Why so many KPIs make so little sense

If you work in a business of any size, you’ll be familiar with the daily/weekly/monthly round of KPIs, or Key Performance Indicators.

Despite their popularity in management circles, many KPIs are either pointless or provide only a partial view of what’s going on. And a dangerously partial view at that…it’s like trying to run an organisation of thousands of people spread around the planet using only the tools of keyhole surgery.

In my own career I’ve also found an unerring correlation between how badly an organisation is failing and the number of KPIs they track. In theory, if KPIs worked as well as their evangelists claimed, organisations with lots of KPIs would be stellar performers, but I’ve never seen one that is.

One organisation I dealt with tracked 42 (yes 42!) KPIs at board level, in a room full of people with very little idea how the levers they pulled impacted front-line staff or customers. But they were absolutely certain that anything adverse which happened from the minute the board meeting broke up was the fault of their feckless front-line staff who, as far as I could see, had their work cut out staying on top of each month’s fresh batch of lunacy.

But, crazy though large organisations are sometimes, if you want to find an example of how to do things really badly, the government is always a good place to look.

Take, for instance, the use of GDP (Gross Domestic Product) to measure the health of the economy. This is used by politicians in much the same way as KPIs are used in a corporate environment.

Without getting too technical, GDP is just the total of all the money spent in the economy. A bit like measuring customer satisfaction or employee engagement, this doesn’t seem like a completely crazy idea. (In concept at least…the application often leaves something to be desired…)

And, to be fair, GDP is a number I might be interested in if I was running the country. I’m just not sure I’d obsess about it because there are too many problems with using it to track anything meaningful, a similar fate to many corporate KPIs.

For example, GDP takes no account of where the money spent has come from. At its simplest, if the government borrows money and just gives it to people to spend, after a short time-lag while the money works its way through the system, GDP goes up.

There’s a sugar rush of economic activity in the short term (if you’re lucky…over time, like any addiction, you need a progressively bigger dose for the same effect). But in the end, all that’s left is additional debt for someone else…specifically your children and grandchildren…to pay back through higher taxes, poorer public services or some combination of the two.

Nobody actually got richer. You just borrowed money from your children and grandchildren and, to add insult to injury, your children and grandchildren will also be the ones who have to pay it back with interest in a few years’ time.

In a corporate environment, this is like meeting a sales target by persuading customers to let you invoice them early on the basis that “we’ll worry about next year when we get there”, leaving you already in the hole before the next financial year even gets under way. In case you think nobody could possibly be that stupid, even large PLCs get embroiled in this sort of scandal from time to time.

Another problem with GDP is also a frequent issue for corporate KPIs.

GDP is just an average, when what really matters is the distribution of government largesse. To give an extreme example, if GDP goes up but all the benefits are captured by a few individuals, the government gets to chalk that up as a success for the economy even if a large chunk of the population is destitute.

And before you laugh about how ridiculous that would be, this more or less has been US economic policy in recent times, with the UK not much better. According to Bloomberg, just 50 individuals in the US owned 50% of the country’s entire wealth, with billionaires’ wealth growing rapidly in recent months despite the economy crashing into a once-in-a-century economic crisis.

I know all that sounds crazy, but corporate KPIs are often little better.

Sales teams can hit their KPIs by cutting prices to attract bottom-fishing, price-sensitive customers who will cost the customer service department a fortune to keep happy and ultimately won’t pay their bills. But that isn’t the sales department’s problem. Others parts of the business get to pick up the pieces.

Cost-based KPIs can be met easily by just not spending money. But if that includes halting the marketing campaign that brings in new customers, most corporate KPI systems would call that a victory. As, usually, would the budget-holder concerned…especially since blame for the lack of new customers a few months from now when the budget cuts have worked through the system will invariably fall on somebody else.

Companies can hit staff sickness KPIs by intimidating staff to come into work instead of staying at home to avoid infecting others, or designing compensation systems so nobody can afford to take a day off, no matter how sick they are.

You might think nobody would behave that unreasonably, but I once worked for a large PLC where more than three sick days a year got you an automatic written warning…short of hospitalisation, sick days were rare there but staff motivation was, unsurprisingly, in the sewer.

KPIs aren’t bad necessarily. But they way they’re implemented in practice often hinders, rather than helps, achievement of the underlying business objectives.

KPIs are meant to focus attention, but often focus attention on the wrong things. Sometimes completely the wrong things, such as focusing on continued cost reduction at the expense of deteriorating customer satisfaction. Sometimes KPIs lead to a focus on the irrelevant, taking time, energy and resources away from fixing the problems that really matter.

In the place I worked with 42 KPIs, we spent all day mired in triviality. Major organisational issues were rarely, if ever, addressed. Deliberately so, some might say.

Another theoretical benefit of KPIs is that they provide clarity, so people know what they’re aiming to achieve. But it’s rare to find a manager without stacks of mutually-conflicting objectives. That’s not a triumph for clarity, it’s an indication of poor strategic thinking.

Finally KPIs, in theory at least, have a useful role to play in performance improvement and can be a useful benchmark for continuous improvement. But if targets can be fiddled or non-performance excused by re-basing the comparator, they’re not much use.

Flipping back to a government example again, we saw this a few days ago when government ministers hailed the fact that the UK economy had “bounced back” after lockdown because “GDP had increased”. When comparing September with June that was factually accurate, but GDP was still around 8% lower than it had been pre-lockdown.

It’s not just in the world of politics that an 8% reduction in performance gets presented as a victory. I’ve seen similar tricks pulled probably hundreds of times in a corporate environment.

The net effect of all these issues, and others we don’t have time to go into today, is to neutralise many, if not all, of the benefits organisations can enjoy from a well-conceived system of KPIs.

Poor KPIs drag down organisational performance, spawn never-ending bureaucracy and rarely achieve what they set out to achieve. Setting better KPIs means thinking about performance management very differently.

Sadly, few bother.

If this article has resonated with you in some way, I’m starting the research for my next book, which will be how to create and manage KPIs better than most organisations do at the moment. If you have any stories or experiences you would like to share, in complete confidence naturally, please get in touch via the contact page. I’ll be delighted to hear from you.

Published by Alastair Thomson

Founder of Better Business Publishing Ltd. An experienced Chairman, CEO, CFO and Non-Executive Director for large multinationals across sectors such as advertising, manufacturing, financial services, utilities, printing, direct mail fulfilment, contact centres, professional membership bodies, education and training.

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