- Let's do one more illustration
of an application of managerial accounting
using information inside a company.
The general topic here is performance evaluation.
And let me use one of my favorite illustrations of this,
the famous Soviet oil drilling contest.
I found this story years ago
and I forgot to write down the source,
so you'll have to trust me on this story.
But the story goes back to the old Soviet Union.
There was an oil drilling contest.
Oil teams were set in competition, one with another,
to motivate the oil drillers to work hard
and drill as much as possible.
Okay, well, here's the way the contest designers
decided to measure who would win the contest.
Meters drilled.
The team that drills the most meters
is going to win the contest.
Well, some clever folks on one of the teams
figured out that the best way to drill lots of meters
is to drill a shallow hole,
say a hundred meters down, and then stop.
Pull out your drilling rig
and move your stuff a short distance away
and drill another 100-meter hole.
Pull up your stuff and move a short distance away
and another hundred meters down.
You see, drilling the first hundred meters
requires the least effort, the least expense.
Once you start getting down deeper and deeper,
then you have to add more pipe and put more water down
and things get substantially more complicated.
So just drill a bunch of shallow, 100 meter deep holes.
That's the way to drill the most meters
in a given period of time.
The winning team drilled an impressive number
of 100-meter dry holes, no oil at all.
They never even came close to striking oil.
But they did create a lot of 100-meter holes.
Now could you think of a better way
for evaluating the performance of the drilling teams?
Well, sure, we could do better than this.
For example, we could say, listen,
a hole only counts if you find oil in it.
So if you go down 100 meters and there's no oil,
then that didn't count for anything.
Or maybe we could say that for every meter
in the first hundred meters, you get a point.
For every meter that you drill down
in the second hundred meters, you get two points.
And the third hundred meters, three points,
or something like that.
Some kind of weighted average reward
that would encourage teams to drill a little bit deeper.
The point is this.
If you set up a performance evaluation system in a business
that rewards drilling meters,
what are your people going to do?
They're going to drill meters.
They're not going to care about how much oil they find.
They just want to drill meters.
You have to be careful what you measure.
This is the key insight,
the key concept in performance evaluation.
Remember, you get exactly what you measure,
so you have to make sure you measure the right things.
If you want meters drilled,
then measure meters drilled
and you'll get meters drilled.
If you want your purchasing agent
and your production facility
to get the cheapest possible materials,
then reward them on how cheaply they can buy the materials.
But is that really what you want?
Do you really want the cheapest possible materials
that possibly won't be up to the quality standards
that you require?
Be careful what you measure.
You are going to get exactly what you measure,
so make sure you measure the right things.