Beware the Cult of Rigid Metrics and Performance Indicators

There was a time when audited financial statements were considered the only information managers needed. Even before scandals like Enron drove home the sub-optimal utility of such measures, there was growing interest in the intangibles that drive business performance.

And while most progressive organizations now recognize the need for a broader set of indicators, a new challenge has arisen: that of rigid adherence to a bunch of numbers that were never intended to be rigidly applied or whose lessons were ever designed to be the only source of managerial knowledge. Smart organizations recognize that they must constantly evaluate and update the way they measure themselves.JL

IESE reports in Forbes:

Rigid performance measurements such as key performance indicators or the balanced scorecard are increasingly used by companies to manage all aspects of a business. But these metrics don't account for factors such as trust and common sense, and, as a result, managerial discretion and professionalism are routinely undervalued. No set of metrics can anticipate every contingency. Rigid evaluation can cause those who have the company's best interests at heart to lose faith
One of the most repeated mantras of the corporate world in recent years is that "you can't manage what you can't measure." This mindset means rigid performance measurements such as key performance indicators (KPIs) or the balanced scorecard (BSC) are now increasingly used by companies to manage all aspects of a business. But these metrics don't account for factors such as trust and common sense, and, as a result, managerial discretion and professionalism are routinely undervalued. This can create serious problems in the long run.
In an article published in the Journal of Business Ethics, IESE's Natàlia Cugueró-Escofet and Josep M. Rosanas weigh in and question the ethics of metrics. They investigate the effects of over-reliance on formal evaluation criteria, explaining how it tends to lead to "gaming the system," to the company's detriment.
The solution? More flexibility. The performance metrics need room to breathe and managers must be able to look to "informal justice."
A Dangerous Trend
Once upon a time, performance was evaluated using a mix of formal targets and informal controls (company culture, managerial discretion, personal relationships and so on). In recent years however, management control literature has promoted increasingly more sophisticated, agency-based methods.
This means rating managerial performance against a number of objectively measurable indicators tied to the corporation's strategic agenda, often described as the balanced-scorecard approach.
Informal evaluation, meanwhile, has been largely overlooked. In the case of mortgage lenders at a mid-sized Spanish bank, a manager who opposed the risky over-lending practices was "promoted" sideways, to a better office with a higher salary, but out of a decision-making role. In a similar case at a large bank, a board member with a strong grasp of accounting felt that he couldn't speak up about over-valued assets, as the compensation of the whole board depended upon profitability and he did not want to have everybody against him.
The results were catastrophic for the banks, which had to be bailed out from economic collapse in 2008. The very rewards system they had installed had incentivized workers to act contrary to the companies' best interests.
Rediscovering Flexibility
It's not just a case of the wrong metrics being applied, Cugueró-Escofet and Rosanas argue. No set of metrics can anticipate every possible contingency. And rigid evaluation policies can cause even those workers who do have the company's best interests at heart to lose faith: they may leave the company, or shift priorities for personal betterment when they see others rewarded.
Instead, it's high time to bring informal methods back into management control. This means re-engaging with less regimented forms of motivation and evaluation, investing in staff so that they care about the company's success, and increasing the role of discretion and common sense in evaluations, while recognizing the limits of metrics. Informal forces can include concepts like "work ethic," as well as company culture and management attitudes toward subordinates.
These soft management practices have to be applied with what the authors call "informal justice," whereby managers instinctively correct for deficiencies in the formal metrics and feel secure making suggestions to help improve them.
Two Types Of Justice
The co-authors briefly present the formal management control systems of four selected case studies regarding Spanish banks, an IT company and fashion retailers. They then define and distinguish "formal justice" and "informal justice" and look for the presence (or absence) of both in their analysis. For short and long term ethical development, they posit that informal justice is the key to improve an unjust situation.
In conclusion,  shifting to exclusively formal evaluations has been a mistake and many companies and countries are still paying for it. "Formal justice", derived from formal systems, may be absent; in which case it is "informal justice" that can help in two ways: by working as a corrective when metrics go wrong and by putting pressure to change the formal system for the future to obtain better alignment between company and staff interests, thereby preventing future crises and creating a more human workplace environment.