MIT Sloan Management Review Article on Governance for Smarter KPIs

Without adaptation and refinement, static business metrics create two types of strategic risk. One is encouraging performance on the wrong measures. The 2008 global economic crisis, for example, was triggered in part by banks’ dependence on a then widely used metric: value at risk, which measures potential portfolio losses in normal market conditions at a single point in time. Financial institutions did not adjust this measure as riskier subprime mortgages and securitized default swaps became a larger part of their portfolios. Guided by a metric that severely underestimated potential losses — in some cases, by orders of magnitude — many financial institutions went bankrupt or suffered significant losses.

About the Author

David Kiron is the editorial director, research, of MIT Sloan Management Review and program lead for its Big Ideas research initiatives.

Michael Schrage is a research fellow with the MIT Sloan School of Management’s Initiative on the Digital Economy. His research, writing, and advisory work focuses on the behavioral economics of digital media, models, and metrics as strategic resources for managing innovation opportunity and risk.

François Candelon is a senior partner and managing director at Boston Consulting Group (BCG) and the global director of the BCG Henderson Institute, where his research focuses on the impact of technologies on business and society. He can be contacted at candelon.francois@bcg.com.

Shervin Khodabandeh is a senior partner and managing director at BCG and the coleader of BCG’s AI business in North America. He is a leader in BCG X and has over 20 years of experience driving business impact from AI and digital. He can be contacted at shervin@bcg.com.

Michael Chu is a partner and associate director at BCG, where he focuses on applying AI and machine learning to business problems in commercial functions, including optimizing pricing, promotions, sales, and marketing. He can be reached at chu.michael@bcg.com.

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