Optimising financial processes

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The Hidden Danger of KPIs and Performance Measures

“What gets measured gets managed – even when it’s pointless to measure and manage it, and even if it harms the purpose of the organisation to do so.”

There. I said it.

It may seem like heresy in a world of “KPI worship” but it’s sadly true.

The idea of measurement as a “good thing” is so appealing, it seems obvious that the first thing we should do in any business endeavor is to set Key Performance Indicators to focus attention and performance expectations.

It is so obvious; we rarely think about it.

Sometimes the simple, obvious answers are plain wrong.

The wise Rory Sutherland, vice-chairman of the famed marketing services agency Ogilvy and founder of its behavioral science practice, wrote about this, and you can read his article at the link below.

It is received management wisdom that a set of KPIs, targets and measures is key to success.

But the devil is in the detail and this decision then leads to the more problematic question “what are the right KPIs?”.

As you dig into the topic and try to define and prioritize a suitably concise set of KPIs and targets, you start to realize the swamp of nuance that you are sinking into.

What are the right measures? What is most important? What should the targets be?

It is easy to focus and drive performance in the creation of interim outputs that are not, in themselves, key to business process outcomes or overall business success.

Now, I am sure that you, like me, have experienced the downside of KPIs.

For example, the call center service agent who can’t wait to finish your call or pass you onto to someone else, even without resolving your issue, in pursuit of the KPI target to maximize the “calls per agent per day”.

The problem is further exacerbated when the KPI target achievement is related to individual or team performance reviews or pay.

The real challenge here is to identify “What Does Good Look Like” and, despite it’s simplistic phrasing, this is one of the hardest business questions to answer.

“To Who?”

The next person or team in the chain? The end customer? The budget owner for your team or staffing?

The Kaplan & Norton “Balanced Scorecard” tried hard to address this issue with the four perspectives of Customer, Financial, Process, Learning & Growth”.

But it remains a challenge.

As Rory explains, “the truth is that the drive for greater quantification may carry more risks than benefits. Quantification bias leads to what Nassim Taleb calls “naïve optimization”, where a small subset of variables become over-optimized to the detriment of other, equally important factors that aren’t being measured. The resulting side effects, and consequent loss of variety and resilience, often remain hidden until it’s too late.

Yet the reason this naïve optimization retains its appeal is that, in its early stages, it appears to work very well. If you are planning a three-year stint in an organisation whose long-term survival does not concern you much, naïve optimization is the way to go.”

You can read Rory’s article in Management Today here . . . It is a worthwhile read. You may need to register, but it is free of charge.

Then think about your own performance measures and those that you set.

Are we sacrificing the future for the illusion of short term progress?

Thanks for reading . . .