Time Paths

[jgunkler]

Kim,
Your story about the friend in the security business reminded me of an experience I had in the 1970's where looking at simple time paths led to an obvious solution.

I consulted with a series of banks who made loans to farmers (in the U.S.) The loan officers complained about the "inconsistency" of management messages to them. For a while they were provided incentives for bringing in new business; then, as defaults began to rise, those incentives stopped and they were required to issue higher "quality" loans. They did and, after awhile, their new loan business fell off and the incentives were put back in place for selling more loans (etc., etc. -- I found they had been through this cycle several times.)

I simply graphed the time paths of both "# of new loans" and "loan quality" over several of the cycles, showing them that they had essential two sine waves that were 180 degrees out of phase with each other. The two metrics on the graph had an almost perfect negative correlation.

I then helped them to institute a new metric, and base sales incentives on it. The new metric? "# of new high quality loans" (where "high quality" was operationally defined as loans that scored at or above a set threshhold on their loan quality metric.) The sine waves stopped; "loan quality" rose and leveled off; and "# of new loans" showed a steady rise over time.

[kim]

Great example John - thanks for this. I believe similar issues come up insurance companies.
Long, long ago, I was involved in the brewing industry and we had similar incentives for opening new accounts. Within weeks we were delivering the smallest imaginable packages to every small club and back-street store you could imagine. We too had to change the incentive to 'quality accounts'.
Kim