The Insidious Side of the
A Universal Business Measurement Tool
Have you ever wondered why incentive schemes fail? Tieing key performance indicators (KPI’s) to strategy has evolved as accepted best practice over the past few decades. Since 1992, the Balanced Scorecard (Kaplan & Norton)[i] approach has been a universal model used to create and classify those KPI’s and other performance metrics. However, there is an insidious side to the Balanced Scorecard. It is prone to what is known as surrogation bias in the hands of inexperienced and naïve business managers.
During the 21st century most corporate learning & development initiatives have focused on building better leaders. Very few have seen the value in training better business thinkers and strategist who have a profound understanding of cause and effect of business decisions designed to create long term sustainable value. The lack of big picture thinkers who understand the importance of aligning & cascading strategy through the business is a skill that has been underdeveloped. These business thinking skills are essential if a surrogation bias is to be mitigated.
A trap for the Inexperienced
The trap for inexperienced managers is that whilst the concept of a Balanced Scorecard is relatively easy to understand, it is much more difficult to implement without running into significant issue caused by this so-called concept of surrogation bias.
So, what is surrogation bias? Surrogation bias[ii] is a psychological phenomenon in which the measure of a strategy evolves to replace the strategy itself. What happens all too frequently is managers lose sight of the strategy the KPI is intended to represent, and subsequently confuse achieving the metric with achieving the strategy.
As an example, many companies have a Net Promoter Score (NPS) metric to measure the level of customer satisfaction. Very few have a Net Promoter Score strategy. There are many ways of getting a good NPS that are disconnected to fundamental improvement for example in the quality of service delivery. I’m sure I am not the only one who has been rung up by a service department asking for a 9 or 10 (out of 10 rating) if I was happy with their performance. NPS has been gamed by most organisations seeking to implement it as a measure. The banks are a great example of this!
If you would like a complimentary 14 page diagnostic assessment on your organisations susceptibility to surrogation bias and other strategic misalignment issues please click here.
So who are the Villains ?
Surrogation bias is further exacerbated if it is linked to an incentive or bonus scheme. This is one of the root causes of the epic failures uncovered by the Banking Royal Commission. Whether it be depositing money into kids banks accounts in order to activate them or selling credit card insurance to people who were ineligible, all can be linked back to surrogation bias.
So are Kaplan & Norton the unwitting villains in this plot. I think not. During the 1980’s Roberts S Kaplan was a noted Management Accounting academic & theorist. He explored ways of understanding and measuring intangible value creation. He thought existing performance management approaches, primarily relying on financial accounting measures, were becoming obsolete. The belief was that reliance on summary financial performance measures were hindering an organisations ability to create future economic value. He got together with David P Norton and came up with an emerging concept of how to help firms overcome these issues. This resulted in the publication of their seminal 1992 HBR article “The Balanced Scorecard – Measures that Drive Performance”. It’s worth pointing out that the primary focus was to support long term value creation rather than short term profit maximisation. Exactly what the Financial services industry has been accused off during the Royal Commission.
Was it all Based on a Fallacy
Kaplan & Norton quickly recognised that the foundational premise of the Balanced Score Card was a fallacy. That is “measures that drive performance”. They recognised quite early after the publication of the initial 1992 article that measures don’t drive performance strategies do! Kaplan himself has been at pains to point this out ever since. They were learning as they were going and by the time of the publication of the book “The Balanced Scorecard” in 1996[iii] all reference to “Measures that Drive Performance” as a tag line had been replaced by “Translating Strategy into Action” and the Strategy Map introduced as the fundamental building block. The Strategy Map concept is used to explicitly connect the cause and effect of strategies in each of the four domains (Financial, Customer, Internal Process, Learning & Growth). You need to do this first before attributing measurements. However, it was too late, the genie was out of the bottle.
To this day many academics, consultants, and managers, continue to think erroneously of the scorecard as a performance measurement system only rather than a holistic performance management system. Their knowledge and acquaintance with the scorecard is probably based only on reading the original 1992 HBR article or the first half of the initial Balanced Scorecard book (1996)[iv].
All is not Lost
However, all is not lost. We have at our disposal means to identify conditions that propagate surrogation biases and means to mitigate their effects. Nobel laureate Daniel Kahneman and Yale professor Shane Fredricks have identified through research three conditions that can led to a surrogation bias being present.
- The objective or strategy is fairly abstract (in the minds of the people responsible for implementation)
- The metrics of the strategy are concrete (as communicated by head office)
- The employee accepts, at least subconsciously, the substitution of the metric for the strategy
If you think your organisation might be at risk after applying the above tests, Michael Harris & Bill Tayler in their recent HBR article “Don’t Let Metrics Undermine Your Business” (HBR Sept-Oct 2019) have identified three ways to help mitigate the risk of surrogation bias.
- Get the people responsible for implementing the strategy to help formulate it. This sounds very simple but all too often most employees are receivers of strategic propaganda and rhetoric from senior managers further fostered by measures they need to achieve being dictated to them in their annual Personal Performance Plan. This further exacerbates the surrogation bias. Team-Based Strategic thinking is a process that helps enable the alignment and cascading of strategies through an organisation.
- Loosen the link between metrics and incentives. If you are not going to implement the first option above, you have to decouple metrics from incentives, or you will have a royal commission on your hands. It is that simple.
- Use multiple metrics for a strategy or objective. The research shows that having multiple metrics rather than just one causes people to surrogate less as they can’t just focus on the one metric. g. NPS
So, managers be warned if you organisation is using financial incentives based on performance measures linked to a Balance Scorecard you can nearly be rest assured that you have some form of surrogation bias happening. As the immortal Peter Drucker once said, “the only strategy that is important is the one that is in your people’s head when they make a decision”. What strategy do your people have in their heads?
[i] Robert S. Kaplan, David P. Norton, “The Balanced Scorecard – Measures that Drive Performance”, Harvard Business Review, (January – February 1992); 71-74.
[ii] Michael Harris, Bill Tayler, “Don’t Let Metrics Undermine Your Business”, Harvard Business Review, (September – October 2019); 63-69.
[iii] Robert S. Kaplan, David P. Norton, The Balanced Scorecard – Translating Strategy into Action, Harvard Business School Press, Boston Massachusetts, 1996.
[iv] Robert S. Kaplan, Conceptual Framework of the Balanced Scorecard, Working Paper 10-074, Harvard Business School, Harvard University, 2010.
“Your organisation is perfectly designed for the results that you achieve” – W.Edwards Demming