I have become increasingly aware that key performance indicators (KPIs) in many organizations are a broken tool. Measures are often a random collection prepared with little expertise, signifying nothing. KPIs should be measures that link daily activities to the organization’s critical success factors (CSFs), thus supporting an alignment of effort within the organization in the intended direction. I call this alignment the El Dorado of management.
The Myths Surrounding Performance Measures
Poorly-defined KPIs cost the organization dearly. Some examples are: measures gamed to the benefit of executive pay, which leads to the detriment of the organization; teams encouraged to perform tasks that are contrary to the organization’s strategic direction; costly “measurement and reporting” regimes that lock up valuable staff and management time; and a six-figure consultancy assignment resulting in a “door stop” report or balanced scorecard that doesn’t function well.
Myth #1: Most Measures Lead to Better Performance
Every performance measure can have a negative consequence or an unintended action that leads to inferior performance. Over half the measures in an organization may well be encouraging unintended negative behavior. In order to make measures work, one needs to anticipate the likely human behavior that will result from its adoption, and endeavor to minimize the potential negative impact.
This myth has been covered in the unintended behavior – the dark side of performance measures section of the introduction.
Myth #2: All Measures Can Work Successfully in Any Organization, At Any Time
Contrary to common belief, it is a myth to think that all measures can work successfully in any organization, at any time. The reality is that there needs to be, as Spitzer has so clearly argued, a positive “context of measurement” for measures to deliver their potential. To this end I have established seven foundation stones that need to be in place in order to have an environment where measurement will thrive. These seven foundation stones are explained in length in Chapter 3 and are:
- Partnership with the staff, unions, and third parties
- Transfer of power to the front line
- Measure and report only what matters
- Source all KPIs from the organization’s critical success factors
- Abandon processes that do not deliver
- Appointment of a home-grown KPI Team Leader
- Organization-wide understanding of the winning KPIs definition
Myth #3: All Performance Measures Are KPIs
Throughout the world, from Iran to the United States and back to Asia, organizations have been using the term KPI for all performance measures. No one seemed to worry that the KPI had not been defined by anyone. Thus, measures that were truly key to the enterprise were being mixed with measures that were completely flawed. Let’s break the term down. Key means key to the organization, performance means that the measure will assist in improving performance. There in fact four types of performance measure. These are explained in Chapter 1.
Myth #4: By Tying KPIs to Remuneration You Will Increase Performance
It is a myth that the primary driver for staff is money and that an organization must design financial incentives in order to achieve great performance. Recognition, respect, and self-actualization are more important drivers. In all types of organizations, there is a tendency to believe that the way to make KPIs work is to tie KPIs to an individual’s pay. But when KPIs are linked to pay, they create key political indicators (not key performance indicators), which will be manipulated to enhance the probability of a larger bonus.
KPIs should be used to align staff to the organization’s critical success factors and will show 24/7, daily or weekly how teams are performing. They are too important to be manipulated by individuals and teams to maximize bonuses. KPIs are so important to an organization that performance in this area is a given, or as Jack Welch says, “a ticket to the game.”[i]
Performance bonus schemes are often flawed on a number of counts and this is addressed in a working guide that can be accessed from www.davidparmenter.com.
Myth #5: We Can Set Relevant Year-End Targets
It is a myth that we know what good performance will look like before the year starts and, thus, it is a myth that we can set relevant annual targets. In reality, as former CEO of General Electric Jack Welch says, “it leads to constraining initiative, stifling creative thought processes and promotes mediocrity rather than giant leaps in performance.” [ii] All forms of annual targets are doomed to failure. Far too often management spends months arguing about what is a realistic target, when the only sure thing is that it will be wrong. It will be either too soft or too hard.
I am a follower of Jeremy Hope’s work. He and his co-author Robin Fraser were the first writers to clearly articulate that a fixed annual performance contract was doomed to fail. Far too frequently organizations end up paying incentives to management when, in fact, they have lost market share. In other words, rising sales did not keep up with the growth rate in the marketplace. As Hope and Fraser point out, not setting an annual target beforehand is not a problem as long as staff members are given regular updates about how they are progressing against their peers and the rest of the market. Hope argues that if you do not know how hard you have to work to get a maximum bonus, you will work as hard as you can.
Myth #6: Measuring Performance Is Relatively Simple and the Appropriate Measures Are Obvious
Myth #7: KPIs Are Financial and Nonfinancial Indicators
Myth #8: You Can Delegate a KPI Project to a Consulting Firm
The Myths Around the Balanced Scorecard
For the rest read my Chapter 2 from the third edition
This information has been extracted from David Parmenter’s Key Performance Indicators (4th Edition) which is the highest rated KPI book on Amazon.
You may like to visit:
- his KPI home page
- his KPI toolkit (whitepaper + e-templates) for (<100 FTEs, 100-250 FTEs, 0ver 250 FTEs)
- his KPI book page
- his KPI database
- his KPI book e-templates
[i] Jack Welch and Suzy Welch, Winning (New York: Harper Business, 2005).
[iii] Dean R. Spitzer, Transforming Performance Measurement: Rethinking the Way We Measure and Drive Organizational Success (New York: AMACOM, 2007).