Goodhart’s Law, in the form boards can use: when a measure becomes a target, it stops being a good measure.
In the form employees actually live: the moment you pay people on a number, they start working for the number. The metrics do not merely inspect the organisation. They teach it how to behave.
If you have a dashboard, you have a curriculum. The only question is whether you meant to teach what you are teaching.
The Company Gets “Better” and Worse
If you measure me on the short term, why would I care about the long term? That is not a character flaw. That is literacy.
If you reward deals on close, not on retention, salespeople will shove through the wrong deals. Why wouldn’t they? You were clear.
If you want “a lot” of leads, digital will bring you a lot of leads. You did not say good leads. You said a lot. They heard you.
If customer service is timed on how fast they close a ticket, they will close tickets. The customer may still be on fire. The ticket is not.
If you measure success by the lowest hourly rate, you will get the lowest hourly rate. Plus a massive bill for all the extra hours it takes them to get the job done. You forgot to measure efficiency. Procurement just gave you what you paid them to find
You have an employee whose KPI is to grow sales, and they can see a customer who needs to be kept. What will they do?
They will ignore them.
Exactly as you instructed, with the metric. They are measured on growth, not on keeping. Then everyone “improves,” and the company gets worse.
This is not always because somebody failed to understand. It is often because somebody in the building is busy winning the short term, because nobody has promised them the long one.
Kodak Was Not Staffed by Idiots
Do you really think the Kodak board was full of people too dim to see digital photography coming?
Did Blockbuster’s managers not understand that Netflix was going to be a hit?
Did the people at MTV not understand that YouTube was a revolution?
They knew.
Viacom sued YouTube. That is not the behaviour of people who “didn’t see it.” That is the behaviour of people whose job, bonus, and next two years were still attached to a P&L that YouTube was in the process of eating. Then a certain number of them left and went where the video actually was.
They were not stupid.
Their personal interest, their horizon, and their bonus required them to do something that was bad for the company on a horizon they would not be paid to occupy. They did not stay for the long term. The bonus arrived in the short one.
This is the sentence boards should be allergic to: if they were smart, they would have done the right thing. Smart people optimise the scoreboard you hung on the wall. If the scoreboard is the quarter, you will get a very intelligent quarter, and then a case study.
A Metric Is a Moral Instruction
Every KPI is a sentence that begins with “ignore the rest.”
That can be healthy. A factory must ignore a thousand interesting ideas to make the line run. It becomes lethal when the ignored rest is the business: trust, retention, safety, the brand, the option to still exist in a different technology.
Three design failures repeat:
Too few numbers, too much weight. One target, one bonus, one way to cheat.
The wrong clock. A decade-shaped job on a 90-day timer.
Credit without the bill. The person who books the win is not the person who books the harm. I have written about that pattern as “efficiency.” Goodhart is the same pattern in a lab coat.
What to Do Instead of Adding Another KPI
Do not respond to Goodhart by building a cathedral of metrics. People will game a cathedral too; it only takes longer.
Do this:
- Pair every growth metric with the thing it will cannibalise (sales with retention; speed with quality; cost with failure demand; leads with lead quality).
- Put a time bomb on the bonus. Part of variable pay that only vests if the “win” is still a win after the damage would have shown up.
- Name the ignored rest out loud in the board pack: “This KPI teaches people to neglect X. Here is how we watch X.”
- Ask who is promised the long term. If the answer is “shareholders, in the abstract,” and not “this team, in their pay,” you already know what you will get.
- Why the numbers people almost always defeat the visionaries
- The efficiency report that hides the damage
- How to move your company’s work onto your customers (satire)
- The doorman fallacy
- Leads versus the brand you cannot count
- Goodhart’s Law
- The quarter versus the decade
- A KPI audit for boards
Relevant Sources
- Goodhart’s Law — overview — https://en.wikipedia.org/wiki/Goodhart%27s_law
- Problems of Monetary Management — Charles Goodhart (1975 origin of the idea) — discussed in the same entry
If you want a KPI set that cannot be gamed into a Kodak impression of health, that is a board design job. Contact me.