In search of "Common Sense"

Dec 30, 2008

Language of Metrics (Criteria of Soundness) (Part 1)

How do we evaluate the operational measures framework used by any organization?

Does the framework act like a lighthouse giving accurate direction to the ship or does it create a fog, throwing the organization off-the-track without even it being aware?

Does the framework represent the deep understanding of 'inherent simplicity' or it mirrors the superficial complexity of the organization?

Any organization is a combination of many parts which need to gel well in order to achieve the overall GOAL of the organization consistently over a period of time.

It requires tremendous effort to ensure alignment of various parts to bring about 'synergy' and to also ensure that the parts are not working at counter purpose to each other. We depend on elaborate business performance measurement to get the alignment of the units, sub-units, individual leaders and associates, whether it is Balanced Scorecard based or indigenously developed measurement system.

Eliyahu Goldratt has famously said:

"Tell me how you measure me, and I will tell you how I will behave. If you measure me in an illogical not complain about my illogical behaviour"

End of the day any measurement system is to induce 'behaviour' as organizations are 'people' based systems.

The two main criteria for evaluating any measurement system are:

1. Does it induce the parts to do what is good for the system (organization) as a whole?

This is to ensure that leaders and associates do not focus on local optima but on global optima. A good measurement system should not create any conflict in people's minds while deciding their actions as to what leads to global good. Goldratt has railed against Cost Accounting based measures like efficiency and product costing proving that these create debilitating conflicts and many times resulting in decisions which lead to ruin of organizations. In his business novels, he gives umpteen examples where in the name of increasing labor efficiencies, machine utilization, reducing head-count etc people take decisions which go against ‘common-sense’ just keep up and look good as per the prevailing measurement system.

The global good also needs to be sharply defined rather than vague statements like 'We want to be the best'. Goldratt suggests that for commercial organizations with shares listed on stock exchanges, the Goal has to be "Making money now as well as in future." All the other issues like customer satisfaction, loyal employees, high quality products/services etc can be the critical success factors or necessary conditions for this high level GOAL of the organization.

2. Does it direct the managers to the point that needs their attention (sometimes very urgent, sometimes not so urgent)?

This relates to focus. In an environment of limited time, attention and resources, wasting these precious things on unimportant issues can again result in debilitating consequences.

Losing focus is one thing a manager/leader cannot afford. A measurement system with too many measures has the capacity to create confusion and result in loss of focus.

There is a general belief that 'Any action is better than no action. Perhaps the action you take will be successful; perhaps different action or adjustments will have to follow'.

In a scenario where a manager is presented with multitude of measures, there could be a tendency to 'ACT' to improve some of the measures which are easier to improve and which do not involve tougher decisions, more analysis, resolving apparent conflicts etc. This could lead to a false sense of accomplishment but the reality might be that a decision / action which is most important at that point of time is left unattended or just ignored. Such a scenario is ripe to spring nasty surprises as the unattended 'necessary action' deteriorates the whole system apparently invisibly and suddenly the break / crack in the system appears on the surface. In some cases it gives an impression which is very close to Nero playing fiddle while the Rome was burning.

A typical example is in project management where there are situations when 90% of the project is finished in a year (as scheduled / budgeted) but the remaining 10% takes another year. This points to the failure of the measurement system which proclaims 90% of the work is done. The project manager who is measured on the quantum of work irrespective of the fact whether the activity lies on the critical path or a feeder / non-critical path is tempted to focus on the non-critical path whenever there are conflicts, resource contentions on the critical path. The measurement system does not alert such foolhardy decisions in advance which results in the nasty surprise of budget and schedule overruns when nothing but activities on critical path as pending.

In the next post, we will examine how we can go about building such framework which will meet the above two basic criteria.

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