Quantum Finance - are Performance Indicators what they seem?

There is a popular assertion made by theoretical physicists that in the minutiae of the quantum world, the process of observing an object actually changes it. This is one of those concepts that makes my head hurt and is likely to cause a nosebleed if I think about it too hard.

I have long been a believer in those business school mantras of ‘you can’t manage what your don’t measure’ and ‘you don’t get what you expect, you get what you inspect’. It does make you wonder if some of these B-School professors would be better plying their trade as literature buffs or poets though; such is the elegance of these phrases.

Recently, however, I have become somewhat unsure of myself and I am no longer as convinced as I once was. Or perhaps, I am reaching another transcendental stage of understanding (unlikely!). Perhaps what we measure in business changes as we observe it also?


The ‘law of unintended consequences’ is alive and well in measurement systems, especially where incentive pay is concerned. It seems whenever a measurement system is implemented, not only does it get ‘managed’ (in the style of company ‘earnings management’), but some unusual things start happening at the periphery. On inspection, these unanticipated consequences are quite logical, just not sensible. Consider the many examples of young companies focussing on maximising revenues in the run up to a sale or IPO. A common side effect is to find that the revenue line does indeed track upwards impressively, only to be later undermined by bad debts, poor DSO and weak margins or even no margins! Under the microscope of single minded revenue targets, you do indeed get what you inspect.

Financial processes are an interest of mine and I have had the opportunity to explore them at quite a number of companies over the years, most recently in helping drive efficiency improvements and manage risk in the key finance processes. Every one of these organisations has a fine set of KPIs which are managed and inspected. The KPIs are aggregate measures and typically lagging indicators of performance. Once the KPI scores start to turn on the wrong direction, the damage may already have been done.

The following is a recent example to underscore this thinking. One organisation appeared to have an excellent collections record with DSO (Days Sales Outstanding) at an impressively low level, meaning their performance on getting paid by the customers seemed world class. By coincidence, we were involved in a separate process analysis looking at exceptions in key finance processes, including the revenue or Order to Cash (O2C) cycle. It became clear that invoices were indeed being paid stunningly fast for their major customers, but the accounts receivable process still appeared to have a lot of manual effort. What transpired is that whilst the average time from invoice to payment was impressive, the time from order or delivery was less so. Why?

A ‘shadow process’ was in play, through which sales invoices were only raised once the A/R team were confident that the customer was ready to initiate payment. Earlier in the cycle, pro-forma invoices that were not tracked as ‘real’ invoices were used as a form of statement or request to pay. Unsurprisingly, the DSO KPI target was being overachieved, but the core business process was underperforming.

Perhaps the KPI should be changed, but this is one of many examples where it seems that KPIs alone are not enough to manage performance and drive continuous improvement. We also need to measure leading indicators of success and have a mechanism to identify variances on these at a detail level. The measurement of KPIs alone seems to change their very existence . . .

A balance of Performance Indicators (KPIs) and Exception Indicators (I shall call them ‘KEIs’) available on a continuous basis, together with supporting real-life detail for process leaders, probably represents a more effective type of scorecard for the organisation seeking ‘Quantum leaps’ towards World Class Finance.

Thanks for reading . . . .