage fees and auto loan problems, the political context suggests that the penalty’s severity stems in part from public outrage over the original fake-accounts scandal. In the face of the bank’s prolonged difficulties, the CEO who’d taken the helm after the scandal, Timothy Sloan, resigned in March 2019.

Were these devastating outcomes simply the natural consequences of having a bad strategy? Closer examination suggests that Wells Fargo never actually had a cross-selling strategy. It had a cross-selling metric. In its third quarter 2016 earnings report, the bank mentions an effort to “best align our cross-sell metric with our strategic focus of long-term retail banking relationships” [emphasis added]. In other words, Wells Fargo had—and still has—a strategy of building long-term customer relationships, and management intended to track the degree to which it was accomplishing that goal by measuring cross-selling. With brutal irony, a focus on the metric unraveled many of the bank’s valuable long-term relationships.

Every day, across almost every organization, strategy is being hijacked by numbers, just as it was at Wells Fargo. It turns out that the tendency to mentally replace strategy with metrics—called surrogation—is quite pervasive. And it can destroy company value.

The Surrogation Snare

Of course, we all know that metrics are inherently imperfect at some level. In business the intent behind metrics is usually to capture some underlying intangible goal—and they almost always fail to do this as well as we would like. Your performance management system is full of metrics that are flawed proxies for what you care about.

Here’s a common scenario: A company selects “delighting the customer” as a strategic objective and decides to track progress on it using customer survey scores. The surveys do tell managers something about how well the firm is pleasing customers, but somehow employees start thinking the strategy is to maximize survey scores, rather than to deliver a great customer experience.

It’s easy to see how this could quickly become a problem, because there are plenty of ways to boost scores while actually displeasing customers. For example, what happened the last time you were urged to rate your experience a 10 on a satisfaction survey “because anything but a 10 is considered a failure”? That request may have turned negative feedback into a nonresponse or an artificially high score, and the pressure was probably off-putting. And think about all the pop-up windows, follow-up emails, and robocalls that pester you with surveys you would rather ignore. Such tactics tend to lower a customer’s satisfaction with a company, but surrogation can lead those charged with delighting the customer to use them despite the strategy.

Surrogation is especially harmful when the metric and the strategy are poorly aligned. The greater the mismatch, the larger the potential damage. When a production manager’s success at achieving the strategic objective “make high-quality products” is measured by using very precise quality standards (such as “ball bearings must be 10 millimeters in diameter, plus or minus 0.0001 millimeters”), surrogation might not be a problem. However, if success at the objective is measured by the number of customer returns, the production manager might find creative ways to avoid returns. For example, he or she might connect directly with the purchasing departments of clientele, offering to personally handle any product concerns so that returns are registered as rework rather than returns. Or the manager might be willing to gamble a bit, pushing beyond acceptable (or even safe) quality standards, knowing that while the lower quality will increase the likelihood of a return, it may not actually trigger one. Furthermore, when a single metric is used more widely—for example, to gauge the performance of multiple managers overseeing various components of a complex product—surrogation can have a far bigger impact and do much greater harm.

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Here is a direct link to the complete article.

Michael Harris is a doctoral student at the University of North Carolina’s Kenan-Flagler Business School.


Bill Tayler is the Robert J. Smith Professor at Brigham Young University’s Marriott School of Business.

 

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