Hard Performance Targets – The Abuse Of Management Information!

Thursday, 18 September 2014
By Christopher Hall
If you can’t measure it, you can’t improve it. If you do not measure it, you probably do not care.
Tom Peters
Measuring aspects of business service is a good idea, but setting hard performance targets using these measures usually leads to unintended adverse consequences. Christopher Hall considers some of the issues of setting hard performance measures.

The quest for efficiency by monitoring employees is a growing industry. Highly refined, detailed and sophisticated measures are being developed for all business activities. The idea is to create appropriate management incentives to improve efficiency and keep tight control over the business. The accountants have never had it so good!

This may appear an excellent way to improve company efficiency. However, is it optimal once the less measureable impacts of customer service and staff behaviors are brought into the equation?

Let us look at what goes wrong when people run a business using hard performance measures.

Efficiency VS Effectiveness: A Financial Services Call Center

One call center had hard efficiency targets with the number of calls being monitored. Every hour, reminders were sent to staff not reaching the required number of calls. These staff must be inefficient, lazy and wasting company time!

The effects of these hard targets from the other side of the telephone are obvious. In one instance, it was my third call in three months. I was still being advised to ring again if the problem did not sort itself out. They clearly did not want any complex problem that would take time to resolve.

I was not alone. Hardly surprisingly, customer satisfaction from the call center was poor.

However, one brave manager did make the decision to stop monitoring staff and allow the call center staff to help the customer. This did not take much encouragement as most staff found job satisfaction in helping people.

The results were interesting. The number of calls per member of staff went down, as one would expect. However, customer satisfaction increased and more importantly, the number of calls decreased. Customers were having their issues resolved and they did not need to call back again, and again, and again, or leave.

Were the call center agents to blame? They were just doing what they were asked to do even if it did throw a spanner in the works. It sound just like the Enron senior executive discussing the electricity supply regulatory regime “If they are going to put in place such a stupid system, it makes sense to try to game it”.

Efficiency and customer service can often go hand-in-hand. However, targeting simplistic efficiency measures is not normally congruent with either efficiency or customer service.

Targeting accounting profits: Financial Services and Enron

In years leading up to 2008, profits were on the rise and many executives wanted them to continue on an ever-increasing trajectory. Banks were becoming more commercial and profit focused. Many banks set the objective to double economic profits every 5 years. There was ‘lots of slack in every business’ and if senior management failed to make their targets, they would be shown the door!

The analysis for this level of growth was based on the high inflation period of the 80s and early 90s. Doubling economic profits in this period was simple; you just had to grow roughly in line with inflation. This is not a hard challenge for a mature banking business.

However, the 1992 recession was partly caused by the determination of the government to crack inflation. ‘If it is not hurting, it is not working’ was the war cry from John Major, the Prime Minister at the time. In the lower inflation environment, doubling economic profit meant real, rather than notional, increases in bank lending.

Increasing lending in banks is a lovely way to make money. As any banker will tell you, it is easy to grant new loans. It is collecting the money in years to come that is difficult.

In one institution, reports surfaced of 13 credit increases being allowed in a single year. In other words, allowing the customer to borrow in order to cover the interest repayments. This example is undoubtedly extreme and atypical, but it highlights the issue. Increasing lending to existing customers reduces the default rate, reduces provisions, increases interest income, increases commissions and decreases the charge for the cost of equity. A wonderful way to meet your economic profit targets for many years – until the merry go round eventually stopped in 2008 with many banks posting record losses and becoming insolvent.

Other industries have similar issues. The Enron story is very similar with executives being set unrealistic hard profitability targets. The result was creative accounting that exploited the tightly defined, hard accounting rules in the United States of America. It did not matter if the financial accounts did not show a true and fair view to any reasonable man – you just had to comply with the rules.

To quote a former Enron accountant:
“Say you have a dog, but you need to create a duck in the financial statements. Fortunately, there are specific accounting rules for what constitutes a duck: yellow feet, white covering and orange beak. So you take a dog and paint its feet yellow, its fur white and you paste an orange plastic beak on its nose, and then you say to your accountants, ‘This is a duck! Don’t you agree that it’s a duck?’ The accountants say, ‘Yes, according to the rules, this is a duck’. Everybody knows that it’s a dog not a duck, but that doesn’t matter, because you’ve met the rules for calling it a duck.”

Accounting profits for Enron were spectacular for their industry. These were driven by highly innovating accounting devices – right up to the point that they went insolvent.

If you want to run your business by targeting hard accounting measures, you will get the results you asked for – but almost certainly not the results you want.

Running the Business By Numbers: A Public Speaking Organisation

There is an international speaking club organisation with a division representing the clubs across London. The international association had set various ‘targets’ for the division with non-financial recognition awards if you achieved them.

These awards had the result of focusing some members’ minds on achieving the targets directly. The power of simple recognition should never be under estimated in motivating people.

One of the measures was a target for the number of new members. At a divisional committee meeting covering the London clubs, the statistics were presented.

“Club South has problems it was announced. They have not taken on any new members and are going to collapse.”

“Club North is doing brilliantly, look at all the new members they have taken on.”

However, the new member figures did not reflect the reality on the ground.

Club South has deliberately decided not to take on any more members - it was too successful. All its members were turning up, turnover of members was very low, it had a very diverse program of additional events, everyone knew each other, they had lively enjoyable meetings, they were already meeting twice as often as other clubs and they had very limited speaking slots available. The actual challenge was to persuade them to split the club so that they could continue growing.

Club North on the other hand far from brilliant and actually about to collapse. There were an excessive number of new members that were easily recruited from an efficient internet site. But that does not make a successful club. In practice, new members were being ignored, the club did not have special events and most members did not turn up for meetings. Come renewals time, the club membership fell like a stone as predicted. The real challenge was trying to persuade the dwindling club’s committee to change their approach to build a core of loyal, enthusiastic good speakers that would look after new members.

So what were the critical success factors for determining if a club was going to succeed? One factor was whether there was a social gathering after the club meeting where members welcomed guests. The social allowed time to discuss issues, recruit volunteers for special events and created an environment for new and old members become emotionally attached to the club. It was also a culture that any club president could easily create.

As a forward-looking critical success indicator it was very easy to observe and feel – but how could you ever put a hard measure on it?

Measures are a great starting point to summarise business activity in order to frame some good questions. However, they can never tell the underlying story of what is really happening in the business or what needs to be done to become successful.

How to Improve Your Rankings: School League Tables

The government introduced school league tables to publish examination results of students. The idea was that transparent school comparisons would to encourage all schools to improve their performance.

However, parents want to send their children to the highest achieving school. Hence, the unintended consequence is that schools with the best exam results then get more applications from academic children. This in turn maintained them, without much effort, high in the school rankings.

However, speaking with school inspectors is interesting. Their view was that the best teaching is usually in the schools lower down in the official rankings. Teachers in the underperforming schools were using some of the best teaching techniques to obtain academic results for the least academic pupils with less interested parents.

Conversely, the best performing schools were believed to have some of the worst teachers. These school’s results were from selecting academic pupils who often also had good parents coaching them in the evenings.

So if you are a school that is not highly placed in the rankings what should you do? At least one school had a good idea. Split the class into two groups, the academic children who are expected to obtain good exam results and the rest. One then submits two registration forms, “High school” and “High school A”. Of course “High School” now suddenly jumps up on the rankings attracting more applicants to the school.

In selecting a school for my child, my key criteria were the attitudes of the headmaster and staff - not the facilities or academic success. The result was selecting a school that did produce excellent results but more importantly it did so with happy active children engaged in a wide range of non-curricula activities.

Why put so much emphasis on academic success when there are plenty of studies to show that success in life is not highly correlated with academic success at school?

If you were a teacher in one of these schools, how would you want to be evaluated? Personally, if I were a teacher, I would like to be rewarded on having well behaved, active and interested children who are busy and looking after each other. The academic achievement and success in life will naturally come out of that.

Believing Raw Statistics Without Understanding the Microeconomics: Buy-To-Let Mortgages

It’s been well reported that before the 2008 crash, some Financial Services companies were aggressively increasing their buy-to-let lending portfolio.

The risks were assessed exactly the same as the retail homeowner portfolio. After all, the loss rates over the previous seven years were the same as the retail homeowner mortgages

All participants were making a lot of money, from the Buy-to-let owner, estate agents, brokers, government and banks? So who would want to argue that Buy-to-lets might be a much more risky business with a house price bubble being formed?

There is a problem with these facts. They only represented a fraction of the economic cycle – the upside booming economy element.

If one thinks about the people involved one gets a very different picture from the statistics.

A mortgage on a residential homeowner means that the customer could lose his own home if he fails to keep up repayments. These customers are typically in a job and represent a good cross section of society.

Buy-to-let mortgages on the other hand have a very different profile. There were buy-to-let seminars encouraging people that ‘buying a house was an upward only bet’ and “the way to make your self a millionaire”. All you had to do was to gear up to the maximum. Then, as property prices increased you could withdraw your equity profits with even higher mortgages. This was great news for the people running these seminars, the brokers and banks. It gave them an ongoing churn of seminar fees, introduction fees, new mortgage applications and increasing lending.

The people who attended these buy-to-let seminars at this stage of the cycle typically did not have good pensions, salaries or other equity. Hence, if they got into trouble, and property prices collapsed, it was the banks that would be collecting the keys and taking the loss.

The crisis of 2008 taught the Financial Service industry the lesson that buy-to-let mortgages are riskier than residential homeowner mortgages. However, this was an obvious mistake that could have been prevented by considering what the customers would do in a downside scenario.

Trying to persuade people that there could be a housing bubble and that but-to-let was riskier than residential mortgage was a challenge. “There is not a shred of evidence for you hypothesis in the historic data" as one person told me in a bank that later went insolvent. It would typically take at least half-day seminar to change people’s perspective that they might be housing bubble that could burst in the years leading up to 2008 and even then there would be dissenting voices.

Any statistic, such as low default rates for buy-to-let properties, cannot be taken at face value without understanding the economic context and applying judgment. The problem is how can you persuade people that a statistic is inappropriate when their livelihood depends on believing it?

Summary

You get what you measure as the old adage says. However, if you measure the wrong things, you end up with the wrong conclusions. If you put performance targets on those measures, you will almost certainly obtain bad unintended consequences.

If your task is very simple and repetitive with no human interaction, some hard targets may be appropriate.

The problem is that even carefully constructed hard performance measures usually have unintended, or undesirable consequences as soon as humans are involved.

Performance management is a necessary part of company life, however, it needs to reflect many subjective factors and be flexed for changing circumstances. This is too complex to ever become formulaic.

So what does this teach us?

  1. If you are still really determined to create hard targets based on measures, you had better look out for the unintended business consequences! You must ask yourself what the human incentives will be if you were in that role and how you would arbitrage the measure.
  2. Do create business measures. Quantifying things helps improves your judgment and understanding of the business.
  3. Do NOT run the business on statistics. Talk to lots of people to understand what the statistics really mean on the ground and what they are omitting. Never forget the old adage that there are “liars, dammed liars and statisticians!”
  4. Do create soft objectives for staff. Objectives help people work together towards a common goal.
  5. Do evaluate staff subjectively against the soft objectives. You must reflect the changing priorities and issues over the year that will have modified the objectives. You want you staff to do the right thing and be adaptable to changing business priorities.
  6. Do recognise your staff every day. People will do a lot for you just for recognition without any pay or bonus. That is how the international speaking organisation works.

In summary, hard targets are appropriate for robots doing tasks on objects. Soft objectives are appropriate for humans dealing with other humans.

— Christopher Hall. Email: Hallcjlondon@aol.com

Christopher Hall has worked in the financial services industry for over 25 years especially within Risk and Performance Management. The examples discussed have been collated from a range of sources. They represent the authors own views and understanding of the issues.

Note: Enron quotes from the book, “Smartest Men in the Room” by Bethany McLean and Peter Elkind.

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