Monday, September 26, 2016

Well Fargo is a Victim of the Cobra Effect

Anyone who follows this blog knows that I rarely hold a grudge and I don’t like kicking an individual or organization while it is down.  I am just not wired that way.  This week I am going to make an exception because of the lesson that can be learned for everyone in the agile community.  I am talking about Wells Fargo and their latest scandal regarding opening bogus new accounts for existing customers.

This isn’t the first time I have had my differences with Wells Fargo.  They were involved in a financial literacy campaign which denigrated humanities majors and liberal arts students.  Now thanks to federal regulators they are paying a $185 Million dollar fine for creating new accounts for customers without consent.  This gets to something the agile community call perverse incentives.

One of the central tenants of “scientific management” is that you measure how an employee does their job and then based on the data, as a manager, you figure out how to make that employee more efficient.  On the surface it seems like a smart idea.  A business person measures how work is done and then they strive to use that data to improve the speed and quality of the work.  This is where the perverse incentives come into play.  If you measure something and then use it as a performance incentive it ceases to be useful because it will force people to game the system to meet the metric.  This is called the “cobra effect” and I have blogged about it repeatedly.

Based on his testimony to congress, Well Fargo CEO John Stumpf said that he set up the incentives to “cross-sell” bank services to improve the company stock price.  This was the beginning of over two hours of uncomfortable questions and criticism from both Democratic and Republican congress members.  You know that you have done something bad when both Democrats and Republicans denounce you in public.

It did not have to be this way.  Stumpf could have measured performance and created training and education programs to make his staff learn how to better “cross-sell” products.  Instead, he used the blunt instrument of job incentives and it worked for a while until regulators and congress got involved.  Wells Fargo now faces additional investigation and possible criminal penalties.  It did not have to be this way but “cobra effect” can claim another victim and it could be a major American financial institution.

Until next time.