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Saturday, April 07, 2007

 

Goodhart's Law: Why targets don't work, according to an economist


USEFUL CONCEPT TO EXPLAIN MY RANT ABOUT TARGETS, BELOW: Goodhart’s Law. Named after a chief economist at the Bank of England. Goodhart’s Law states that if a measure becomes a target it loses its value and ceases to be a measure. Controlling an indicator of a problem will not cure the problem. Goodhart himself phrased it like this: `Any observed statistical regularity will tend to collapse once pressure is placed upon it for control purposes’.

SOURCE: Central Banking, Monetary Theory and Practice: Essays in honour of Charles Goodhart, page 96. Systems thinking, as practised by Toyota and other high-performing organizations, stresses that target-based systems distort behaviour and make your organization inflexible. John Seddon’s book Freedom From Command & Control is helpful in understanding systems thinking and how you can lead more effectively by using it. Peter Senge's work is also instructive on systems thinking and how it can help you avoid falling into the trap of target-based attempts to lead change.

More on the misuse of targets in attempts at leading change - which is obviously a bug-bear of mine - in The 60 Second Leader, my book, due out April in the UK and June in North America. Damn, I plugged. But, I'm angry about this target nonsense, so researched it and put it in the book. So that plug was based on passion, not self-promotion. Honest.


Comments:
Targets are also to blame for the big AOL bru-ha-ha last summer. I wrote about this on my blog - http://yourcustomerseyes.typepad.com/your_customers_eyes/2006/06/index.html.

I agree that targets are problematic, as they encourage companies and their employees to focus more on the targets (and the incentives awarded for meeting those targets) than the customers they are supposed to be serving.

It really does not take a huge leap of faith to believe that if you focus on taking really good care of your customers, and provide them with a consistently great experience, you will have no problem reaching revenue talrgets. You will more than likely exceed them!

But you've got to know your customers, know what they want, know what they need, and know what they will need going forward. If you want valuable targets, how about setting targets for collecting important customer knowledge, and building strong customer relationships? The value of customer relationships is NOT measured soley on revenue!

- Chuck Dennis
 
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