Key performance indicators (KPIs) are as important to a business as its own existence. No CEO doubts the importance of measuring their company’s performance properly. Yet the executive teams I’ve assisted over more than 25 years generally struggle to engage with the challenge.
As one CEO put it to me, “when we get to corporate KPIs their eyes glaze over.” Or, as another said “they [the managers] start looking for the exits.” This article attempts to discuss the concern, and raises the question; What are your KPIs really measuring?
When you look at what these KPIs so often are, you can understand why so many managers switch off. The number crunchers take over, and can overwhelm operating managers with spreadsheets and precise breakdowns of financial results and output measures. Pretty soon managers feel like they’re being asked to jump through hoops they don’t really understand — and don’t particularly want to.
To stop this happening, CEOs need to remind their teams of a few important truths about KPIs.
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KPIs are about relationships
Managers, especially those in large organizations, spend an inordinate amount of time and money measuring the satisfaction levels of their staff. Sections of HR are dedicated to running employee satisfaction surveys and making sure managers conduct frequent check-ins with their direct reports. That’s fine up to a point. But when I ask senior executive teams what the organization is getting out of this, I receive blank stares.
KPIs need to reflect the fact that value creation is a two-way street, and that both sides of the transaction need to get something out of it. Think about it. Why do you want employees to be engaged? Because you need something from them. It’s critical to understand the decision-making criteria (strategic factors) that key stakeholders use to support your entity and what you want from them in return. The two-way street for employees is defined by how well the company delivers on the things that employees want, tracked by tools such as those above, and by tracking the productivity and innovation of employees as a group. Most organizations fail to develop measures around both sides.
You see the same problems with sales, where the focus is largely on what companies get out of the deal rather than on what they’re giving to customers. Grace, the CEO of a community bank (and a client) put it this way: “Years ago, our executive team discussion would focus on sales and margin and a breakdown of those numbers. But…once we opened our minds to stakeholders, our monthly performance reviews took on a different perspective. We now discuss KPIs on the drivers of sales, such as customer service scores and product rankings conducted by organizations such as Canstar.”
Grace acknowledges that the digital revolution has made this a lot easier: “You have a society which is much more sophisticated and elegant in knowing what it wants. With technology, and I include social media in this, there’s a greater degree of transparency about how you’re performing.”
Consider causality when measuring KPIs
To most managers, a set of performance measures just looks like a table of numbers. Since they appear to be concurrent, managers rarely question the way each measure impacts the others over time. But leading indicators should predict the future. If your organization does well with employees now, that drives results for other stakeholders such as customers tomorrow. If your organization does well with customers tomorrow, then shareholder outcomes will be improved the day after.
Once managers get that this is what KPIs are supposed to do, they start asking themselves some really interesting questions about how their business works. One of my clients is a cooperative which collects and grades avocados from member farmers for distribution to retail stores. Brian, the Managing Director, and his management team mapped their business KPIs.
He said, “Mapping our KPIs opened our eyes to how critical the grading process is to us. The accuracy of the grading [into premium, first, second or reject grade] on the shop floor impacts grower payments, which varies according to the grade of fruit. It’s also linked to the reputation of our customers, the major supermarket chains, for reliable quality. These results, in turn, impact our business’ sales and profitability.”
The numbers are never the whole story
Key performance indicators are only partial measures of something. Any set is incomplete. The word “indicator” gives that away.
Over a decade ago I helped a not-for-profit association develop a KPI scorecard. The organization operates schools for children with autism and supports the families of those children. The CEO recently informed me that it is only with continued use and review that the organization’s scorecard remains relevant. “Each year,” he says, “as circumstances change, we tweak our scorecard to make it just that bit better.” Measures found to have a “weak” correlation with client outcomes — and which have been dropped — include the number of media stories about the organization, the number of current research projects undertaken by the organization, and capital investments. These have been replaced by measures such as corporate sponsorship and fundraising by volunteers. The organization also tries to keep the number of KPIs manageable and has shrunk the list from 16 to 12.
As the conditions around your organization, department, or section alter, be prepared to morph your performance measures. It’s set and reset, not set and forget. As bank CEO Grace observed, the dynamics of your business operating environment are changing all the time in response to digital innovation, social media, and the emergence of Covid-19. It’s time to rethink how you develop your performance measures. Look at performance as a two-way street and watch for the linkages between indicators and the impact of one upon another. And most importantly, be ready to adapt to changing circumstances.
Source: Harvard Business Review