How organisations can tackle unconscious bias in decision-making
Organisations can combat unconscious bias, particularly in the form of strategy surrogation, by adopting flexibility in their performance metrics
In the fast-paced world of business, evaluating performance is vital, but fixating on a single metric can distort success. This phenomenon, known as “surrogation propensity,” hinders strategic outcomes by substituting measures for the strategy itself. Picture a health journey where steps become the sole measure of well-being. While increasing step count seems promising, it neglects other crucial factors like nutrition, posture, and mental health. Similarly, when managers focus excessively on performance measures, they lose sight of broader goals, leading to skewed perceptions of success.
A recent study by UNSW Business School’s Professor Mandy Cheng and Dr Linda Chang, in the School of Accounting, Auditing and Taxation, and Dr Kelly Wang from UTS unravels the risks of surrogation propensity and its impact on strategic decision-making. The paper: Reducing Strategy Surrogation: The Effects of Flexible Performance Measurement Systems and Environmental Dynamism, published in The Accounting Review, provides evidence for how organisations can break free from conventional performance metrics to become more efficient and innovative.
Uncovering the pitfalls of strategy surrogation
According to the researchers, increasing emphasis on “managing by numbers” has led to numerous instances of strategy surrogation, both in everyday scenarios (e.g., tracking steps on a Fitbit to measure health) and typical business settings (e.g., linking customer engagement success to the number of new sign-ups for a loyalty program).
A famous example is Wells Fargo, where strategy surrogation resulted in the unauthorised opening of 3.5 million accounts. By prioritising the “number of accounts per customer”, Wells Fargo's cross-selling strategy went awry. This case study exemplifies the significant issues associated with strategy surrogation, emphasising the need for a more balanced approach to measuring success in business and beyond.
“A mining company may receive a high sustainability rating from a rating agency and believes that it has successfully implemented its sustainability strategy, even though it has not delivered any real, positive long-term impacts on the local communities,” explain the paper’s co-authors, Dr Wang, Prof Chang, and Dr Cheng. “Any performance measure used to measure a strategy can result in strategy surrogation if managers focus strictly on the measure and lose sight of the organisation’s strategy.”
But importantly, their paper identifies ways to reduce this unconscious and undesirable behaviour. “Strategy surrogation happens when managers make suboptimal decisions because they focus only on their performance measures and forget that these performance measures are only an imperfect representation of their strategy. In other words, managers sometimes mistakenly think that performance measures and strategy are the same thing when performance measures only capture some aspects of the strategy.”
For example, imagine a car company that wants to innovate and create high-tech cars. They measure their success by counting the new features they add to each car model. However, this narrow focus on features can cause strategy surrogation. It means they might put all their attention and effort into adding new gadgets without considering other important aspects of innovation.
To try to uncover how to tackle this prevailing problem, the researchers conducted an experiment to investigate whether implementing a flexible performance measurement system and the rate of business environmental change can affect strategy surrogation and managers’ innovation investment decisions.
They found that implementing a flexible performance measure system (PMS) can reduce strategy surrogation and improve managers’ innovation investment decisions, particularly when organisations operate in rapidly changing environments. They explain: “Flexibility in a PMS means allowing managers discretion to modify and customise the PMS to suit emerging needs when implementing their strategy. For example, a flexible PMS will allow managers of the car manufacturer mentioned earlier to develop new measures that also capture the development of innovative after-sales services if they notice a shift in customers’ preference towards requiring after-sales services.
“The reason why implementing a flexible PMS works is that by inviting managers to think about the appropriateness of their performance measures, managers are more likely to recognise that performance measures and strategy are two different things, and therefore less likely to engage in strategy surrogation.”
Why is flexibility important in performance management?
In their paper, the researchers argue that strategy surrogation happens because managers think that strategy and performance measures are the same thing and focus on achieving the measure. “Our goal was to find a way to help managers see that performance measures and strategy are actually different,” they explain.
“Flexible PMS encourages managers to think about whether the measures need to change as the environment changes. Because of this, managers become conscious that measures only represent the strategy and are not the same as the strategy. This is particularly important for environments that change rapidly, as focusing only on performance measures may cause managers to miss opportunities as the environment changes.”
Strategy surrogation is essentially an unconscious bias that can have detrimental effects on organisations. The researchers suggest avoiding decision-making bias in the problem described above, the car company should take a broader approach to measuring strategic success. Implementing a flexible PMS will invite managers to take this boarder approach by thinking about their organisation’s strategy and evaluate whether the current performance measures adequately represent their organisation’s strategy.
As a result, organisations can combat surrogation propensity by harnessing flexibility in performance measurement systems. “With strategy surrogation, managers are not deliberately ignoring their organisation’s strategy, but they tend to unconsciously focus on performance measure (e.g., customer satisfaction) because they are easier to understand and more relatable than the broader concept of the strategy (e.g., delight the customers)," they said.
“In other words, strategy surrogation often describes the scenario where ‘good people sometimes do the wrong thing’ due to their unconscious bias. Our motivation for this study was to identify what organisations can do to help managers not fall into the strategy surrogation trap.”
How to break free from conventional metrics to nurture innovation
Excessive focus on performance measures can hinder organisational innovation by favouring easily measurable activities and overlooking alternative approaches, as seen in the car manufacturing example. This challenge becomes more pronounced when measuring complex goals like innovation, which cannot be fully captured by standard metrics alone. Succumbing to surrogation limits managers' thinking to measured areas and may lead to missed opportunities for truly innovative ideas beyond traditional measurement systems.
To address this decision bias, organisations can enhance their performance measurement systems by incorporating greater flexibility. This can be achieved through adopting a bottom-up approach. When implementing PMS, organisations can adopt either a top-down or bottom-up approach. The researchers explain: “In a top-down approach, PMS is designed and implemented by top management, and only they have the authority to choose and modify the performance measures.
“On the other hand, with a bottom-up approach, lower level/line managers are also involved in the design and implementation of the PMS, and they are allowed to modify and customise measures to suit their operational situations.” This approach therefore allows organisations to incorporate flexibility into their PMS.
Overall, the researchers suggest organisations should incorporate more flexibility in their performance measurements and give managers the autonomy to proactively to modify and customise performance metrics as their business environment changes. By considering a wider range of factors and the changing business environment, managers are less likely to fall into the strategy surrogation trap. Moreover, they will embrace a mindset that encourages out-of-the-box thinking. This will enable organisations to unlock their full innovation potential and achieve meaningful and sustainable growth.