Don’t oversimplify your growth plans into one metric
Original Publish Date: Dec 13, 2020
“To facilitate managers' decision-making, firms develop strategic performance measurement systems that translate strategy into performance measures. Ideally, managers see measures for what they are—imperfect proxies for intangible strategic constructs. However, managers may fail to fully appreciate the fact that measures are merely representations of the strategic constructs, and act as though the measures are the construct of interest—a phenomenon we label surrogation.” – Lost in Translation: The Effects of Incentive Compensation on Strategy Surrogation
Your company probably has a rough growth or strategic plan for 2021 at this point.
A lot of such plans identify one metric for the entire business to optimize for. Sometimes it’s an umbrella metric with sub-metrics underneath it. Hopefully, your plan doesn’t have such a metric.
But to be sure, I can offer you two ways to find this metric if you’re a publicly traded company.
Listen to your most recent earnings call or review your recent investor presentation. Companies often introduce this metric as the KPI that will make or break your operations. The type of metric that management will follow closely with every waking moment.
Look for the management compensation section on your recent annual report. Specifically, the part on incentive design. This will give you a few metrics that your company will push for. Compare these metrics with your company’s internal messaging to figure out the main metric of interest (or “metric of the hour”).
Why did I spend a few lines talking about finding this metric?
Companies sometimes risk over-optimizing their operations around a single metric hoping to drive growth. Invariably, they create a situation where they reward behavior and outcomes that go against the best interests and long-term strategy of the company.
Wells Fargo’s fake account scandal often pops up to illustrate this point. I want to focus instead on a valuation example from the tech industry.
Not so long ago, the market would reward the valuations of social media companies strictly by the number of users. It’s possible that this has changed little outside of a few caveats. Either way, several of these companies started obsessively focusing on moving the needle drastically with the overall number of users on their respective platforms.
What were a few unintended consequences of this obsessive focus?
Many of these companies went on an acquisition spree gobbling up startups that were remotely gaining traction with no regard to the economics or future monetization opportunities. The biggest victim ended up being the user. Popular or infamous topics of the moment like user privacy, user experience, user engagement stem from the drive to accumulate users at all costs.
Few suggestions to counter the obsession with a single metric…
Suggestion #1 – Think about the entire story
Growth never occurs in isolation. It’s a reflection of many choices spanning multiple levels inside a company, different departments, multiple internal and external stakeholders.
Pay attention to your initiatives. Choose a reasonable set of metrics that capture the breadth of your initiatives and their intended outputs. One other option would be to think of metrics as they fit into the different parts of your business model – customer value, profit formula, resources, processes – and connect them to the initiatives in your growth plan.
Note that these metrics can change as your company’s story and strategy evolves.
Suggestion #2 – Consider including outcomes
“Outcomes are the changes in customer, user, employee behavior that lead to good things for your company, your organization, or whomever is the focus of your work.” – Josh Seiden
Balance the collection of metrics with outcomes you’re looking for through your growth plan.
Like the previous suggestion, understand the stakeholders you want to influence – ex: customer, user, employee – and the “changes in their behavior you want to create”.
Let’s focus on a likely stakeholder in your growth plan: your customer. Challenge yourself to think about the initiatives in your plan and the change in customer behavior that you’re aiming for through each initiative to garner the results for the upcoming year. Thinking in these terms also helps you adopt a customer-centric mindset.
Final takeaways
I’m not suggesting you do away with your love for metrics. A healthy sprinkling of metrics almost works like milestones or progress meters along a long journey. The tendency to over-emphasize one metric is what we need to watch out for. A well-rounded set of metrics along with an understanding of outcomes you’re looking for will be a worthwhile addition to any growth plan.