Key Performance Indicators
Description
Key Performance Indicators (KPIs) help define and measure the organizational goals which are fundamental to an organization's current and future success. Having solid KPIs is crucial for companies that are implementing performance management systems, such as balanced scorecards, six sigma, or activity-based management. In many organizations, KPIs are often too numerous, randomly assembled, and overly complex--essentially rendering them ineffectual, or at worse, counterproductive. Key Performance Indicators provides a model for simplifying the complex areas of KPIs while helping organizations avoid common mistakes and hazards.
Now in its fourth edition, this bestselling guide has been extensively revised and updated to incorporate practical lessons drawn from major implementations. Fresh content includes a more concise KPI methodology with clear implementation guidance, original insights on how other areas of performance management can be corrected, and new in-depth case studies. A revised starter kit is included to identify critical success factors, and the KPI resource kit contains updated worksheets, workshop programs, and questionnaires. Helping readers to better define and measure progress toward goals, this important guide:
* Dispels the myths of performance measurement and explains a simple, yet powerful KPI methodology
* Explains the 12-step model for developing and using KPIs with guidelines
* Helps readers brainstorm performance measures, sell KPI projects to the Board and senior management, and accurately report performance
* Features the "KPI Project Leaders Corner" which provides readers with essential information and useful exercises
* Includes an array of practical tools--templates, checklists, performance measures--and a companion website (www.davidparmenter.com)
Key Performance Indicators: Developing, Implementing, and Using Winning KPIs, 4th Edition is important resource for C-suite executives, senior management, project teams, external project facilitators, and team coordinators involved in all aspects of performance management systems.
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Content
Introduction
Overview
Every performance measure has a dark side, a negative consequence, an unintended action that leads to inferior performance. I suspect that well over half the measures in an organization may well be encouraging unintended negative behavior.
The Introduction explores the burning platform in performance management: how old, broken bureaucratic methods are being used that limit the longevity of organizations. It suggests a way forward, blazed by some modern organizations and documented by the paradigm shifters (Drucker, Welch, Collins, et al.).
Key learning points from the Introduction include:
- Every performance measure has a dark side and why over half of your measures may be destroying value.
- The three major benefits of ascertaining an organization's critical success factors and the associated performance measures.
- The importance of measuring at the top of the cliff.
- Examples of measures that are often confused as KPIs and dysfunctional measures that, if used, will damage an organization.
- Performance with KPIs should be seen as a requirement, a "ticket to the game" and not worthy of additional reward.
- Why a KPI project has to be run in-house.
- The steps CEOs need to take to get performance measurement to work in their organizations.
- The foolishness of setting year-end targets when you cannot see into the future.
- Guidelines as to the chapters the Board, CEO, KPI team, and team coordinators should read.
- Why owners of my previous editions should buy the fourth edition.
- The variety of electronic material that is available for free and for a fee to help the KPI team get started.
Why You Should Be Interested in This Book
Many organizations fail to achieve their potential because they lack clarity regarding the more important things to do. These organizations have not distinguished their critical success factors (CSFs) from the myriad known success factors. This lack of clarity means that often staff members will schedule their work based around their team's priorities rather than the priorities of the organization. As Exhibit I.1 shows, even though an organization has a strategy, teams often are working in directions very different from the intended course.
Exhibit I.1 Discord Between Teams' Efforts and the Organization's Strategy
Performance, in many organizations, is thus a rather random exercise, like the weekend golfer who is lucky to win the Saturday competition every 10 years. This does not need to be the case, as truly great organizations know their CSFs, communicate them to their staff and use the CSFs, as this book suggests, as the source for all their measures.
Steve Jobs believed that few in management thought deeply about why things were done. He came up with this quote, which I want to share with you. I believe it should be on every wall and in front of every work area.
Your time is limited, so don't waste it living someone else's life. Don't be trapped by dogma-which is living with the results of other people's thinking. Don't let the noise of others' opinions drown out your own inner voice.1
From my observations, the failure rate for key performance indicators (KPIs) and balanced scorecard projects is "off the scales." KPIs, in many organizations, are a broken tool. The KPIs are often a random collection, prepared with little expertise, signifying nothing at best, and wasteful, distracting, and counterproductive at worst.
This fourth edition is a major rewrite that incorporates: "lessons learned" from some major implementations using this methodology; a more concise KPI methodology with clear, fresh implementation guidance; insights into how other areas of performance management can be rectified.
Unintended Behavior: The Dark Side of Performance Measures
Source: NASA, https://www.nasa.gov/multimedia/imagegallery/image_feature_1633.html. Photo courtesy of Fernando Echeverria.
Performance measures are like the moon: they have a dark side, promoting an unintended action that leads to inferior performance. I suspect well over half the measures in an organization may well be encouraging unintended negative behavior.
Dean Spitzer's Transforming Performance Measurement: Rethinking the Way We Measure and Drive Organizational Success2 was one of the first books to focus on the unintended consequences of performance measures.
Example: City Train Service
A classic example is provided by a city train service that had an on-time measure with some draconian penalties targeted at the train drivers. The train drivers who were behind schedule learned simply to stop at the top end of each station, triggering the green light at the other end of the platform, and then to continue the journey without the delay of letting passengers on or off. After a few stations, a driver was back on time, but the customers, both on the train and on the platform, were not so happy.
Management needed to realize that late trains are not caused by train drivers, just as late planes are not caused by pilots. The only way these skilled people would cause a problem would be either arriving late for work or taking an extended lunch when they are meant to be on duty.
Lesson: Management should have been focusing on controllable events that led to late trains. The measures that would assist with timely trains would include:
- Signal failures not rectified within __ minutes of being reported. These failures should be reported promptly to the CEO, who will make the phone call to the appropriate manager (receiving these calls on a regular basis would be career-limiting).
- Planned maintenance that has not been implemented should be reported to the senior management team on a weekly basis, keeping the focus on completion.
Example: Accident and Emergency Department
The National Health Service in the UK has set a four-hour target to treat all patients who turn up for treatment at accident and emergency (A&E). The A&E are measured on the time from patient registration to being seen by a house doctor. Hospital staff soon realized that they could not stop patients registering with minor ailments, but they could delay the registration of patients in ambulances as they were receiving good care from the paramedics.
The nursing staff thus began asking the paramedics to leave their patients in the ambulance until a house doctor was ready to see them, thus improving the "average time it took to treat patients." Each day there would be a parking lot full of ambulances and some circling the hospital. This created a major problem for the ambulance service, which was unable to deliver an efficient emergency service.
Lesson: Management should have been focusing on the timeliness of treatment of critical patients, and thus they only needed to measure the time from registration to consultation of these critical patients. Nurses would have treated patients in ambulances as a priority, the very thing they were doing before the measure came into being. Far too often we do not sort out the wheat from the chaff.
Example: Fast Food Service
A fast food chain wanted to reduce the chicken waste so they held a competition. They would fly the winning manager and their family to a well-known resort. A restaurant manager who was under performing and feeling the pressure, both at home and work, saw the competition as the opportunity to rectify both issues. The manager got the shifts to assemble and explained his plan. "I want you to take the chicken out of the freezer when you receive an order and not before." "But boss, that will lead to huge queues both in the restaurant area and in the drive through," his supervisors explained. "Do not worry, we will only do this for the week of the competition."
The manager won the chicken waste award and was hailed in the head office as a hero, and an example of what was possible. Until the next week's revenue numbers came in. All the customers caught up in the long queues had taken their custom elsewhere. When head office investigated, they were flabbergasted. "How could you think of such a change to procedure?," they asked. "I delivered your zero waste you wanted," replied the unrepentant manager.
Lesson: Tying a reward to an important measure will lead to gaming. Low chicken waste should be treated "as a ticket to the game."
Some Common Measures to Avoid
- Measuring sales staff against a predetermined gross revenue target. Sales staff are legendary at meeting their targets at the expense of the company, offering discounts, extended payment terms, selling to customers who will never pay; you name it, they will do it to get the commission.
- Tying pay to low inventory levels. Stores maintaining low inventory to get a bonus and having production shut down because of stockouts.
- Measuring completion of case load. Experienced caseworkers in a government agency will work on the easiest cases and leave the difficult ones to the inexperienced staff because they are measured on cases closed. This has led to tragic circumstances.
- Capacity utilization rate. This is an anti-lean...
