Wrong Metrics and Relationships - The reason behind Business Inefficiencies?

" The salesman who achieves his sales targets should be rewarded"
" Installing SAP helped my department reduce costs by 20%"
" Company X is better than company Y because it has more revenues and its sales grew by 50%"

Familiar sounding statements? The next time you see such a statement, think about it for a second. Metrics/Statistics are as much wrong as they are right. Many times, statisticians only give you the good information and hide the things which you should not see. Many times we ourselves try and link two things which might actually be totally unrelated or might not have a strong correlation.

Many businesses have a "sales achieved" metric for their salesmen. Salesman 'A' might be able to sell 100 units but with a margin of only $1 on each unit; While Salesman 'B' might be able to sell 50 units with a margin of $2 on each unit. Both of them made $100 for the company, but only salesman A was able to achieve the target of 100 units sale. What the managers have wrongly assumed here is "Sales target achieved => better salesman"

There are loads and loads of examples where such a wrongly established relationship leads to a lot of inefficiencies in the business. With such a metric in place, the objective of the salesman becomes to sell more and not for how much margin. The objective of the company is to make more money but the objective of the salesman is not to make money but to sell more...all because of a wrong metric/performance measure.

Incorrect 'cause and effect' relationships have rocked many a business. Many firms are gungho on Technology these days. People claim that a new software reduced costs by 20% for their department. Yeah ok, it must have...but why do you not tell us about the increase in overhead costs (which may not be allocated to that department) due to that software. So the costs for department might have reduced, but the costs for the company might not have!

Take the example of the Fortune 500 rankings. The rankings are done on the basis of gross revenues. The companies which make it to the ranking proudly claim that they are a Fortune 500 company and we run behind those companies for jobs and even metion in our resumes "Worked for a Fortune 500 client". Do you think gross revenues is the correct measure? Tomorrow, I could open a company, make 10 billion laptops and sell them for $10 each. This would give me revenues of $100 billion and would make my company rank #18 in the Fortune 500 rankings. Yeah, I got the revenues but made a huge loss! Profitability (profit as a percent of revenues) would any day be a better metric to give us a more realistic picture of which company is performing well.

Statisticians are not the only people to be blamed, normal people like you and me are to blame as much. We try and make frameworks and models out of everything we see and try and correlate things which in reality might not be correlated. We see X leading to Y and make a notion in our head that X leads to Y. Does it, really? It might, it might not.

Check the next post to see how to establish a cause and effect relationship.