“What gets measured gets managed” is an oft-used adage in business management. It usually encourages chief executive officers (CEOs) and business leaders to measure progress on important result areas as closely as possible, to ensure that the organisation is acting on moving them in the right direction.
But here’s the question: are we measuring the right thing?
Businesses frequently use a simple rule of thumb, or heuristic, to measure an important result. Sales growth may be tracked through primary sales volume: the quantity shipped to distributors. Profitability may be judged by the gross margin percentage. Such measures are necessary because they simplify business life. They align people around a single figure and become the common language, or shorthand, for discussing performance.
The problem begins when the economics of the business change but the measure does not. A metric that was once sensible can start encouraging precisely the wrong behaviour.
Think of it as a ship’s operating compass. If its true north is even slightly wrong, the crew may work with complete discipline and still take the ship towards a destination the captain never intended.
Consider an FMCG company selling home care brands which were largely relatively low value and where the different variants of the product did not differ much in price. It used volume growth and overall shipments as the primary method of monitoring sales. This made sense.
However, the company acquired another brand in the personal care business that was high value and relatively low volume, where the price difference between variants was several times. When they continued to use volume as a measure, predictably, the sales teams tended to sell the low-value products instead of the much more profitable high-value products. This immediately resulted in an impact on the total turnover growth and, more importantly, profit growth, even though volume growth remained the same. Once the heuristic was changed to measuring total ‘value’ of sales, the sales teams focused on the higher-value products, which grew faster and set the company back in the right direction.
In another case, a fashion company used gross margin percentage over their variable product cost as a measure of profitability when pricing their various ranges. This worked when most products had broadly similar costs and prices. Product cost was also a large part of total company cost because the company mainly sold to wholesalers and large stores.
Over time, however, the company moved towards higher-end products and expanded its own retail operations. A premium product could generate substantially more gross margin in rupees, even at a lower margin percentage. But the operating teams treated it as no more profitable than a lower-priced product because both were viewed through the percentage-margin rule.
The rule also created pressure to overprice higher-value products merely to preserve or increase the margin percentage, even when customers did not see enough added value to justify that price. Once the company began focusing on absolute contribution rather than only percentage contribution, it made better pricing decisions and its premium ranges grew faster.
Heuristics are indispensable. No organisation can revisit the full economic logic behind every decision every day. Rules of thumb allow different functions to coordinate, review progress and act quickly. Precisely because they are so influential as a ‘shorthand’, senior management must periodically test whether they still point to the business’s true north.
A useful review can begin with three questions. What are the few measures that operating teams discuss every week? What behaviour does each one encourage? And does that behaviour still create the customer value and financial outcome the company now seeks?
One practical way to do this is to take the five or six measures that dominate the weekly review and trace each one through to the decisions it shapes. What does a salesperson, product manager or service executive or production manager do differently to improve that number? Does the action improve customer value, revenue quality or cash contribution? If the connection is weak — or if teams can improve the metric while damaging the business — the heuristic needs to change
Equally importantly, they should examine ‘What behaviours do they encourage that are detrimental to our business direction and progress?’. A volume target may encourage discounting or low-value sales. A margin-percentage target may suppress a profitable premium range. A service-level target may improve speed while reducing the quality of resolution.
These questions become even more important when business fundamentals change. For example, when acquiring a new business or merging a business with another business, or when the strategic direction shifts, or if major external circumstances focus result in the need to change direction even temporarily.
If ‘what gets measured gets managed’ is the right adage, then it’s vital to be careful about the measure you use in the first place!
