42 Degrees - Business from a different angle

The people at the Ford Motor Company know a thing or two about running a business. In the economic boom of the late 1990s, Ford made record profits by selling more cars than they had ever done before.

So when the inevitable downturn came, prompted by the dotcom crash and the events of 9/11, Ford reasoned that the way back to profitability was easy. It simply had to maintain its market share and continue selling record numbers of cars. Sales targets became Ford's overriding obsession.

True to its ambition, Ford did continue to lead the market during the downturn. The only problem was that it had to offer customers zero finance deals to get the sales. As a consequence, every car sold made a loss for the company instead of a profit. By the end of 2001 Ford had racked up losses totalling $5bn US.

Instead of turbo-charging Ford's performance, that alluringly simple sales target nearly brought the company to a halt.

Like the UK government, which earlier this year announced that it was cutting the number of its targets from 250 to 110, Ford had fallen foul of what has been called "The McKinsey fallacy", says David Boyle, author of Tyranny of Numbers.

"This is the idea that while targets and measurements in business sound like a good thing, if not very carefully thought through they fail to account for what really is important – in Ford's case profit – and can in fact undermine the very thing they are intended to improve."

This isn't only true of sales targets, but almost every key performance indicator in an organisation. Take a fashionable management obsession such as Investors in People (IiP), the government-backed initiative to help companies improve their human capital. It sounds like a great idea on paper. Some commentators, however, argue that the reality may be very different.

"Our research suggests that managers tend to focus on what you need to do to get the badge rather than actually concerning themselves with improving training and development. And once companies have IiP, investment in training tends to actually go down because they feel they've cracked it," observes Dr Scott Taylor, lecturer in organisational behaviour at Birmingham Business School.

Once you scratch the surface, the whole area of target setting becomes so fraught, that it is a wonder that targets are taken seriously. Probably the most common mistake among managers is that the targets they set are often incomplete or just plain ridiculous.

A Norwegian hospital recently decided that one of the factors in the annual performance review of its priest would be the number of last rites given. Not only was it a figure he could do nothing to affect, it meant that the priest benefited if more people died – the opposite of everything a hospital stands for.

But trying to be too thorough in target setting can create a whole new area of problems. For instance you may give people production targets and at the same time give them quality targets. "They are mutually exclusive," says Dr Taylor. "This can place staff in an impossible double bind."

Then there is the issue of how targets are established and communicated. "Too often they are imposed from the top with no participation from the work force," observes Professor Paul Edwards, Professor of Industrial Relations at Warwick Business School.

He cites the example of a supermarket that desperately needed to change its culture. "It was all reasonable, sensitive stuff. But targets were set by senior managers. By the time they reached the shop floor, these subtle and sophisticated goals had been reduced to: 'you must stack the shelves more quickly'." It was the same authoritarian culture that senior executives were trying to escape from.

Another difficulty is that, unless there is good will, almost any target can be subverted – as a large marketing services company recently discovered when it acquired a UK subsidiary. Acutely aware that the value of the subsidiary lay in its top employees, it cleverly locked them in with a three-year earn-out based not just on turnover, but also on profit. Surely a cast-iron formula for financial success?

Well, no. The chairman and chief executive of the newly acquired subsidiary ensured they hit their turnover targets by tendering under cost for new contracts. Then they achieved the profit target by freezing wages and slashing staffing levels on client business.

At the end of the three years, the senior execs hit their targets and got their substantial earn-outs. But what they left behind was a demoralised company crammed with dissatisfied clients paying under the odds for poor service. It was not quite the robust operation the new owners had envisaged.

"The moral," says Professor Edwards, "is that you have to have the goodwill of the people who are implementing your targets. But most importantly, it is to remember that hitting targets is the outcome of success, not the cause of it."