Performance Metrics and their Incomplete Story

This post is going to focus on performance metrics and why they never tell the complete story.

Recently, I was talking to a friend about the awesomeness of the ubiquitous ‘Coke’ brand in light of his visit to the Coke factory in Atlanta, GA. He mentioned that the CEO of Coke was at one point in time reconsidering growth targets for his team. He was dissatisfied with the customary 2-3% YoY growth and wanted to serve up stretch goals for his team.

He ended up changing the denominator from it being the market cap of all aerated drinks to all liquids that go down a human throat. That opened up the playing field and fueled much envied growth at Coke and changed the performance metrics.

Contrast this with a recent performance metric that we have all been reading about in the news – the ratings issued by the three rating agencies, Moody’s Investor Service, Standard & Poor’s and Fitch Ratings. The rules require ratings, which according to Warren Buffet eliminate any negotiating power on the part of the ones seeking the ratings. This in itself would not be so bad were this not a part of other externalities, which are in the form of an issuer-pay model and an obvious lack of competition. The performance metrics of the rating agencies should be concerned with the returns, risk, ability to meet contractual obligations, impact of adverse changes in economic conditions, etc. of the financial product/company being rated.

However, the reality is that the rating agencies focused on the profit and the volume metric. Once they rate a product (fairly or dubiously) there are no penalties for a lack of performance or a higher degree of risk being realized, than which is expected of a particular rating association. There are obvious conflicts of interest, which have been raised in the past.

The point of the matter is that we should never have a performance metric that tells only half the story. More so, if people are going to rely on that metric to make important decisions. All of the world’s Service Level Agreements, Key Performance Indicators (KPIs) and other measures, which profess to track productivity or quality or some version of it will not save an organization from mediocrity if they are not focused on the right metric.