Page 50 - Performance Leadership

Chapter 3 Measurement Drives Behavior • 39

next period’s targets therefore are forced not to be higher any more than
absolutely necessary. Another variant is overspending at the end of the
year to make sure all the budget is used and thus secure an equally high
or higher cost budget for the next round.
Due to compliance and shareholder pressures, there is an increased
focus on short-term objectives instead of the longer-term strategy.
Myopia is the result. For instance, a professional services firm found
out it had a problem with its DSO (days-sales-outstanding). On aver-
age it took customers about 60 days to pay the invoices, whereas the
chief financial officer calculated that there would be a significant finan-
cial performance improvement if customers would pay on average
within 45 days. All the account managers were urged to work with their
clients to have the invoices paid sooner. One particular account man-
ager was extremely successful—all the outstanding invoices were paid
immediately. Unfortunately, these were the last invoices the firm could
send. The account manager had pushed his client to such an extent
that the client paid the bills and terminated the relationship. The actual
performance indicator was considered more important than the over-
all customer relationship. Again, a more balanced set of metrics is
needed to avoid this type of measurement fixation.
Another common behavior can be observed when managers focus
not on the important targets and the key performance indicators, but
on the targets and indicators that are easy to measure. This phenome-
non is called tunnel vision. A widespread example is the use of “rev-
enue” as a target for salespeople. This often leads to high discounting
by the salesperson who needs to reach his or her target at the end of
the quarter or year. At the same time, the CFO will complain about
margin pressures. This sales behavior is a logical consequence of meas-
urement on revenue because it is the easiest metric to track. Measur-
ing salespeople’s performance based on contribution margin is much
more worthwhile. This metric takes not only the revenue into account
but also the cost of goods sold and, to a certain extent, the cost of sales.
With that information, the salesperson will check the profitability of
the deal when a customer asks for a discount, instead of making the
revenue target at the expense of the margin.
A common best practice states that performance indicators should
have a single owner and that management should provide this person