Enterprise Risk Management Initiative, Poole College of Management, North Carolina State University

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Preventing Metrics from Replacing Your Strategy

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Tying Performance Metrics to Strategy

Over the past few decades, many organizations have adopted the linkage of performance metrics to strategy as an accepted best practice. Metrics give strategy form, allowing us to overcome the abstract nature of strategy and have the greatest chance to achieve organizational objectives. A recent article in the Harvard Business Review utilizes a metaphor, comparing strategy to the blueprint for building an organization and metrics to the concrete, wood, drywall, and bricks that make up the structure of the entity.

Replacing Strategy with Metrics

Across almost every organization, strategic thinking is commonly being dominated by numbers. This tendency to mentally replace strategy with metrics is known as surrogation. In a scenario where customer survey scores are utilized to measure a strategic objective, employees are inclined to focus on maximizing survey scores, instead of delivering an exceptional customer experience. Surrogation is particularly destructive to an organization when the metric and the strategy are inadequately aligned. The greater the disparity, the more exposed the entity is to significant adverse consequences.

The Wells Fargo Scandal

When it was revealed to the public that Wells Fargo employees were opening fraudulent savings and checking accounts without the consent of clients, the company’s integrity and reputation were called into question. Many conclude that the organization’s incentive system is to blame for this catastrophe. The incentive-compensation program provided motive for employees to participate in subversive sales practices. Incentives, combined with the pressure to meet quotas and the overarching sales culture at Wells Fargo, required the rigorous tracking of and emphasis on sales numbers over the importance of the underlying  strategy.

Preventing Surrogation

Studies have shown that people are more inclined to surrogation whenever metrics are present, creating a subconscious bias. This type of substitution is produced when the following conditions are present and integrated:

  1. The objective or strategy is fairly abstract.
  2. The metric tied to the strategy is objective and distinct.
  3. The employee accepts, at least on a subconscious level, the substitution of the metric for the strategy.

In order to mitigate the ramifications associated with surrogation, the author recommends organizations consider employing the following actions:

  • Incorporate those responsible for the implemention of strategy into the strategy formulation process. Those involved will have a better understanding of the strategy, regardless of its abstract disposition, and will be less likely to replace strategy with metrics.
  • Avoid tying metrics closely with incentives. Pay-for-performance programs are often more visible to employees than an organization’s strategies, which may cause employees to shift their focus away from strategy to the metric itself.
  • Utilize multiple metrics. In response to the act of fraud committed at Wells Fargo, the company now measures various customer-focused metrics to evaluate strategic success, in place of emphasizing one specific standard to minimize surrogation by employees.

Summary

To provide an active approach for implementing strategy, organizations will continue to link performance metrics to strategy, in an effort to measure its effectiveness. Management must be diligent to ensure that metrics do not supersede the emphasis on the strategy itself, as it often leads to unethical and deceitful business practices. This can be detrimental to an organization’s brand and reputation.

Link: Harvard Business Review "Don’t Let Metrics Undermine Your Business"

Categorized Under: ERM and Strategy / Interaction of ERM and Strategic Planning / Risk Management Fundamentals / Risk Management Strategies / 
ERM Enterprise Risk Management Initiative 2020-01-24

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