Measurement mess – when you are spending more time measuring than managing
If you can’t measure it, you can’t manage it. The more we manage, the better. Therefore, let’s measure as much as possible. The measures are all key indicators in their own way – leading or lagging. You have now ended up in a measurement mess. That is when you are trying to focus on a multitude of measures, and spend more time measuring than managing.
“I will pull out the data and call it a KPI”
Performance management is in many ways developing from company-wide understanding of performance to a vast amount of on-demand self-service measurements and self-selected key performance indicators (KPIs). With the ever-increasing number of self-service tools, such as Qlik, Looker, Tableau and Power BI, everyone can now act as a data scientist and use their valuable time to develop their own sets of KPIs. Divisions, business areas and functions within the same organization are setting up their own reporting and selecting their own KPIs.
Key should stand for something
There is a difference between a KPI and metrics, as all metrics are not key. Setting up a ratio using the available data, does not constitute it as being called a KPI. The word KPI has suffered inflation. Yes, improving the ratio might bring you closer to the strategic goals, but calling it a KPI means it is KEY for your company. Only the metrics which are key for your success and the specified metrics you are focusing on as a company, are the ones you should call KPIs.
Consequences of the measurement mess is that focus is set on a multitude of performance indicators and organizations are having a hard time heading towards a common goal. It is extremely difficult to go about doing business by trying to focus on improving too many KPIs at once. It is like being the captain of a sailing boat and granting everyone onboard the opportunity to measure their own success on reaching their own desired destinations. You as the captain (top management), should set the goal (destination by) and have performance indicators to know how well your boat/crew is performing.
I have seen companies monitoring over 100 KPIs throughout the organization and even seen a book containing 17000 KPIs to choose from. How many performance indicators can truly be key for your organization?
Four steps to clean up the measurement mess
Whether you are already drowning in KPIs and wish to start focusing, or simply have difficulties in aligning your organization to head in a selected direction, you might find the following steps useful.
Step #1: Understand what is preventing you from success
Even though it sounds cliché, go back to your strategic goals. Your KPIs should address the problem areas and root causes that prevent you from reaching these strategic goals. If the KPIs are not aligned with your strategic objectives, then try again. If you however are not sure of your problem areas and their possible root causes, then implementing KPI’s is like shooting in the dark without knowing what you are hunting for.
KPIs are guides that show whether you are heading in the right or wrong direction towards your goals. They are essential in order to align the efforts towards working on common goals and should change the behavior of your employees and/or the underlying business processes.
If one of your goal is e.g. to be the fastest player on the market, then you should understand why your customers consider you to be slow. Maybe the thing is that you redo everything, which increases the lead-time. Bad quality being passed forward could then be the key area on what is preventing you from being successful. Then this is the improvement area on which you should put focus. Start managing and measuring your performance on essential improvement areas, not measuring everything because you simply are able to do so.
Step#2: Focus by selecting only a handful of KPIs
As stated, KPIs should be key. Be brave and dare to focus your efforts by selecting a handful of KPIs that will steer you towards your strategic goals and increase your profitability. For focusing to happen, it is apparent that you can not choose too many. Everyone in your company should understand which metrics you are pointing your company spotlight on. Keep in mind that even though you have placed focus on a handful of key performance indicators, employees can still pull out metrics in order to understand the possible underlying reasons for the KPI performance. As barriers preventing a KPI from improving can be case specific, functional or regional – let employees figure out what the causes are in their own cases. Please also note, that even though the selected KPIs are key for the time being, they can be replaced later when outdated – they are not carved in stone.
Involve personnel early on to avoid the Not-invented-here syndrome
Change resistance is unavoidable if you have not involved personnel in the selection, modelling and setup of the KPIs. If you ”surprise” the personnel with a launch of KPIs in an incorrect and arrogant top-down manner, you will surely be faced with the Not-invented-here syndrome. Mitigate this risk by involving personnel in the creation and launch of the KPIs. Early stage involvement and launching as being developed by own employees, will be greeted with a totally different tone.
Don’t choose empty high level KPIs
ROCE, EBITDA or Inventory turnover, are lagging financial measures, not indicators of your performance. They are the positive outcome of good performance and necessary standard measurements in financial reporting. Select KPIs that tackle the problem areas/opportunities within your company. As you probably want to be an agile company, then good measures are the ones related to lead times. When adding a measure of accuracy to lead time, you already have a good pair of performance metrics. When it comes to sales, then leads converting to qualified leads and win/loss ratios can be effective. In customer service on the other hand, average resolution time or first contact resolution. In order to have products to sell, then you can go with a measure on availability/out-of-stock with age of stock to ensure good flow. These examples are already a bit more tangible than e.g. the ROCE%.
“Tell me how you measure me, and I will tell you how I will behave” – Eli Goldratt
Step#3: Set it up properly
Keeping an eye on a KPI is good, but promptly acting on it when necessary is better. Therefore, continue setting up the process on how to monitor the KPI development and addressing the way on how to act on them. I have seen too many company dashboards and demos to say I am not impressed with eye candy metrics. Nowadays, anyone can set up visually attractive metrics and dashboards. However the problem lies within setting up a properly working performance management system around the KPIs. This is where employees know what the company aims on improving, understand the current performance and do their best to improve the performance every single day.
Consider the current meeting habits in your company in order to have a good forum to linking actions to KPI performance. Note that the information should preferably be available in real-time, so that focus can be set on viewing and correcting current performance whenever needed. Also set up the metrics with a sufficient amount of dimensions and hierarchy, to allow for drill-down and drill-up functionality. It is difficult to take proper corrective actions on performance, if you do not understand why the performance indicator points in a particular direction. You should not waste time on KPI’s if they don’t trigger actions.
Don’t set up your KPI’s so that you act on noise
Depending on the rhythm of your business you will probably have KPIs that are real-time and unfortunately some with a monthly updating frequency. Note that the monthly KPIs are extremely lagging and not that actionable. One thing that you should be beware of, are the spot KPIs. They measure only a specific point in time, e.g. the end of the month situation. If you can’t use averages for a time-period, then at least include trailing averages/sums, so that you do not act on noise. The noise is the volatility from day-to-day or month-to-month – making the performance sometimes great, sometimes bad.
Don’t encourage loophole finding
Even though you have done a particularly good job in making a KPI watertight, people will certainly find an alternative way to improve a KPI. Usually improving the KPI using these alternative loopholes drive bad behavior, which will not improve the underlying root cause you are trying to fix. An example is call centers where employees are calling each other just to keep their “Number of calls” KPI up.
Blocking loopholes by incorporating the quality aspect in KPIs is usually difficult, which is why you have to explain that the measure is only telling you if you are heading in the right direction towards the company goal. On top of that you just have to trust your people to behave appropriately and manage people so that they don’t behave inappropriately.
Money is a driver that can overcome business sanity any day
This may come as a unwelcomed advice particularly to Finnish businesses, but don’t link monetary incentives to KPIs! This transforms the KPI to a goal, sets the KPI to a fixed period of e.g. a calendar year and encourages loophole finding. You can certainly make an KPI important, without mixing money in the equation. If your employees require an monetary incentive to improve a KPI, then you have a management problem or you have hired the wrong people. It is human that monetary awards encourages people to loophole finding, so try to keep money and KPIs as two separate things.
In 1902, there was a rat problem in Vietnam, so the government created a bounty program that paid a reward for each rat killed. To collect the bounty, people would need to provide the tail of a rat. Soon, however, officials began noticing rats without tails. People would capture rats, remove their tails, then release them back into the sewers to procreate and produce more rats with tails.
Step#4: Launch by explaining WHY
KPIs are not valuable if your people do not have the willingness to act on them
Now that you have 1) understood what is preventing you from being successful, 2) have put company focus on a handful of KPIs and 3) set it up properly, it is time for launching them. You should convince and align your troops to keep an eye on and most importantly improve these KPIs. People need to understand the background and purpose of things. Therefore, it is utterly important that you thoroughly explain ‘WHY’ the indicators are important and crucial for the success of your organization and provide examples on how to affect the outcome.
KPIs are not the same as goals
Clearly explain that KPIs are not the same as your company goals. KPI is the gauge showing you how well you are doing work towards the goal. That’s why it’s called a performance indicator. Improving a particular KPI should not become the sole goal of your employees, improving the KPI only indicates that the company is getting closer to its goals. If people bluntly put all their effort in improving specified KPIs without understanding your company goals, then you will probably head in the wrong direction. Improving e.g. the KPI Inventory turnover, can easily be done by having nothing on stock. That will have severe consequences on your sales and your profitability, hence not heading you towards your company goal of growing and being profitable.
People should understand the KPI, not to look at it
Looking is one thing, understanding is another. I have seen many companies looking at figures daily, weekly, monthly, quarterly, year-to-date, vs. plan or forecast, vs. last year, and still they can’t tell their ship is sinking. Always understand the long-term trend, so that you can tell whether your ship is slowly taking in water. When you understand trends, you might realize your ship has already been slowly sinking for years.
Encourage people to share the success
People love to improve and be on the winning team. Recognize improvements and support the people that genuinely help others improve. Note that the team is the company as a whole, not the parts of it. Most company cultures do not benefit from internal competition, where individuals, teams or functions compete against others internally. Encourage your employees to share ways on how they have improved their performance, in order to gain a positive spiral of continuous improvement within the whole company.
Cleaning up the mess is not easy, however something you need to do in order to improve in the right places
As you probably got from the article, it is not a simple job to clean up a measurement mess. It requires management to put their foot down, set the company goals and state that focus needs to be set on specific improvement areas. There is no out-of-the-box solution for cleaning up the mess, however utilizing external help will certainly provide you with an honest opinion about your situation and help you in changing your direction. Sometimes what is needed for change is awareness of the problem and a personal trainer/coach.
Please note, that if you find yourself in a measurement mess, the worst problem is not that you use a lot of resources in measurement throughout your organization, that you have difficulties in aligning the business, that incentive games are played or that it is time-consuming to make decisions. The true problem is in fact, that you are probably improving in the wrong places. Functions within your organization use their time and resources to tackle various issues and celebrate the fact that they have improved in areas which are not key for your company success. In the organizations of today, there is no shortage of ongoing improvement projects and focus is needed to promptly take action on pursuing market opportunities. Stop messing about.