We use key performance indicators (KPIs) to incentivise desired behaviours and results. Yet, every KPI spawns an equal and spurious reaction that produces unintended results. No KPI can replace good judgement and common sense.
The KPIs that matter the most are the ones that help you make strategic decisions for your business based on the business outcomes you want to achieve. Yet I find that KPIs used often displace the business outcomes and become the desired results per se at the expense of the business.
We use KPIs to incentivise desired behaviours and results. Yet Steve’s first law of motivation (yes, my law), states that every KPI intended to motivate a desired action spawns an equal and spurious reaction that produces unintended results.
A vice-president (VP) of sales of consumer goods at the Japan subsidiary of a major international brand company had her staff turn down a customer request to order additional stock of a product, even though the company had inventory available. The head office had mandated a KPI that tracks forecast accuracy. Had she allowed staff to accept the order, it would have worsened that KPI because the customer would have ordered more than had been forecast.
When the chief executive officer (CEO) of the subsidiary, her boss, found out about the rejected order, he hit the roof, not just because of the lost order, but also for the unsold inventory that would likely end up as scrap. The intent of the KPI had been to incentivise reduced scrap!
Running a business requires more than painting by numbers, even though KPIs are often treated that way. A recently-hired VP in charge of claims at the Japan office of a major international consumer insurance company complained to me about 40-odd KPIs he had to track as mandated by the head office, not one of them useful in running his business. Nonetheless, he worked tirelessly at making his numbers. The strategic objective of his division was to increase loyalty among clients who had experienced submitting a claim. Tracking policy renewal rates of such clients would seem to be a reasonable way to gauge that satisfaction and loyalty. Yet when I asked about this, the VP told me the company does not track such data, so neither does he. Perhaps the company has no such KPI, but what was stopping him?
Executives in the head office of a European snack food company required the CEO of each subsidiary operation around the world to submit a list of important KPIs to be included in a harmonised reporting template for every operation. The standard report format was to be compiled from the lot of KPI submissions. The Japan subsidiary CEO was troubled by such a specious request, and rightly so. The importance of any KPI is always contingent upon desired business outcomes. A better approach would have been for the executives in the head office to begin a discussion about the strategic objectives most important to them, and the kind of data that would help them make better and quicker decisions in achieving those objectives. Can you imagine the deluge of KPIs that were returned to the head office and trying to sort through them to determine which might even matter without such a discussion? No KPI is a heuristic for the business on its own.
In the military, there is a saying: “When the map and the terrain don’t agree, believe the terrain.” KPIs may serve as your map, but your business is the terrain. No KPI can replace good judgement and common sense. Now if only there were KPIs for those.
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