Understanding Perverse Targets

Perverse Targets are targets that we set or are set that cause us to not act in the best interests of the business. In this article we examine some of the ways perverse targets have made us falter!

Perverse targets can have a strange effect on all of us. They stem from targets set by senior management that are both crude and ill thought out. A lot of targets may seem quite simple (such as giving a figure for sales to be achieved within a monthly period) but there always seems to be a way for these targets to cause the opposite of their intended result.

Take, for example, that simple sales target. Being asked to hit £30,000 in a month is fine but what if the manager or even members of staff have the ability to discount. It’s an age old adage but any fool can sell by discounting. £30,000 sales at 33% margin will generate more gross profit than £35,000 at 27% so if a manager crudely thinks they can hit the sales target by sacrificing margin then often they will be mistaken.

Other types of perverse targets could be one related to buying. Buyers have targets too. The author has actually witnessed buyers both refusing to buy good quality stock for the sake of a 1% reduction in gross profit and on other occasions paying more than needed for items in a bid to increase the amount of money given out in a monthly period.

The financial services industry is not immune to this phenomenon either. All short term money lending is done according to a set criterion in order to ensure that the debtor has the ability to repay the money lent. Creating a target for an employee to lend out a certain amount of money in a month may cause the creditor to lower the criterion necessary for a loan in order to meet said target. The end result will be more defaults which helps neither the creditor nor the debtor.

Governments have also fallen prey to perverse targets. None more famously than Tony Blair himself in the 2 day GP appointments  controversy.

Targets are a necessary evil in this day and age but the way in which they are structured can cause the best of us to lose our heads and go for gold. If you are someone who creates targets then think about what you are doing very carefully and don’t be crude!

 

 

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This entry was posted on November 6, 2012 and is filed under Targets. Written by: . You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.