Sunday, October 14, 2007

Death by a thousand KPIs

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.

4 comments:

  1. Anonymous10:07 AM

    I'm really surprised that "Death by a Thousand KPIs" hasn't received a whole list of comments. About a year ago we started a new corporate push to proliferate KPIs at our organization. At first they seemed really good, but as time progressed I quickly learned about the "law of unintended consequences" when you try to reduce a business to a bunch of little metrics that individuals are supposed to work towards. I became so frustrated with some of my peers' use of KPIs, for all the reasons you mention, that I started using the phrase "Death by KPIs." I googled "Death by KPIs" this morning and found your link. Great to see there are people half way across the world thinking the same thing. One point I would add about the danger of KPIs is that senior executives, who don't really know the lower level details of a business very well, love KPIs because it makes them feel like everyone is focused on key drivers that will make the business successful. They rarely have enough exposure to detials to anticipate or appreciate the unintended consequences. From Boston.

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  2. Thanks for your comments, Boston!

    I'm glad you identified with the post and enjoyed it. I think many people suffer from KPI-overkill at work, and there is a real need get past this and focus on the actual business and on the people who need to get it done.

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  3. Hi

    I like this post very much. It help me to solve some my work under my director’s requirements.

    Apart from that, below article also is the same meaning

    key performance indicators examples

    Tks again and nice keep posting
    Rgs

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  4. Dear Farid,

    This is an excellent distillation of the biggest issues with KPIs. I found it because I just (freakishly) wrote an article with almost the same title - and clearly inspired by the same exasperation with KPIs. But yours make points so much faster! Beautifully done.
    Best regards,
    Jarrod Hart
    See my less succinct version here: http://theprovincialscientist.com/2011/04/25/kpis-explained/

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