So many consultants, books and articles have been touting the importance of using key performance indicators (KPIs) to measure business success. However, if misused, KPIs become ineffective when it comes to optimizing company performance, even harmful in the long term. The Totem team decided to investigate the positive and negative aspects of KPIs. As a result, here are several tips to help you avoid some blunders.
Our first tip sounds rather simple and straight-forward. Today’s managers on average measure 25 to 40 key performance indicators compared to 5-7 in 1955, when only some management teams applied such metrics. So, do we progress or regress? What is the optimal number of KPIs? There cannot be a one-size-fits-all answer since individual needs depend on the actual context. However, we see a trend: companies tend to add new KPIs based on their circumstances at the time. The system gets heavier and more complex. No doubt, KPIs are a key factor of success, but at the same time, you must make sure that you build and optimize your KPI dashboard in accordance with your strategic objectives. This means you must take a step back from time to time to analyze your KPIs and to keep only those that are actually relevant to your current business. Choosing to target and monitor only specific KPIs saves valuable time for your managers. Yet, if one or several of your KPIs do not produce the expected results, then breaking them into several smaller KPIs would help you identify the exact area for improvement.
There are two sides to every indicator. On the one hand, it allows to evaluate the performance of a specific element that you judge important in your business. On the other hand, it may lead to actions on the part of your employees that are not necessarily in line with your other objectives. For example, measuring your sales in dollars per month may result in loss of motivation among your representatives once the monthly targets have been achieved, thus striking a blow to your annual sales, or it may tempt them to offer excessive discounts to inflate the sales numbers, ultimately reducing your business net income.
Here is a real-life example showing how things can go really off-track: one police force introduced KPIs to measure its performance. As a result the chief pressured his team to prioritize burglaries of multiple-occupancy households, instead of their gravity or date, because the system would count each occupant as a separate solved crime and therefore give the appearance of a better performance.[1]
This does not mean you should stop using KPIs. But you must question the pertinence of your selection to make sure:
“People do what their management inspects, not what it expects.”[1]
Following the KPIs, which you have meticulously selected, properly measured and effectively presented in a dashboard, seems like the right thing to do. However, remember that your KPI dashboard should remain flexible. Often out of habit, we keep using the indicators that focus on our strategic objectives towards our vision – we measure our process, our staff efficiency, etc. – however without questioning the pertinence of the initial plan altogether. Sometimes, you need to be able to step aside from the dashboard to evaluate the current context and, if necessary, to update your plan. Today’s economy is evolving at a rapid pace, which dictates the need for an adaptable tracking tool that would make sure that noncurrent indicators, once their associated targets have been achieved, do not give a false impression of success.
Resist the temptation to choose your KPIs based on the top 10 performance indicators of 2015, like “The proven metrics of business success”, “The best and worst KPIs”, etc. OK, we invented these titles, but they are representative of the numerous articles on the subject.
Your business is unique! A KPI that is perfect for one company may not be suitable for another. We customize our products, our services, our communications, what not… So why not customize our performance measuring tools based on our organizational context?
Assurant Solutions, a U.S. company providing specialized insurance products, dared to address KPIs in an innovative way. Trying to get a better perspective on the performance of its call centre, the company called on mathematicians and actuaries to examine the data using a modeling tool. However, they focused only on facts and rules-based analytics, ignoring basic management principles. So the company turned to a model-based system that analyzed the attributes and variables of calls to measure such metrics as the retention rate of unhappy customers or those shopping around for a better deal, as well as the call wait time. Initially, the marketing team assumed that shorter call waiting would translate into a higher acquisition rate. Instead the analysis showed that:
How do you explain the fact that many companies ask their management to rigorously measure their KPIs, but do not give them the power to act? If the decision-maker or the team does not have the means or does not feel concerned by a certain metric, it is better to avoid adding this KPI to the dashboard. Otherwise it will create clutter and discourage the management. An indicator is a performance measurement tool; it is not a guarantee of success. An indicator must come with concrete steps to bring the process in line with the objectives. Give your employees freedom to act instead of burying them under endless approval processes that only delay your goals.
Performance indicators alone do not guarantee success. The strategic selection of indicators based on your strategic objectives, as well as the measurement process and the decision-making process associated with them will greatly impact the performance of your company.
The Totem team can provide assistance and support:
Sylvie Grégoire, MBA, CRHA
President, Totem Performance organisationnelle
[1] Bernard Marr, a bestselling author, keynote speaker and leading business and data expert, in his blog “Caution: When KPIs Turn To Poison”
