5 KPIs to avoid and why every measure has a dark side
By David Parmenter
- Measuring sales staff against a predetermined gross revenue target. Sales staff are legendary at meeting their targets at the expense of the company, offering discounts, extended payment terms, selling to customers who will never pay; you name it, they will do it to get the commission.
- Tying pay to low inventory levels. Stores maintaining low inventory to get a bonus and having production shut down because of stockouts.
- Measuring completion of case load. Experienced caseworkers in a government agency will work on the easiest cases and leave the difficult ones to the inexperienced staff because they are measured on cases closed. This has led to tragic circumstances.
- Capacity utilization rate. This is an anti–lean performance measure that prompts plant supervisors to maximize long runs, producing items for stock rather than for actual customer demand.
- Delivery in full on time on all deliveries. Using this measure on all dispatches no matter how insignificant they are will lead to cherry picking by staff. It is only human nature to tackle the easy, nonimportant dispatches first, putting the major, more complex, deliveries at risk.
Unintended behaviour – the dark side of measures
Measurement initiatives are often cobbled together without the knowledge of the organisation’s critical success factors and without an understanding of the behavioural consequences of a measure.
Every performance measure has a dark side, a negative consequence, like the dark side of the moon. The key is to understand it. Well over half the measures in an organisation will be encouraging unintended behaviour. The importance of understanding this dark side and the careful selection of measures should never be underestimated.
How performance measures can go wrong can be illustrated by two examples.
Example: city train service
A classic example is provided by a city train service that had an on-time measure with some draconian penalties targeted at the train drivers. The train drivers who were behind schedule learned simply to stop at the top end of each station, triggering the green light at the other end of the platform, and then to continue the journey without the delay of letting passengers on or off. After a few stations a driver was back on time, albeit the customers, both on the train and on the platform, were not so happy.
Management needed to realize that late trains are not caused by train drivers, just as late planes are not caused by pilots. The only way these skilled people would cause a problem would be either arriving late for work or taking an extended lunch when they are meant to be on duty. Management should have been focusing on controllable events that led to late trains, such as the timeliness of investigating signal faults reported by drivers, preventative maintenance on critical equipment that is running behind schedule, etc.
Example: accident and emergency department
Managers at a hospital in the United Kingdom were concerned about the time it was taking to treat patients in the accident and emergency department. They decided to measure the time from patient registration to being seen by a house doctor. Staff realized that they could not stop patients registering with minor sports injuries, but they could delay the registration of patients in ambulances as they were receiving good care from the paramedics.
The nursing staff thus began asking the paramedics to leave their patients in the ambulance until a house doctor was ready to see them, thus improving the “average time it took to treat patients.” Each day there would be a parking lot full of ambulances and some circling the hospital. This created a major problem for the ambulance service, which was unable to deliver an efficient emergency service.
Management should have been focusing on the timeliness of treatment of critical patients and thus they only needed to measure the time from registration to consultation of these critical patients. Nurses would have therefore treated patients in ambulances as a priority, the very thing they were doing before the measures came into being.