Myth: Most Measures Lead to Better Performance

Every performance measure can have a dark side—a negative consequence or unintended action that leads to inferior performance. Well over half the measures in an organization may be encouraging unintended negative behavior. KPIs are like the moon; they have a dark side. It is imperative that before a measure is used, the measure is:

• Discussed with the relevant staff: “If we measure this, what will you do?”
• Piloted before it is rolled out.
• Abandoned if its dark side creates too much adverse performance. I expand on this dark side in the section on Unintended Consequences.

Myth: All Performance Measures Are KPIs

Throughout the world, organizations have been using the term KPIs to refer to all performance measures. No one seemed to worry that they have not agreed on a common definition of what a KPI actually is. Thus, measures that were key to the enterprise were being mixed with measures that were badly flawed.

Let's break the term down. Key means key to the organization. Performance means that the measure will assist in improving performance.

From research I have performed in diverse industries and as a byproduct of writing my book, Key Performance Indicators—Developing, Implementing and Using Winning KPIs,² I have concluded that there are four types of performance measures. These four types are discussed in a subsequent section.

Myth: By Tying KPIs to Remuneration, You Will Increase Performance

It is a myth that the primary driver for staff is money, and that an organization must provide financial incentives to achieve great performance. Recognition, respect, and self-actualization are more important drivers. In all types of organizations, there is a tendency to believe that the way to make KPIs work is to tie them to an individual's pay. But when KPIs are linked to pay, they can create key political indicators (not key performance indicators), which often leads to a manipulation of the measures to enhance the probability of a larger bonus.

KPIs should be used to align staff to the organization's critical success factors and show how teams are performing 24/7, daily or weekly. They are too important to allow them to be manipulated by individuals and teams to maximize bonuses. KPIs are so important to an organization that performance in this area is a given, or as Jack Welch says, “a ticket to the game.”

Myth: Measuring Performance Is Relatively Simple and the Appropriate Measures Are Obvious

There will not be a reader of this book who has not, at some time in the past, been asked to come up with some measures with little or no guidance. Performance measurement has been an orphan of business theory and practice. While writers such as W. Edwards Deming, Wheatley and Kellner-Rogers, Gary Hamel, Jeremy Hope, and Dean Spitzer have been pointing out the dysfunctional nature of performance measurement for some time, it has not yet permutated into business practice.

Performance measurement is worthy of more intellectual rigor, in every organization, on the journey from average to good and then to great performance.

Myth: KPIs Are Financial and Nonfinancial Indicators

I firmly believe that there is not a financial KPI on this planet. Financial measures are a quantification of an activity that has taken place, and we have simply placed a value on the activity. Thus, behind every financial measure is an activity. I call financial measures result indicators: a summary measure. It is the activity that you will want more or less of. It is the activity that drives the dollars, pounds, and yen. Thus financial measures cannot possibly be KPIs.

Financial measures will always be used to measure the performance of a group of teams working together. However, they will never pinpoint the problem, or what went well, as they are a result indicator. When you have a pound or dollar sign in a measure, you can always dig deeper for the drivers of performance, the activities you want more or less of. Sales made yesterday will be a result of sales calls made previously to existing and prospective customers, advertising campaigns, product quality and reliability, amount of contact with the key customers, and so on. I group all sales indicators expressed in monetary terms as result indicators.

Myth: There Are Only Four Balanced Scorecard Perspectives

For over 20 years, the four perspectives listed in Kaplan and Norton's original work³ (Financial, Customer, Internal Process, and Learning and Growth) have been consistently reiterated by them and their followers. I recommend that these four perspectives be increased by two more perspectives, and that the learning and growth perspective be reworded as “innovation and learning” (see Exhibit 18.3).

Myth: Indicators Are Either Lead (Performance Driver) or Lag (Outcome) Indicators

Regardless of where the lead/lag indicator labels came from, they have caused a lot of problems and are fundamentally flawed. Many management books that cover KPIs talk about lead and lag indicators; this merely clouds the KPI debate.

I believe we need to dispense with the terms lag (outcome) and lead (performance driver) indicators. At my seminars, when the audience is asked “Is the late-planes-in-the-air KPI a lead indicator or a lag indicator?” the vote count is always evenly split. The late plane in the sky is certainly both a lead and a lag indicator. It talks about the past, and it is about to create a future problem when it lands. Surely this is enough proof that lead and lag labels are not a useful way of defining KPIs and should be counted among the myths of performance measurement.

Key result indicators replace outcome measures, which typically look at past activity over months or quarters. PIs and KPIs are now characterized as past, current, or future measures (see Exhibit 18.4).

Past measures are those that look at historic events—activity that took place last week, last month, last quarter, and so on. PIs and KPIs are now characterized as past-, current-, or future-focused measures. Current measures refer to those monitored 24/7 or daily (e.g., late/incomplete deliveries to key customers made yesterday). Future measures are the record of an agreed future commitment when an action is to take place (e.g., date of next meeting with key customer, date of next product launch, date of next social interaction with key customers). In your organization, you will find that your KPIs are either current- or future-oriented measures (see Exhibit 18.4).

KPIs are current- or future-oriented measures as opposed to past measures (e.g., number of key customer visits planned in the next month or a list by key customer of the dates of the next planned visits).

Most organizational measures are very much past indicators measuring events of the last month or quarter. These indicators cannot be and never were KPIs.

In workshops, I ask participants to write a couple of their major past measures in the worksheet shown in Exhibit 18.5 and then restate the measures as current and future measures. Try this exercise among a group of employees in your organization. Ask them to please take five minutes to restate three measures used in the organization.

The lead/lag division did not focus adequately enough on current or future-oriented measures. Most organizations that want to create alignment and change behavior need to be monitoring what corrective action is to take place in the future.

Monitoring the activity taken now about the organizing of future actions to occur will help focus staff on what is expected of them. Future measures are often the fence at the top of the cliff. They are in place so we do not have to report inferior performance (the body at the bottom of the cliff). In other words, future measures help make the right future happen. Here, in Exhibit 18.6, are some common future measures that will work in most organizations.

All these future measures would be reported in a weekly update given to the CEO. Although CEOs may let a couple of weeks pass with gaps appearing on these updates, they will soon start asking questions. Management would take action, prior to the next meeting, to start filling in the gaps to ensure they avoided further uncomfortable questioning. The differences in the four

measures and the past, current, and future time periods are further explained in Exhibit 18.4. KRIs are summaries of past performance, principally monthly trend analysis over 18 months. KPIs focus on activity in the past week, yesterday, and today, and that planned for the next week and the next two weeks. PIs and RIs will be heavily weighted to the past; however, we do need at least 20 percent of measures to be current- or future-focused.

They assume that a measure is either about the past or about the future. They ignore the fact that some measures, particularly KPIs, are about both the past and the future. I recommend that we dispense with the terms lead (performance driver) and lag (outcome) indicators. We should see measures as either past, current, or future. Current measures refer to those monitored 24/7 or daily. I also include yesterday's activities, as the data may not be available any earlier (e.g., late/incomplete deliveries to key customers made yesterday).

Future measures are the record of a future commitment when an action is to take place (e.g., date of next meeting with key customer, date of next product launch, date of next social interaction with key customers). In your own organization, you will find that your KPIs are either current- or future-oriented measures.

Myth: Measures Are Cascaded Down the Organization

This was probably the most damaging process used in the balanced scorecard approach. It assumed that by analyzing a measure such as “return on capital employed” you could break it down into myriad measures relevant to each team or division. It also assumed that each and every team leader, with minimal effort, would arrive at relevant performance measures. Kaplan and Norton ignored the crucial facts that team leaders and the senior management team need to know about the organization's critical success factors and the potential for the performance measure to have a “dark side,” an unintended consequence.

I believe all measures are sourced from the organization's critical success factors and that it is better to find measures, from the ground up, at the team level within the operation, level 4 in Exhibit 18.7.

Other myths (discussed in my KPI book⁴) include:

• All measures can work successfully in any organization at any time.
• We can set relevant year-end targets.
• You can delegate a performance management project to a consulting firm.
• The balanced scorecard can report progress to both management and the board.
• Measures fit neatly into one balanced scorecard perspective.
• Strategy mapping is a vital requirement.
• Performance measures are mainly used to help manage implementation of strategic initiatives.

Unintended Consequences—The Dark Side of Performance Measures

Every performance measure has a dark side, an unintended negative consequence. The importance of understanding this dark side and the careful selection of measures should never be underestimated. Well over half the measures in an organization may be encouraging unintended behavior. The frequency with which performance measures are set to fail, is at best, naïve or, at worst, corrupt management. As Dean Spitzer says, “People will do what management inspects, not necessarily what management expects.”⁵ How performance measures can go wrong can be illustrated by two examples.

There needs to be a new approach to measurement—one that is done by trained staff, an approach that is consultative, promotes partnership between staff and management, and finally achieves alignment with the organization's critical success factors and strategic direction.

Dean Spitzer, an expert on performance measurement, has suggested the appointment of a chief measurement officer who would be part psychologist, part trainer, part change agent, and part project manager. The chief measurement officer would be responsible for setting all performance measures, assessing the potential dark side of a given measure, abandoning broken measures, and leading all balanced scorecard initiatives. I have included more information about this role in the attached PDF material to this chapter.

Key Result Indicators

The common characteristic of key result indicators (KRIs) is that they are the result of many actions. They give a clear picture of whether your organization is traveling in the right direction and at the right speed. They provide the board or governing body with a good overview of progress on the organization's strategy. These measures are easy to ascertain and are frequently reported already to the board or governing body.

The fact that key result indicators are called KPIs creates a problem that many organizations do not appreciate. They cannot understand why performance ebbs and flows and appears to be outside the control of the senior management team. Key result indicators that are reviewed typically on monthly or quarterly cycles will only tell you whether the horse has bolted and are thus of little use to management, as they are reported too late to change direction or shut the gate, so to speak. Nor do they tell you what you need to do to improve these results.

KRI measures that have often been mistaken for KPIs include:

• Customer satisfaction
• Employee satisfaction
• Return on capital employed

Separating KRIs from other measures has a profound impact on the way performance is reported. There is now a separation of performance measures into those impacting governance (up to 10 KRIs in a board dashboard, as shown in Chapter 8) and those RIs, PIs, and KPIs impacting management. Accordingly, an organization should have a governance report (ideally in dashboard format) consisting of up to 10 KRIs for the board, and a series of management progress reports at various intervals during the month, depending on the significance of the measure.

Result Indicators

The result indicators (RIs) summarize the activity of more than one team and they provide an overview of how teams are working together. The difference between a key result indicator and a result indicator is simply that the key result indicator is a more overall and more important summary of activities that have taken place.

As already mentioned, financial indicators are a result indicator as they are a result of activities often undertaken by a number of different teams. Financial indicators are useful, but they can mask the real drivers of the performance. To fully understand what to increase or decrease, we need to look at the activities that created the financial indicator.

Result indicators (RIs) could include:

• Number of employees' suggestions implemented in past 30 days
• Sales made yesterday
• Hotel bed utilization in a week

Performance Indicators

Performance indicators (PIs) are those indicators that are nonfinancial (otherwise they would be result indicators) that can be traced back to a team or teams working closely together, who share the same measures. The difference between performance indicators and KPIs is that the latter are deemed fundamental to the organization's well-being. Performance indicators, though important, are thus not crucial to the business. Performance indicators help teams align themselves with their organization's strategy. Performance indicators complement the KPIs; they are shown on the organization, division, department, and team scorecards.

Performance indicators (PIs) could include:

• Abandonment rate at call center (caller gives up waiting)
• Late deliveries
• Sales calls organized for the next week, two weeks, and so forth

Key Performance Indicators

What are KPIs? KPIs represent a set of measures focusing on those aspects of organizational performance that are the most critical for the current and future success of the organization. KPIs are rarely new to the organization. Either they have not been recognized or they were gathering dust somewhere.

The late-planes KPI worked because it was linked to most of the critical success factors for the airline. It linked to the “delivery in full and on time” critical success factor, namely the “timely arrival and departure of airplanes,” it linked to the “increase repeat business from key customers” critical success factor, and so on.

It is interesting that Ryanair, an Irish low-cost airline, has a sole focus on timeliness of planes. Ryanair knows that this is where it makes money, often getting an extra European flight each day out of a plane due to their swift turnaround and their uncompromising stand against late check-in. They simply do not allow customers to get in the way of their tight schedules.

The late-planes KPI affected many aspects of the business. Late planes:

• Increased costs, including additional airport surcharges and the cost of accommodating passengers overnight as a result of planes having a delayed departure due to late-night noise restrictions.
• Increased customer dissatisfaction, leading to passengers trying other airlines and changing over to their loyalty program preference.
• Alienated potential future customers as those relatives, friends, or work colleagues, inconvenienced by the late arrival of the passenger, avoided future flights with the airline.
• Had a negative impact on staff development, as they learned to replicate the bad habits that created late planes.
• Adversely affected supplier relationships and servicing schedules, resulting in poor service quality.
• Increased employee dissatisfaction, as they were constantly firefighting and dealing with frustrated customers.

The Seven Characteristics of Effective KPIs

From extensive analysis and discussions with over 3,000 participants in KPI workshops, covering most organization types in both public and private sectors, I have been able to define seven characteristics of effective KPIs (see Exhibit 18.10).

1. Nonfinancial. When you put a dollar sign on a measure, you have already converted it into a result indicator (e.g., daily sales are a result of activities that have taken place to create the sales). The KPI lies deeper down. It may be the number of visits to contacts with the key customers who make up most of the profitable business. As already mentioned, it is a myth of performance measurement that KPIs can be either financial or nonfinancial indicators. I am adamant that all KPIs are nonfinancial.
2. Timely. KPIs should be monitored 24/7, daily, or perhaps weekly for some. As stated above, it is a myth that monitoring monthly performance measures will improve performance. A monthly, quarterly, or annual measure cannot be a KPI, as it cannot be key to your business if you are monitoring it well after the horse has bolted.
3. CEO focus. All KPIs make a difference; they have the CEO's constant attention due to daily calls to the relevant staff. Having a career-limiting discussion with the CEO is not something staff members want to repeat, and in the airline example above, innovative and productive processes were put in place to prevent a recurrence.
4. Simple. A KPI should tell you what action needs to be taken. The British Airways late-plane KPI communicated immediately to everyone the need for a focus on recovering lost time. Cleaners, caterers, baggage handlers, flight attendants, and front desk staff would all work to save a minute here and a minute there, while maintaining or improving service standards.
5. Team based. A KPI is deep enough in the organization that it can be tied to a team. In other words, the CEO can call someone and ask, “Why?” Return on capital employed has never been a KPI, because it cannot be tied to an individual manager—it is a result of many activities under different managers. Can you imagine the reaction if a GM was told one morning by the British Airways official, “Pat, I want you to increase the return on capital employed today.”
6. Significant impact. A KPI will affect one or more critical success factors and more than one balanced-scorecard perspective. In other words, when the CEO, management, and staff focus on the KPI, the organization scores goals in all directions. In the airline example, the late-plane KPI affected all balanced-scorecard perspectives.
7. Limited dark side. Before becoming a KPI, a performance measure needs to be tested to ensure it produces the desired behavioral outcome (e.g., helping teams to align their behavior in a coherent way, to the benefit of the organization).

For the private sector, key performance indicators that fit the characteristics I have proposed could include:

• Number of CEO recognitions planned for next week or the next two weeks
• Staff in vital positions who have handed in their notice in the last hour—the CEO has the opportunity to try to persuade the staff member to stay
• Late deliveries to key customers
• Key position job offers issued to candidates that are more than three days outstanding—the CEO has the opportunity to try to persuade acceptance of offer
• List of late projects, by manager, reported weekly to the senior management team
• Number of vacant places at an important in-house course— reported daily to the CEO in the last three weeks before the course is due to run
• Number of initiatives implemented after the staff-satisfaction survey—monitored weekly for up to three months after survey
• List of level one and -two managers who do not have mentors, reported weekly to the CEO—this measure would only need to be operational for a short time on a weekly basis
• Number of innovations planned for implementation in the next 30, 60, or 90 days—reported weekly to the CEO
• Number of abandonments to be actioned in the next 30, 60, or 90 days—reported weekly to the CEO
• Major projects awaiting decisions that are now running behind schedule—reported weekly to CEO
• Complaints from our key customers that have not been resolved within two hours—report 24/7 to CEO and GMs
• Key customer enquiries that have not been responded to by the sales team for over 24 hours—report daily to the GM
• Date of next visit to major customers by customer name—report weekly to CEO and GMs

For government and nonprofit agencies, some additional key performance indicators could be:

• Emergency response time over a given duration—reported immediately to the CEO
• Number of confirmed volunteers to be street collectors for the annual street appeal—monitored daily in the four to six weeks before the appeal day
• Date of next new service initiative

My KPI book provides many examples of measures and illustrates the difference between these four measures.