How Using the Wrong Metrics Can Damage Your Bottom Line
Written by The One Page Business Plan Company, on July 22, 2021
Danny was a restaurant manager for a midsized seafood chain. His quarterly bonus was based on three factors… food quality, restaurant cleanliness, and level of service. A target metric was set up for each of the three objectives as measured by unannounced inspections and customer feedback cards. Each week, he would focus on those three metrics to ensure he’d regularly receive his bonus.
Things were going great until the wheels started coming off…
While reviewing the restaurant’s financial statements, the company’s controller noticed a disturbing trend… even though Danny was consistently making his bonuses, the profitability of the restaurant was drastically declining.
A detailed analysis of the restaurant’s food and labor costs showed that Danny was overspending those accounts to boost the chances he’d make his target metrics. Extra employees were used to boost customer service scores and higher food costs were incurred by giving customers larger portions at no extra cost.
Even worse, the controller learned that other managers in the company were doing the same thing.
On paper, those managers were hitting their target metrics, but the numbers were useless. By manipulating his food and labor costs to hit his bonus, he was damaging the bottom line of the restaurant. It wasn’t that the bonus metrics were inherently bad, but when performance was measured with only those metrics, company managers did everything they could to hit it… oblivious to the damage to the chain’s bottom line.
Campbell’s Law holds that the more a metric is used, the more likely it is to corrupt the process it is intended to monitor. How? By encouraging “gaming” the system or incentivizing the wrong things.
One way to help eliminate negative surprises like Danny’s bottom line is to use regularly scheduled monthly reviews, based on a One Page Business Plan. That way issues like Danny’s don’t go undetected for months.
Once the chain caught on to what was happening, they still retained the metrics, but added two more to the quarterly bonus calculation… profitability and sales growth. In the restaurant business, metrics like food quality, restaurant cleanliness, and level of service are necessary to meet the other two, sales and profitability growth, but they don’t tell the whole story.
Is your midsized company using metrics that focus on the wrong things?