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Navigating the Perils of Metrics in Business Success


Portrait Of Women at whiteboard by Jacob Lund from NounProject.com


In a world where metrics have become the new currency, I find myself turning to the wise words of British economist Charles Goodhart: “When a measure becomes a target, it ceases to be a good measure.” It’s an axiom as robust and enduring as a tortoise, offering a succinct warning about the perils of overreliance on quantifiable targets.


Consider the old quantum mechanics thought experiment: Schrodinger’s Cat. In this paradox, a cat placed in a box with a potentially lethal substance is simultaneously dead and alive until observed. The act of observing changes the outcome. It seems a far cry from business strategy, but think about it this way: the minute we start measuring something, it’s as if we’ve opened that box and changed the nature of what’s inside.


We see this play out in businesses every day. An example I recently came across is the case of a car dealership. Let’s say they set a target of selling 30 cars a day. This number becomes the driving force behind every decision, the beacon guiding their actions. And yes, they might reach that target. But what if in the process they’ve offered such generous discounts to make the sales that they’re losing money on each transaction? Does that still qualify as success?


The true measure of success is not just hitting a target, but understanding what that target represents in the broader context of your business.


This kind of scenario illustrates what Jon Danielsson, the financial economist, meant when he said, “Any statistical relationship will break down when used for policy purposes.” It’s not that the statistics are flawed; it’s that the world is more complex than any one measure can capture.


It’s like measuring the health of a forest by the height of its tallest tree. Yes, the height of the trees can tell you something about the forest’s health, but it doesn’t tell you everything. If you focus only on growing taller trees - to the exclusion of all else - you might end up with a forest that's tall but sickly, with poor biodiversity, and a high risk of toppling over in the next storm.


Setting targets can be like shining a spotlight on a stage: you illuminate one area, but you cast the rest in darkness. And what’s in that darkness can be just as crucial. By focusing on a single metric, you risk ignoring the many other factors that contribute to the overall health and success of your business.


This doesn’t mean we should abandon metrics and measurements. They remain essential navigational tools in the vast seas of business. What it does mean is we need to be wary of how we use these tools. We need to be aware of Goodhart’s law and the pitfalls of turning a measure into a target. We need to understand that the act of measuring can influence what’s being measured, just like opening Schrodinger’s box.


So, instead of setting rigid targets, we should strive for balance. A holistic approach to measurement that accounts for various aspects of business health is likely to yield more reliable, actionable insights. In our interconnected world, where the complexities of business are more akin to ecosystems than machines, a singular focus is not just myopic - it’s perilous.

The true measure of success is not just hitting a target, but understanding what that target represents in the broader context of your business.


 

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About the author

Nils Bunde is the CEO of AskRadar.ai, an A.I.-powered Enterprise SaaS company. He is a serial entrepreneur, with experience in technology, beverage, healthcare, insurance, and retail.



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