Why excessive goal-setting is bad for business
By Philip Delves Broughton Monday, 01 June 2009
Chasing misguided goals has been highly damaging for UK plc lately. Could there be a better approach?
Goals are good, right? Indeed, setting targets is so tightly woven into the way we do business that it's difficult to conceive of a world without performance measures or departmental goals. Just imagine how the HR department would cope without its 'measurables'. And how could you motivate the sales team without the lure of two weeks in Ibiza? Targets keep us focused, productive and motivated.
But goal-setting isn't everything it's cracked up to be. The entire world is questioning its value after the implosion of financial institutions for which targets and goals were close to a religion. Wall Street financial institutions were obsessed with each other's performance, which led to firms such as Merrill Lynch and Citigroup taking on risks that only Goldman Sachs was equipped to manage.
Say the authors of the recent academic paper Goals Gone Wild: The systematic side effects of over-prescribing goal setting (The Academy of Management Perspectives): 'Goal setting has been over prescribed... rather than being offered as an over-the-counter salve for boosting performance, goal setting should be prescribed selectively, presented with a warning label, and closely monitored.'
Stan O'Neal, the former head of Merrill Lynch, was obsessed with the potential rewards of derivative trading but unable to grasp the risks. The goal, then, became increasing revenue through exotic products rather than proper risk management - which all but sank his firm.
Is there any business more target-focused than the hedge-fund industry, where quarterly returns dictate whether your firm lives or dies? The effect of this is the extraordinary trading levels that occur around fund redemption dates, which have nothing to do with market valuations and everything to do with nailing a quarterly number.
It's easy to see why companies have come to relish goal-setting. It tallies with the language of measurability, process improvement and organisational engineering that has dominated business thought for so long. Targets have been set for people and companies in the way they have been set for the speed of microprocessors. But are the halcyon days of the corporate target-setter finally coming to an end?
All around the commercial universe, the practice of goal-setting is being re-examined. Firms large and small, led by Unilever, are abandoning the practice of issuing quarterly financial targets, in the hope of ridding themselves of the unnecessary pressure to meet these external goals. The chief executive of Unilever, Paul Polman, said recently: 'I think it would be a good thing for the world if we formed new habits, and (avoided) chasing our tail, especially in businesses that are seasonal.' What mattered far more than goals and targets, he added, was consistent delivery over time. Anything more specific only caused trouble.
Max Bazerman, a professor at Harvard Business School and co-author of Goals Gone Wild, says goals are useful in 'limited domains, but when people focus on a specific stretch goal and fail to perform other valued activities that are needed by the organisation, goals are failing'.
In a simple case, imagine a group of salespeople who are told merely that the person who sells the most will receive the highest bonus. Without any other guidelines, it's easy to see how bad behaviours might ensue. Only if the sales- people are equally aware of the risks of deceit and fraud can the contest run properly.
Sadly, business history - like the history of nations - is littered with examples of poor target-setting that leads to bad behaviour. Northern Rock under its former chief executive Adam Applegarth, for example, remained focused on home loans, and the unit-cost efficiency to be gained by issuing ever more of them. In this magazine in 2005, Applegarth brushed off a question about diversification, saying there was still plenty of expansion to be done in the mortgage business. As for a housing downturn, he said he would relish the chance to show that Northern Rock was more than just the product of a booming housing market, and that it could thrive by issuing various forms of home loan even when house prices fell. So much for that. His goal of specialisation and low-cost operations left the firm stranded when the credit tides went out.
In this sense, the wrong goal is like the wrong strategy. Despite all the stories one hears about the importance of perseverance and battling the nay-sayers, sometimes a bad idea is just a bad idea.
At Enron during the late 1990s, executives were given large bonuses for meeting specific revenue goals. The problem was that achieving the goals required off-balance sheet accounting, booking revenue that had not been earned, and all the other tricks that brought the company down. By focusing on revenue rather than profit, and by both allowing and rewarding reckless financial behaviour, the company sealed its fate.
Government departments are classic goal-setters. Politicians sweep in with manifestos, policies and targets that often jar with the more glutinous nature of progress in bureaucracies. They imagine that by setting goals they will light a fire under the slow-moving departments and have results to show the electorate just before the next election.
The consequence of this, glaringly obvious at the National Health Service, is often illogical behaviour, waste and a fatal mistrust in any promise of change. There have simply been too many fresh sets of impossible goals for anyone to take the next set seriously.
A recent report by the Health Commission in the UK concluded that pursuing targets to the detriment of patient care may have caused the deaths of 400 people at Stafford hospital between 2005 and 2008. And London's Metropolitan Police have complained that Whitehall targets produce a police culture in which everything becomes a priority. Network Rail's employees have been reported to focus on targets rather than customers - a Soviet state of affairs. Clearly, setting goals can be an over-simplistic response to a complex set of problems.
Targets become the reason for that lamest of excuses, 'that's not how we do things', when, of course, the right response to any customer request should be: 'How would you like that done?'
Another risk for target-driven organisations is that the people who rise to the top tend to be target-setters rather than implementers. How many firms are led by strategy departments that have the ear of the CEO and whose main role is laying out plans and targets for the coming year? Setting targets and dreaming about them is considerably more fun than having to meet them. And it often drives people crazy in an organisation to have to manage according to targets set elsewhere by internal or external consultants, whose sense of the possible may not be moored against reality.
Yet goals can help motivate people and organisations. Classic studies of the use of goals by two organisational psychologists, Gary Latham and Edwin Locke, proved their use in work, school, sports and personal health. People tend to do better when they have a goal. It is too vague to ask them simply to improve. Dieters prefer to try to lose a set amount of weight by a certain date, rather than vaguely deciding to drop a few pounds. Runners set time and distance targets or enter races to keep improving. Businesses, too, find that setting revenue or profitability targets helps give focus to the broad range of their activities.
But goals can also create dangerous expectations and unnecessary pressures, which lead to appalling behaviour. Think of the horrors perpetrated in the name of Hitler's Thousand Year Reich or Stalin's disastrous five-year plans. When General Pinochet justified his persecution of political opponents on the grounds that you had to break eggs to make the omelette of Chile's economic rebirth, he was using a goal to excuse a gruesome process. Or to take a more modern example, China's emphasis on 'stability' as a national goal may make political and economic sense, but also serves to justify policies that are repressive by western standards. Can you have goals without principles?
Latham and Locke have risen to justify the latest wave of attacks on goal-setting by saying that the fault with goals is not with the targets themselves but with the ethics of those who pursue them. 'You know how Shakespeare wrote that the fault is not in our stars but in ourselves?' Latham said recently. 'Well, the fault is not in our goals but in ourselves.'
When people fall just short of a goal, psychologists have found, they tend to lie to make up the difference. The problem is not the goal, but the lie. Except - no goal, no lie. By acknowledging a tendency to behave badly when presented with goals, business can learn to manage around it.
In the late 1960s, Ford's then CEO Lee Iacocca determined to take back the small-car market from foreign importers by building a car that would weigh less than 2,000 lbs, cost less than $2,000 and go on sale in 1970. The result was a hastily produced, shoddy vehicle called the Ford Pinto, which had its fuel tank dangerously located across the rear of the car. Fifty-three people died as a result of crashes in which the Pinto's vulnerable tank caught fire. Iacocca's goal had produced a PR disaster for his company.
Might Iacocca not have been better off developing a long-term small-car strategy for Ford and coaxing it through the organisation, challenging his engineers to outperform Honda and Toyota and create something that US car buyers would covet?
Creating learning goals rather than performance goals is what the authors of Goals Gone Wild recommend. What you want in a company is a culture of excellence, which leads to a sustainable competitive advantage, not the sugar-highs of chasing simple revenue or product targets. Just as individuals reassess their goals every few months and years to match them to circumstances, so companies need to keep evaluating what it is they are trying to achieve and finding the right motivational tools. In specific circumstances, that might be goal-setting. But most companies are far too complex to be well served by the pursuit of a single goal that may have all kinds of unintended consequences.
In a famous psychological experiment conducted by Christopher Chabris and Daniel Simons in 1999, a group of subjects were told to watch a video clip and count the number of times a team of basketball players pass the ball among themselves. Most focused so hard on counting that they missed a woman in a gorilla suit walking through the team. You do not want this to happen in your business: people focusing so hard that they miss the blindingly obvious.
The best goals are those that bring out people's best human traits and encourage them to work for the best reasons: because the work is interesting, valuable and fun, and allows them to grow as individuals. Goals imposing unnecessary stress or creating the fear of failure can reduce co-operation, encourage unethical behaviour and decrease long-term motivation.
The best goals may be those that are more easily achievable, more flexible and allow people to fit in with, rather than dominate, complex organisations. Perhaps the old-fashioned advice of 'go out there and do your best' was not so bad after all.