How to prevent failing with good KPI’s

Or how to prevent going down the trap known as ‘Goodhart’s Law’.

How we know it: When a measure becomes a target, it ceases to be a good measure

What he actually said: Any observed statistical regularity will tend to collapse once pressure is placed upon it for control purposes.

Charles Goodhart, 1974, British Economist

This post is a follow-up on my post about six mistakes when setting a KPI for commercial teams.

Goodhart’s law, or the phenomenon he describes is about the extreme effect of people blindly following a KPI, so much that they are fooling the system and making the thing they’re trying to solve actually worse.

Goodhart’s Law in real life

A lot has been written about this, but does this really happen? YES. I have seen this happen, certainly in and between various commercial teams. I have seen places where KPI’s tend to change with the business cycles or with new managers. KPI’s are set on what’s hot. For example: sales complains that ‘the leads are not qualitative enough and need more data’. After some debate, Marketing accepts lead conversion as a KPI. What do you think happens? Marketing, as smart as they are, start optimising to meet or exceed the conversion target (of let’s say 50%).

Side effect? Sales only gets two leads of which only one converts. KPI green, Sales runs to the CEO and starts crying their variable comp is at risk because of ‘them’.

How to prevent Goodhart’s Law with KPI’s for commercial teams

As hinted at in my earlier post, there are a few things you can do as Lean Business Leader.

• Make sure you have a good balance of leading and lagging KPI’s, to have teams focus on value and quality throughout the whole chain or process.
• Focus on the how and the how much. When you specify how much revenue needs to come from a certain business, also add a KPI on standard margin, net-to-list or whatever. Yes deals are welcome, but not at all cost. If that’s important for your business, reflect it in the KPI’s you set for your team.
• This about a combination of effort and outcome. You can only control your effort, but you want teams to consider also the outcome.
• When working with teams in a certain flow (marketing > inside sales > key account management) consider sharing KPI’s partly or totally. You can play with relative weight. For example give Marketing a KPI for 10% on closed won revenue, 50% on leads generated versus plan and 40% on quality (being lead-to-opportunity conversion rate). Having a shared KPI will/should drive teams heading in the same direction.

My main advice to prevent blindly following KPI’s is to make sure you’re not just randomly setting KPI’s. Also, consider the power of Daily and Visual Management where a Leader actively engages in the performance of teams, in reviewing performance against a plan and helps Problem Solving in the moment at genba. Make sure you show you care, you debate and listen to feedback. If a team runs down the hole of Goodhart’s Law it’s on you, not on the team.