Apart from one quite substantial article in the Financial Times, the news that Credit Suisse, one of Switzerland’s largest financial service firms, has dropped return on equity as a key metric has not set the media on fire. Business leaders however, should pay attention, and not just those involved in the financial services industry.
This decision is interesting as it highlights the potential difference between meeting performance targets, and delivering performance itself. Once the leaders of a business have chosen their target figures, then meeting them is generally equated with success – but that only holds true if the correct metrics are chosen in the first place.
The point, made by Credit Suisse CEO Tidjane Thiam, is that pursuit of the wrong metric can be detrimental to the organisation. In the case of return on equity in banking, the management are not able to control all of the factors that drive it. In particular, the danger is that the quest for a positive snapshot at year-end encourages an unsustainable level of risk to be taken.
Deciding which metrics indicate the desired performance characteristics of the business represents a considerable challenge. The example above looks at financial services, but the balance of short-term results, long term risk and sustainable growth is familiar across industries, and the optimum varies according to sector, growth profile and market circumstances. Identifying the metrics by which success should be defined demands an understanding of the relationships and interactions that drive each one.
Whilst this is eminently achievable for even the most complex businesses, not all organisations do so, either because they are focussed on their current metrics at the exclusion of all else, or because they are achieving reasonable results, and see no reason to change the status quo. Such an approach leaves value untapped, and leads to a loss of focus on what really drives performance in their business.
Taking the time to determine both performance drivers and key outcomes metrics is an important discipline; but aligning the two is critical for delivering success. Management teams rarely take the time to step back and challenge the established targets. Mr Thiam must be applauded for doing so, as targets drive an organisation’s behaviour. Align your targets to the desired outcomes and you will enhance the likelihood of delivering the planned results.