KPI - or Key Performance Indicators - are amongst the most dangerous things in a business. They are not useless, indeed you cannot run a business without them. But they are dangerous. In the wrong hands they will throttle a business and suck the life force out of its employees.
Let's see why.
When you first discover KPIs they look so neat and efficient that you are tempted to use them everywhere. Deliveries are slow ? OK delivery time is a KPI which needs to be minimized. Customer complaints are up ? OK number of complaints is a KPI that must be minimized.
The problems are immediately obvious. You can minimize deliveries by reducing the number of orders accepted; you can reduce customer complaints by providing fewer channels for customer interactions. Both actions, while achieving the above KPIs will also just about kill the business.
This is so obvious that one cannot rationally conceive of a situation where this would happen. And yet such examples abound. For KPIs get linked to raises and bonuses, and most people are motivated to maximize their returns.
So why exactly does this happen ? How do perfectly well-intentioned KPIs turn into dangerous weapons ? Three answers come to mind. First who sets them, second what are they supposed to replace, and third how much are they written in stone.
To take these in order, KPIs must be set by, or with, the strategic think-tank of a business. It is their job to ensure that KPIs are not at cross-purposes, and that there are bigger, higher level KPIs that can capture and filter out any irrational behaviours that come about as a result of them. They cannot be set by individual business units who only have visibility into part of the business but not the overall direction in which the business is heading.
Secondly, and this is really important, KPIs cannot replace honesty of purpose and employee attitudes. Obviously, in both the above example, we are dealing with employees who are out to maximize their short-term bonuses, even if it kills the business. These are extreme examples but even well-meaning employees without the proper training can wrongly interpret KPIs and hurt a business in the process. In short, before you add another KPI to the business, make sure you have well-trained and motivated employees who will apply their best efforts towards business goals.
KPIs cannot turn bad employees into good employees.
Third, no KPI should be written in stone. It is almost hilarious to hear people in some business meetings defending their KPIs as if they were divine wisdom. KPIs are operational tools that are used to achieve specific business purposes. If the purpose is not bieng achieved, or if the business requirements have changed, the first casualty should be the KPI itself.