One of the mantras we regularly quote at Intelis Capital is "you are what you measure." It's a phrase that dates back to our time at Choose Energy running product and always seemed intuitive. In short, we're big believers in incentives as they are usually great predictors of action. Or so I thought...
Over the last few weeks, I've read more and more on metrics and it's leading me to refine my thought process. I'm currently in the middle of Alchemy by Rory Sutherland and much like NNT, he ridicules statistics because of their propensity to rule out the extremes which are where alpha is often generated.
He argues that metrics by nature, destroy the diversity of thought because they force everyone to pursue the same narrow goal, often using the same criteria to make decisions.
The other problem with metrics in his mind is that they can be gamed. In his example, he takes the college applications process - for most of the middle class, it's easy to sign up for the right extracurricular activities, do charity work, and get tutoring to achieve the right test scores, all to match the metrics an admissions employee is taught to look for.
Obviously, this is a slippery slope and applies to businesses too. This month's HBR feature is on the risks of letting metrics undermine your business' strategy. You might not be surprised that Wells Fargo is candidate number one for a business that used a metric which had dire secondary consequences. As the article states, "Wells Fargo had a cross-selling metric, not a cross-selling strategy"
I really enjoyed that this article gave the mentality of equating metrics to strategy a name: surrogation. It also listed the three conditions by which metrics and strategy are prone to it.
- The objective or strategy is fairly abstract.
- The metric of the strategy is concrete and conspicuous.
- The employee accepts, at least subconsciously, the substitution of the metric for the strategy.
I'm by no means saying we throw metrics out the window, in fact, I'm arguing the opposite.
We should think more thoroughly about the metrics we deploy as investors and operators to ensure they actually align with our strategy without eliminating diversity of thought and open-mindedness all while still ensuring the incentives don't create the types of behaviors seen at Wells Fargo; easier said than done.