3 common confusions on what KPIs are
By David Parmenter
The 2018 MIT Sloan Management Review and Google’s cross-industry survey* asked senior executives to explain how they and their organizations are using KPIs in the digital era. It is probably the largest survey on this topic with more than 3,200 senior executives providing feedback and supported by in-depth interviews with 18 selected executives and thought leaders. This study found that the measurement leaders, the highest-performing group, in the survey sample:
- Look to KPIs to help them lead—to find new growth opportunities for their company and new ways to motivate and inspire their teams.
- Treat their KPIs not simply as “numbers to hit” but as tools of transformation.
- Use KPIs to effectively align people and processes to serve the customer and the brand purpose.
However, this study lost its way when it confirmed a common misunderstanding by defining KPIs as:
The quantifiable measures an organization uses to determine how well it meets its declared operational and strategic goals.
This definition is flawed on several counts:
- Measuring progress on the journey to reaching the strategic goals is done by periodic reporting, which will seldom lead to profound alignment of people and processes.
- It makes the time-honored mistake that all measures are KPIs. How can this be? In the study, the writers acknowledged that “most companies do not deploy KPIs rigorously for review or as drivers of change. In practice, KPIs are regarded as ‘key’ in name only; the most prevalent attitude toward them seems to be one of compliance, not commitment.” The words “key” and “performance” are linked together so that the measure is one that will lead to customer delight and improved financial performance
- Reporting progress against goals is necessary, typically done monthly, and is not the real driver for alignment that we seek. I have yet to see a monthly report that ever created any change. We need 24/7, daily, and weekly warning flags which encourage timely corrective action and thus the monthly progress report should only confirm what we already know.
* Michael Schrage and David Kiron, “Leading with Next-Generation Key Performance Indicators.” The 2018 MIT Sloan Management Review and Google’s cross-industry survey, Research Report.
What is a KPI?
Well, a Key Performance Indicator (KPI) is an indicator that focuses on the aspects of organizational performance that are the most critical for the current and future success of the organization. KPIs have seven characteristics:
Non-Financial (not expressed in $s, Yen, Pounds, Euro etc) When you put a dollar, yen, pound, or euro sign on a measure, you have already converted it into a result indicator (e.g., daily sales are a result of activities that have taken place to create the sales). The KPI lies deeper down. It may be the number of visits to contacts with the key customers who make up most of the profitable business.
Timely (Measured frequently e.g., 24 by 7, daily, or weekly) KPIs should be monitored 24/7, daily, or perhaps weekly for some. A monthly, quarterly, or annual measure cannot be a KPI, as it cannot be key to your business if you are monitoring it well after the horse has bolted. I have yet to see a monthly performance measure improve performance.
CEO focus All KPIs will have the CEO’s constant attention with daily calls being made to the relevant staff enquiring about exceptions or recognizing their outstanding performance. Staff will perceive talking about poor performance with the CEO, on a regular basis, as career-limiting and will take innovative steps to prevent recurrences.
Simple (All staff understand the measure and what corrective action is required) A KPI should tell you about what action needs to take place. The British Airways ‘late plane’ KPI communicated immediately to everybody that there needed to be a focus on recovering the lost time. Cleaners, caterers, ground crew, flight attendants, and liaison officers with traffic controllers would all work some magic to save a minute here and a minute there whilst maintaining or improving service standards.
Team based (A team can be phoned, and they will accept responsibility, and can take action to improve the KPI) A KPI is deep enough in the organization that it can be tied to a team. In other words, the CEO can call someone and ask, “Why did this happen?” and that manager will take on the responsibility to fix the issue. Return on capital employed has never been a KPI, because the CEO would get nowhere saying to a GM, “Pat, I want you to increase the return on capital employed today.”
Significant impact (on the organization’s critical success factors) A KPI will affect more than one critical success factor and most of the balanced scorecard perspectives. In other words, when the CEO focuses on the KPI, and the staff follows, the organisation scores goals in all directions.
Limited dark side (unintended consequence being of minor significance) All measures have a dark side, an unintended consequence where staff will take some remedial actions that will be contrary to the desired intentions. Before becoming a KPI, a performance measure needs to be tested to ensure that it helps teams to align their behaviour in a coherent way to the benefit of the organization. The possible unintended consequence associated with measuring all the selected KPIs being checked to ensure they are not major or of significance.
To understand more
This information has been extracted from David Parmenter’s Key Performance Indicators (4th Edition) which is the highest rated KPI book on Amazon.
To understand more about the difference of these two types of measures, you can access, free of charge, chapter one, “The Great KPI Misunderstanding”.
In my KPI book, I have setout a number of examples of reporting templates. See an extract of my Chapter 10 Reporting Performance measures from Key Performance Indicators 4th edition.