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Are your KPI’s driving the wrong behaviour and results?

By Dennis Keay

Key Performance Indicators (KPI’s) are an important part of growing a healthy and successful business, and relate to the old adage:

You can’t manage what you can’t measure.

That doesn’t mean all KPI’s are appropriate or useful! That’s because there’s another equally important adage, attributable to Einstein:

Not everything that can be counted counts, and not everything that counts can be counted.

There are two main traps people fall into:-

  1. Measuring the wrong things
  2. Measuring too many things.

Measuring the Wrong Things

What do I mean by measuring the wrong things

An example I came across when working for a large automotive manufacturer was measuring the ‘number of warranty problems fixed each year due to design or manufacturing issues’.  I remember having a discussion with an Executive Director who wanted to INCREASE the yearly target of problems we fixed each year, thinking that that would improve quality and customer satisfaction.  My argument was that this was an inappropriate KPI because we should be aiming to create FEWER problems to fix in the first place…a completely different way of thinking…addressing the root cause, not the symptoms.

The problem with the metric, as it stood, was due to yet another adage:

What gets measured gets done.

It’s human nature for someone to try to achieve a KPI target that they’re being measured against and rewarded for (or punished for missing). When an inappropriate KPI is inserted into an individual’s Performance Plan by a superior (whether they agree with that KPI of not) there’s pressure for them to achieve it. Terrible as it may sound, the KPI I mentioned further above led to a practice of some people NOT fixing problems completely the first time round, just so that they’d get a tick in the box for ‘fixing’ it the first time, and a second tick in the box for fixing the remaining bit at a later date.

The other aspect to measuring the Wrong Thing is whether we’re measuring lead or lag indicators.

A lead indicator is something you can measure that gives you a prediction of future performance. For example, the number of people who smoke cigarettes may give you an indication of future lung-cancer rates. With such predictors corrective-action plans can be put in place.

A lag indicator is after the fact! An example may be a company’s tax return where the accountant reports on what already happened, with no ability to influence the result.

You can think of lead indicators being related to ‘cause’ and lag indicators being related to ‘effect’, so, as you can imagine, lead indicators are preferable because they can assist proactive actions to influence outcomes. 

Another aspect of measuring the wrong things is creating conflicting metrics. By way of example, in a game of soccer, a team wins when they score more goals than their opponents. When the team knows that their sole objective is to win the game, they work as a team.

But, suppose that the each team member were rewarded based on the number of goals they personally kicked (regardless of whether their team won or lost). What would happen then?  Do you think that some players would attempt shots at goal they had only a very slim chance of achieving, rather than passing the ball to a team mate who was in a much better position to score? Of course they would! It’s obvious! Also, it would be very unfair for people in the backline who never have a chance of kicking a goal, and would no doubt set up some internal jealousy and conflict within the team.

We can see in the above example how conflicting metrics lessen the team’s chance of working co-operatively and winning the game. But when it comes to business, metrics, targets and rewards are often set to reward individual performance at the expense of business performance!

As examples we see:

  • Setting Revenue Targets for sales people while ignoring profit and cashflow. (Here’s why:  If you want to more than double your revenue, then halve your prices!  You’ll probably sell 10 times more, increase your internal costs and complexity, AND go broke!)

    I was called in to help a company after they’d inadvertently fallen into this sort of trap. The sales person had a great reputation for clinching the deal, but was often selling (knowingly or otherwise) below cost. That made his bonus healthy while making others in the business extremely busy, frustrated, and often unable to deliver on time. Meanwhile the business was making a net loss.  (You can download our ‘Hidden Cost Minimiser’ document here that includes this case study.)

  • Production Managers rewarded based on production volumes achieved, regardless of whether he or she has let quality slip or delayed critical equipment maintenance to achieve the targets. Both of these can lead to extensive costs to the company at a later date!
  • Purchasing Managers rewarded based on getting the cheapest prices regardless of the cost of delays to projects, purchasing inferior materials, or damage to the supplier’s ability to make a fair profit.
  • The HR Manager rewarded based on the number of people trained, regardless of the effectiveness or results from that training.

The list goes on and on!  We need to determine whether or not what we’re measuring and setting as KPI’s is helping us improve our results. If not, it’s a waste!

So, fundamentally, why don’t those who are setting the KPI’s and targets see what’s happening and address it?  The answers are many, but it’s usually a combination of:

  • Complacency and Precedence: ‘That’s how we’ve always done it!
  • Conformity: ‘That’s how everyone does it!’ (i.e.  other businesses)
  • Ignorance: Lack of understanding of conflicting metrics (behavioural root-cause and effect)
  • Self-interest: Those who set the targets focus on ones they can achieve and are rewarded for. (Ouch!)
  • Short-termism: Again, lack of understanding, and/or self-interest where some people are looking for the next business to go to or the next ladder to climb. (Double ouch!)

Measuring Too Many Things

Let me simply reiterate:

Not everything that can be counted counts, and not everything that counts can be counted.

There are many things we can measure, but measuring too many things can be a waste of time and resources. Often ‘less is best’.  Measuring too many things can simply be distracting. We need to measure as few things as we need, to help us improve performance, and no more.

Summary Thoughts

  1. In general, team-based metrics help drive co-operation and business performance better than individual performance measures.
  2. Metrics at Senior Executive / Department Head levels are normally cascaded town the chain. If the metrics between departments conflict with each other (as is often the case), then this can create rivalry and conflict between Department Heads and departments, rather than co-operation. It’s important to choose metrics (and reward systems) at this level very wisely, because if you don’t, it’s a great way to screw up your business.

If you would like an outsider’s view of whether your KPI’s are hurting or helping your business, you can reach out to us here.

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