The capitalist urge to measure everything (and why it hurts business)

As a species, we've developed precise systems of measurement to describe our world. The kilogram helps to quantify mass; the meter does the same for length; we even have a unit of measurement for radioactivity called the becquerel (curie in the US).

What we don't have are ways to measure inspiration, ambition, friendship, or love. One could argue that the things most important to us are not the ones we've devised units of measurement for; it's the things we can't measure. Yet, with people spending over a third of their entire lives in their offices, the workplace does not trouble itself with the unmeasurable aspects of the human experience. It's a place governed and defined by measurement—of time, productivity, output, and efficiency.

But does this make sense? And what are the risks associated with this approach?

The appeal of data

By growing his 19th-century steel industry empire, Andrew Carnegie became one of the wealthiest Americans in history. He once said, “The worker has no more to do with setting his wages than does a piece of coal with setting its price.” It's a statement that betrays a mechanistic outlook on life, society, and people. The modern economy may have evolved over the years, but it has its roots in the industrial revolution. Many of its systemic flaws can be ascribed to this factory floor mindset, looking at anything and everything as resources to be optimized.

The scientific method enabled humanity to study natural phenomena, gather data, and create replicable processes with consistent results. With the resultant technological breakthroughs, many aspects of life and nature surrendered to our control. Today, we change the temperature with the click of a button—and we want this same level of control and consistency in the world of business.

The truth, unfortunately, is that business is filled with ambiguity and unpredictability. We try to tame this randomness with data. Data becomes the knobs and valves that we believe we can tweak to make reality fit our vision. People wish business was an empirical science, and metrics grant them that feeling of control.

Today, a large percentage of the population is part of the knowledge economy. Their work is idea-led, requiring conceptual thinking and creativity. How well do the productivity parameters of the industrial revolution translate into this type of work? Most often, they don't.

Becoming data-obsessed

Every department has its pet metrics and key performance indicators (KPIs). In the pursuit of endless optimization, they channel their efforts towards ramping up the numbers. It results in data-driven tunnel-vision, forcing individuals and teams to work for data points rather than actively striving to improve business outcomes. As a result, work often becomes more performative than outcome-oriented. But the dangers are more significant than that.

In the late 2000s, American bankers trying to meet quotas started providing loans to people who would traditionally not qualify for them. It was one of the factors that resulted in the subprime mortgage crisis, which fueled the 2008 global recession.

The bank Wells Fargo saw its reputation get a boost after it emerged from the 2008 financial crisis in relatively good shape. In the following years, they converted their cross-selling strategy to a cross-selling metric and emphasized increasing the number of new accounts. Employees resorted to underhanded tactics to game these numbers. By 2018, it had cost them their credibility and millions in fines. This is a fine example of the cobra effect, which we will delve into in the following section.

The problem extends beyond the world of business. We have read news reports of engineering colleges in our country producing unemployable talent. When we place too much importance on the metric of marks or grades, the focus shifts entirely away from the actual goal of education. Instead, it indirectly promotes rote learning and memorization. It shows how institutions—and whole societies too—are susceptible to the risk of letting metrics define reality.

Metrics as management, and how data can mislead

"If you torture the data long enough, it will confess to anything." - Ronald H. Coase, British Economist

Organizations with top-down hierarchies find it easy to decide on metrics and KPIs and pass them down to employees. It allows managers to hold employees accountable and track their progress. Let's call this the 'metrics as management' approach. Upticks in numbers ensure that 'work' is happening and that people are not whiling away their time. Managers can reduce the active attention they need to give matters by placing importance on numbers. It reduces parameters. It simplifies. To coin a word, it dashboard-ifies.

In organizations that follow the 'metrics as management' method, the old adage of 'quality over quantity' is ignored. For instance, sales teams may tout the number of leads as an achievement. However, the picture is incomplete without the quality of these same leads and the conversion rate. The same goes for the number of downloads for apps. It says nothing about the number of monthly active users, which is more helpful in understanding future revenue.

Often, framing the problem in qualitative terms can inspire teams and lead to better results. If your social media team is given the target of creating Instagram Reels thrice a week, they will feel that they've done their job when they satisfy that quota. The results are likely to be okay, but not great.

But when you frame the problem differently and replace the target with an objective, such as increasing engagement, they begin to tackle the problem differently. They stop switching their minds off after posting a Reel. Every upload becomes another step in an iterative process. They will adopt a trial and error strategy until they find an approach that clicks.

Without a looming quota, they also get the creative freedom to think outside of the box. They can delve into their inner selves, find genuine empathy for the pain points of customers, and create meaningful content that connects with them. One such Reel is worth ten that were churned out for the sake of it. Quality trumps quantity.

Many businesses today manage to make this distinction by prioritizing OKRs (objectives and key results) over KPIs. They focus on broader outcomes and are less metric-dependent. They leave room for ambition and out-of-the-box thinking, while the latter system is more one-dimensional.

Organizations need to be careful not to worship false gods. Vanity metrics such as the number of leads or downloads can lull you into a false sense of security and achievement while masking the underlying business reality. Many organizations fall prey to this danger. Vanity metrics look good on paper and are good sales tools. But when they are taken to heart by internal teams as their guiding lights, it leads the business astray. If your key metrics are not aligned with your strategy, then optimizing those metrics can be self-defeating.

When measuring things becomes the norm, there is no room for inspiration and lateral thinking. Innovation is not rewarded. Metric fixation creates blind spots and tunnel-vision for businesses, due to excessive focus on specific parameters, with hidden opportunity costs. Unbeknownst to leadership, it makes the business more susceptible to disruption by other organizations that promote creative thinking.

Perverse incentives are a common side-effect of a measurement-obsessed approach. The focus shifts away from improving the business outcome to manipulating the metric to escape scrutiny, manage deadlines, or earn rewards or praise. German economist Horst Siebert dubbed this the cobra effect based on an anecdote from British India. British officials in Delhi wanted to curb the population of venomous snakes and announced rewards for dead cobras brought to them. They unintentionally gave rise to a new breed of cobra farmers instead.

Meanwhile, in modern India, the cobra effect has been observed in the country's MSMEs, who have traditionally preferred to stay small in order to meet the quotas for various policies and schemes extended to these types of businesses. Staying small also helps to avoid the compliance costs associated with scaling up. This cobra effect has had long-term consequences for the Indian economy, in terms of employment and productivity.

While an alert and sensible leadership team can navigate many of the issues associated with the negative effects of measurement, unfortunately it's not always up to them. Organizations that are publicly listed or funded by venture capital firms face external pressures to track and boost numbers to appease shareholders and investors. These stakeholders want to ensure high returns for their investments and will turn the knobs and valves to get the results they think are good, even if it goes against the company's vision. By continuing to be bootstrapped, we at Zoho, are fortunately exempt from these pressures.

Managing the intangible

Many vital aspects of work and capitalism are abstract in nature. For example, you can't measure why people like working at a certain company, or what makes one organization's brand storytelling and mythology superior to others. It's also impossible to measure or predict the creativity that drives innovation. Yet employee retention, brand equity, and R&D excellence are all areas companies actively invest in.

In fact, often, things that can't be measured need to be taken more seriously because they can't be easily replicated. If you have a team that has great chemistry and generates creative ideas, ensure that you do your best to keep them. If you have a reputation for being a great employer, do your best to guard your organizational culture, however intangible an asset it might be.

The fact that certain assets are difficult to measure shouldn't be confused with a lack of importance. The one mistake that you cannot make when it comes to the unmeasurable is to take superfluous decisions. Unfortunately, many businesses do not realize this. For example, they may mistake modern interior decoration, open office layouts, and snack and beverage counters for good organizational culture. This may appear to work for a brief while but its weaknesses will show through over time.

The right move would be to invest time and mental energy into crafting a long-term vision for culture, rooted in the organization's philosophy. Infusing the company's vision into its culture and weaving strategy into fulfilling long-term narratives makes all the difference.

Creating long-term value

For businesses, metrics are a way of lending shape to otherwise abstract concepts. Sometimes it's an effective way to measure progress and compare results to see if you're on the right track. Other times, an over-emphasis on measurement can become a runaway train that destroys value.

When the obsession with measuring things is removed, it's surprising what organizations can achieve. If you've done a good job of hiring people, autonomy will prove to be one of the biggest driving factors for employees. They will do their best to deliver value instead of doing busywork, and they will be more invested in the company's success as a result.

Real leadership is about inspiring people, not managing metrics. People don't follow spreadsheets into battle. Measuring the efficiency of processes and output is a vital part of work which is not going to, and shouldn't, disappear. But it is important not to be carried away. A balanced approach will be the key to finding success and creating a sustainable organization that people value over the long run.