Let me start by saying that I’m a massive believer in the power of metrics. There’s an old adage that if you don’t measure something it doesn’t happen and I think there’s a tonne of truth in that. As a result we advise our companies to build KPI trees so employees in each department know what to do and there can be confidence that if everyone delivers the company will hit its overall growth and profitability targets.
However, it’s also true that metrics are not a panacea, with difficulties typically arising when a focus on metrics eclipses the big picture. This happens for two related reasons:
- Bad implementation
- Over focus on metrics at the expense of meaning, culture and innovation
Bad implementation is a surprisingly easy trap to fall into. In startups things move fast, and once you get beyond the high level metrics like sales it is often difficult to get good data, particularly at the very early stages. Calculating an accurate CPA by channel is a good example of something that sounds simple, but is notoriously difficult in practice. So entrepreneurs do the best they can, and develop proxy metrics. That works great whilst everyone remembers that they are proxies. The problem is that they forget quickly, particularly when the team grows and the people managing to the proxy weren’t there when the conversation about it being a proxy was had in the first place. If you’re not careful you can end up with a company that is working very precisely to a set of metrics that are slightly off target and everything isn’t working as well as it could.
Or worse, the proxy metrics are only directionally right and when managed to with precision they result in bad outcomes. Arguably that’s what’s happening in the UK and US education systems right now, where schools have been measured on standardised test scores for some time and teachers are now ‘teaching to the test’ at the expense of a more rounded general education. The NHS in contrast has a more comprehensive set of targets comprising waiting lists for operations, wait time in A&E, commitments for cancer patients, maternity patients and many more items. Whilst the NHS is definitely creaking under the pressure of increasing patient numbers and increasing cost-per-patient, it’s my belief that these targets have helped managers to focus on what’s important and improve the quality of the health service provided to us all here in the UK.
The solution to bad implementation, of course, is to improve the implementation rather than ditch the metrics. In education that might mean smaller more regular tests or adding additional measures, maybe of pupil happiness. Some of these might be impossible or prohibitively expensive to measure, but you get the point.
The second thing that can go awry with metrics is much more subtle, and tends to afflict good companies with well defined KPIs. The value of metrics is that they make it simple for people to know what to do. The associated challenge is that people cleve to that simplicity and lose sight of the nuances, particularly if they are comped on the metrics.
Last night, I was talking with one of our portfolio companies which is particularly well run. They make exceptionally good use of metrics and have enjoyed great success as a result. However, growth is now slowing and that’s at least in part because they have been over-focused on what they can measure and neglected brand and some of the more qualitative aspects of customer experience that might have improved retention. Culture and innovation are two other areas that aren’t measurable and can suffer in metrics driven businesses.
The remedy is for the CEO to stay brave and maintain a clear vision for where she or he wants the company to go in the areas which aren’t measurable as well as the areas that are. That requires clarity of thought, constant communication, and allowing for objectives that aren’t fully SMART. Perhaps more challenging, it requires creating an environment where people work effectively toward soft targets as well as delivering KPIs. By soft targets I mostly mean areas where there is no firm definition of quality so gut feel rules – branding is an obvious example, as are mission and vision statements, innovation more generally, and managing to company values.