Performance Measurement Traps

After mastering financial case construction and practical decision tools, you're now ready to tackle one of the most insidious challenges in management: the performance measurement traps that can lead even successful companies astray. Andrew Likierman's research reveals five common traps that organizations fall into when measuring performance, and understanding these pitfalls is essential for avoiding the fate of companies that looked great on paper right before disaster struck. Consider that Merrill Lynch reported a 30.1% pretax profit margin in 2006—its best performance ever—only to lose $8.6 billion the following year. Similarly, BP celebrated strong financial results in early 2010, just weeks before the Deepwater Horizon explosion cost the company $40 billion and irreparable reputation damage.

These catastrophes weren't random accidents but predictable outcomes of measurement systems that created blind spots. When you measure only against yourself, focus backward instead of forward, put excessive faith in numbers, allow metrics to be gamed, or stick to outdated measures, you create conditions where disaster can hide behind impressive-looking performance data. The companies that avoid these traps demonstrate that sophisticated measurement isn't about having more metrics but about having the right ones that reveal true performance. Enterprise Rent-A-Car with its customer repeat intentions tracking, Humana with its early intervention metrics, and Clifford Chance with its diversified performance criteria all show how thoughtful measurement design prevents the dangerous delusions that precede corporate disasters.

The first and perhaps most dangerous trap is measuring against yourself—comparing this year to last year, actual results to budget, or your division to other internal divisions. While these comparisons feel natural and data is readily available, they create a fatal blind spot: you might be winning internally while losing in the marketplace. Enterprise Rent-A-Car recognized this danger and developed a brilliantly simple solution called the Enterprise Service Quality Index (ESQi), which measures whether customers intend to use the company again. By calling random customers and asking "Would you rent from Enterprise again?", they discovered that when this metric rises, market share gains follow within months, while declining scores predict customer defection even when internal metrics look healthy.

Let's see how this trap plays out in a conversation between two managers:

• Victoria: Great news! My division beat budget by 8% this quarter, and we're up 12% over last year. The board is thrilled with our performance.
• Jake: That's impressive, but how are you doing compared to competitors? I just saw that TechForward grew 35% in your market segment.
• Victoria: Well, we focus on our internal targets. As long as we're beating budget and improving year-over-year, we're successful.
• Jake: But what if your customers are starting to prefer TechForward? Have you asked them if they'd choose you again?
• Victoria: We track customer satisfaction scores, and they're at 4.2 out of 5, same as last year.
• Jake: That's exactly the trap Enterprise avoided. They don't just measure satisfaction—they ask customers directly if they'll come back. When that metric drops, they know competitors are winning, even if internal numbers look good.
• Victoria: I hadn't thought about it that way. We could be celebrating while actually losing market share...
• Jake: Exactly. Your 8% growth means nothing if the market is growing at 20% and competitors at 35%. You need external benchmarks to know if you're really winning.

This dialogue illustrates how easily managers fall into the trap of internal-only measurement, celebrating budget victories while missing competitive threats. Victoria's initial confidence in beating internal targets blinds her to the market reality that competitors are growing three times faster. Only when Jake introduces the concept of external benchmarking does she realize that her "success" might actually be failure in disguise.

The power of Enterprise's approach lies in its direct connection to competitive reality. Rather than celebrating beating last quarter's numbers or exceeding budget targets, Enterprise managers know they're succeeding only when customers choose them over alternatives. The company telephones customers within days of rental returns, keeping the experience fresh, and posts results within two weeks alongside profitability numbers on monthly statements. This rapid feedback creates accountability that budget variances never could. Even more importantly, ESQi factors into promotion decisions, ensuring that managers who build customer loyalty advance while those who merely hit internal targets don't. This alignment between measurement and market reality prevents the dangerous delusion of "we're doing great" when you're actually losing ground to competitors.

External benchmarking extends far beyond customer metrics to encompass competitive intelligence gathering across multiple dimensions. When Avon Products wanted to assess its talent management effectiveness, VP Marc Effron didn't just compare against internal benchmarks or last year's performance. Instead, he created the New Talent Management Network, which grew to over 1,200 members sharing benchmarks and best practices across companies. This external perspective revealed that while Avon was improving against its own historical performance, it was falling behind innovative competitors in critical areas like digital talent acquisition and agile performance management. The lesson is clear: beating your budget by 5% means nothing if competitors are growing at 15%, and you'll never know this critical fact if you only look inward.

The challenge with external benchmarking is obtaining timely, relevant data about competitors and market dynamics, yet creative solutions abound across industries. Enterprise solves this through direct customer contact, but different contexts require different approaches. Professional services firms often hire former employees of competitors to gain insights into rival practices, while technology companies monitor patent filings, acquisition patterns, and engineering job postings to understand competitive directions. The specific method matters less than the commitment to understanding your performance in market context rather than organizational isolation.