29 August 2011

Simpler is better: Metrics not working? Check your complexity.

Are your metrics working against one another?

In the former Soviet Union (USSR), an professional weight-lifter was promised a bonus every time he broke a world record. So, being a shrewd “capitalist” (I guess), he decided to break world records one at a time—one or two grams at a time. Naturally, he got many, many bonuses, but it isn’t exactly what his handlers had in mind.

Some organizations pay rewards to their marketing department based on a “new customer” metric—the number of new customers garnered over a specific period of time. Of course, the idea is to build the customer base.

Meanwhile, many of these same businesses reward their sales department to meet or beat quarterly sales goals. So, in far too many cases, their salespeople are out burning through customers—alienating them through high-pressure sales techniques—in order to make their quarterly bonuses.

They may also reward their inventory managers to keep their inventory lean. So, while the salespeople are out making customers angry while getting their end-of-quarter orders (to get their sales bonuses), the warehouses are leaning out their inventory to meet end-of-quarter inventory numbers in line for their own bonuses. So, when many of those orders need to be delivered, they will be late—making the an already alienated customer all the more angry with the treatment endured.

I could go on, but I won’t. I’m sure you get the idea and you’ve suffered (or at least heard of) some similar well-intentioned reward systems go awry.

Some have suggested that these are “reward-motivated abuses,” seeking to blame the employees for doing exactly what management has told them to do, and for which management has agreed to reward them. How, then, can these be “abuses”?

Too much complexity

The problem here is not that the intended goals are not worthy: of course companies want more customers, more sales and lower inventories. The problem is the inherent conflicts evoked by the presence of too many “levers” being offered without linkages.

What’s lacking is a unified goal upon which the whole “system”—the whole organization—can be measured and each participant in the process of reaching that goal might be appropriately rewarded.

Simpler really is better.

“Simple” levers and the “simple” linkages

Link Actions to Financial Goals
The linkages are simple, but in order to prevent your organization—or any part of your organization—from sacrificing tomorrow’s profits for today’s bonuses, your (for-profit) organization’s singular goal should be simple as well. Eliyahu Goldratt set it forth so clearly years ago: The goal is to make more money tomorrow than you are making today.

This simple goal is very easy to understand and very measurable—and it will help prevent improper actions like the following (an many, many more):
  • Burning through customers to make short-term sales goals—because of the reduced long-term Throughput and the added operating expenses required to capture new customers
  • Slashing inventory to reach inventory goals at the risk of alienating customers—because it drives Throughput down and operating expenses up
  • Using company politics to cover or support inefficient or ineffective work efforts or policies—because it drives operating expenses higher (among other things)
Think about it. I think you’ll really like “simplicity” compared to “complexity” once you understand how it can drive your whole “system”—your whole organization—toward improvement (instead of piecemeal).

What do you think?

[Cross-posted at Kinaxis Supply Chain Expert Community]

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