The echo of Schrodinger's cat - turning indicators into targets is a bad idea
Cats are funny and unpredictable creatures. Perhaps that is why the German scientist Erwin Schrodinger used a cat of all creatures to explain quantum mechanics. Particles in the quantum realm can be all in all states at the same time but measuring them makes them 'collapse' into a single state. Never mind the physics, Schrodinger described this counterintuitive finding by comparing it to a cat in a box which is both dead and alive at the same time. By looking in the box however, the cat 'collapses' into a single state and is either dead or alive. So the act of observation influences the actual state of the particles. In business (or government) there is a similar thing going on which fortunately is easier to understand than quantum mechanics.
Every organization will have goals they want to achieve. These are outcomes, like more sales, or improved satisfaction or loyalty. These intended outcomes usually have an ambition level, expressed as a target. These targets are to be reached at some point in the future. How do you know you are on track? By organizing your observations (what you see happening, without conclusions) into defined indicators, the signposts that tell you whether you are on making progress. And this all works fine in a small team. However, as organizations grow, this simple distinction becomes much more difficult to keep clean as the distance between people grows, resulting in a fog between teams and divisions.
This fog is why human nature and all its biases steps in. Mostly driven by fear of uncertainty and finding it hard to let go and let their teams work towards an agreed goal, upper level managers will want to reduce that amount of uncertainty. It is the downside of a common bias called the 'Illusion of control'. The pitfall they will step into is to put targets on the indicators along the way. A classic example is click-through-rates on web campaigns. This is a good indicator that tells you about the engagement with potential buyers you are able to drive with your campaign. And it is only one indicator to be seen in the context of many others on the way to a bigger goal which may be generated sales through marketing for example.
Indicators are so useful because they *teach* you something about where you are, which is exactly what they are supposed to do. So, in an effort to seize control, when upper management says: "you need to hit XYZ click-through-rates on your campaigns', most (bigger) organizations will start to optimize to do just that and optimize. From that moment on, the indicator became useless. Why? Let's imagine you are a car company and you are trying to sell luxury cars for instance, if you push too hard on getting to higher click-through-rates by targeting teenage boys you will achieve hitting the target set on the indicator. But that won't help you with your bigger goal which is…. to sell more luxury cars because teenage boys don't tend to have that kind of money…. Hence, from this point on, looking at click-through-rates loses all value as an indicator because it is no longer a true 'measure'. It’s changed into a bullseye. This is known Goodhart's law and is the business version of Schrodinger's cat because the way you look at an indicator completely changes its value. Ultimately, this all about truly understanding the causality of what influences your objective. In our complex world, there hardly ever is a situation where causality is so clean and simple that you can easily avoid Goodhart's law.
Key point here is to be maniacal about keeping indicators and goals separate, regardless of the level of fog in the organization. The pitfall of putting targets on indicators comes from a perceived lack of control from management layers, so you need to find a way to address this. Denying it does not help. Communication with high frequency updates on indicators and the conclusions you draw in relation to progress towards the target is essential to create transparency about progress and increase the feeling of control in groups or management layers that can't see it as sharply due to the fog.
A much longer and helpful post on this can be found at Ribbonfarm.