The Measurement Paradox

Writing this piece is part of my struggle with why using proper performance metrics is such a problem for most organizations and why it creates such aberrant behavior.

Let me give you a short case study of an extreme example of the kind of crazy behavior I have seen.  A few years ago I worked for a company, that made plastic colored balls that would then be used as the color base for injection molding.  The process was fairly simple, batches were scheduled for the color to be added to product in relation to the color wheel, from light to dark.  When this was accomplished the blender would only have to be fully cleaned after the darkest color was added.  A batch of color would take 20 minutes and to fully clean the blender took about 90 minutes.  It was clear that breaking into the schedule was a significant issue.  Yet, almost every day the schedule was broken into at least once 'for an emergency order'.   When this occurred a batch would take the 20 minutes plus the 90 for the cleanout.  The result was that instead of producing 4.5 batches in this time frame only one was produced.  Of course the batch that broke in was not charged a higher cost, the lost production and increased cost was divided across all products.  

The organization refused to implement a policy of not allowing the schedule to be broken even though it was commonly known that this was causing problems and maybe costing them money. The reason for the vast majority of the panic orders was as a result of the compensation policy of the marketing executives who were bonus-ed on volume.

This process plays out everywhere we look.  We now realize that the recent melt down in the financial system was not just a random affair.  Many key players in the banking system understood the risks they were taking.  They even had a term for the impending disaster.  But, it wasn’t their problem.  The rewards were so substantial that they were driven to take on more and more risk.  By the time things got bad they would take their money and run.

In most organizations the measurement systems for the sub-units are out of alignment with the overall profit goals of the company. 

To understand the problem, one has to take into account how organizations are built.  

To cope with the complexity of organizational life functions are divided into divisions such as manufacturing, marketing, R&D, purchasing etc.  For each of these functions performance measures are created, supported by key performance indicators.   

The people in each function are rewarded or punished for how effectively they attain those goals.  When all the functions achieve their goals the organization will prosper, or, so the theory goes.

In fact, in most organizations this isn’t true and it underlies one of the biggest problems we as consultants face in trying to effect change.

It is also why we meet significant resistance to change from some parts of the organization.  We are trying to change 'to something better', but the resistors often see their positive reward system stripped away and not replaced.  From their perspective this means that the change will have a significant negative impact on their bonus system, on the satisfaction of their job and ultimately on their life.

If that were the end of it.  It would never the less still be terrible but unfortunately, it gets worse.

But here is the other problem. 

In the final analysis when strategic decisions are made the linkages of the separate data flow together - everything is hooked to everything else.  

It doesn't matter that the measurement systems used by each function poorly measure outcomes that drive the real financial throughput and are not interconnected, never the less the outcome is what drives the organization to make or not make decisions. 

How many times have you heard the story of purchasing managers making decisions that impact quality negatively, even when quality is a primary goal for everyone in the management team.   

How do you make good decisions with bad data?

In a recent article in Fortune, they commented that of the Fortune 500 today, less than 60 organizations are the same ones that existed when the magazine started to analyze this data.  

As a pilot I have been trained to create knowledge from the data coming from the various instruments and to have a sense when one of the instruments may be producing erroneous data. We are the taught to integrate that data and then make appropriate decisions.  When a pilot is unable to do this the results can be catastrophic.

I have seen examples where organizations started here and moved to clearly and competently functioning in an environment powered by good data and good decisions.

So where do you begin?

More soon.