A Key Performance Indicator (KPI) is a widely used tool to measure how effectively a company, a group or a team is achieving key business objectives. KPIs sound good but it’s doubtful whether as currently implemented they really enhance performance. Here’s why, and what to do about it..
Organizations use KPIs at multiple levels to evaluate their success at reaching targets. High-level KPIs may focus on the overall performance of the business, while lower-level KPIs may focus on processes in departments such as sales, marketing, HR, support and others.
At the organizational level, analysts start in theory from the firm’s objectives, how they are to be achieved, and who can act on this information.
This process sounds logical until you realize that in many corporations, there is a problem at the outset: the firm’s goals are usually unclear. There is often a significant gap between what the firm’s objectives are said to be, or thought be, and what objectives are actually driving the firm’s behavior. Neophytes often ask: how could this be? After all, these are smart, highly educated people who are spending a lot of highly paid time discussing goals and strategy.
This problem was noted several decades ago by Edgar Schein in his landmark book, Organizational Culture and Leadership. “Most organizations,” wrote Schein, “have multiple functions reflecting their multiple stakeholders and some of these functions are public justifications, while others are ‘latent’ and, in a sense, not spoken of.” To make a public announcement of these latent functions is often “embarrassing.” Thus, the assumptions the members of the organization share about a firm’s mission is “not necessarily very conscious” although we “can surface if we probe the strategic decisions that the organization makes.”
What Is The Goal Of The Firm?
To illustrate the issue, let’s take the goal of the firm. For several decades, big business has explicitly, openly and aggressively pursued the goal of maximizing shareholder value. This even became official when the Business Roundtable (BRT) in 1997 declared creating value for shareholders was the firm’s “paramount duty.” Most firms’ processes and practices were designed to support this goal.
But in August 2019, after much criticism, more than 200 CEOs of major corporations signed a new BRT declaration to the effect that maximizing shareholder value was no longer the paramount goal of firms and instead supported the goal of adding value for all the firm’s stakeholders.
Since then, however, careful research by critics such Professor Lucian Bebchuk and his colleagues at Harvard Law School have been unable to find evidence that these corporations have changed their behavior. There is even some evidence that they have intensified the relative emphasis in their actions on shareholder value.
So what now is the goal of these firms? If Professor Bebchuk is right, in practice their goal remains in most cases maximizing shareholder value. But that goal is politically unacceptable. If the C-suite were to make that goal explicit in public, it would, as Schein says, be “embarrassing”. Hence these firms will find it difficult to talk about their real primary goal in public, and even in private (since embarrassing private documents are bound to leak). Instead, they will tend to make vague PR statements such as “we are for all the stakeholders,” without specifying the balance between stakeholders. In such a setting the goal of the firm will be unclear even to many insiders and it will be difficult to formulate KPIs that reflect the real goal of the firm.
What Is the Structure Of Work?
A similar issue arises with the structure of work. When firms are asked what is the structure of work in their organization, they generally reply that work is structured to help employees achieve their full potential. In their more expansive moments, they may even claim to be unleashing all the capabilities of their people.
Yet if we look at the actual structure of work in these firms, we generally find that bureaucracy is still rampant, with individuals reporting to bosses, and a steep hierarchy of authority, in which information mainly flows downward. In effect, the firm’s stated aspirations in terms of the structure of work is generally out of sync with the reality.
This is not really a surprise, since the bureaucratic structure of work flows directly from the goal of maximizing shareholder value: this is not a goal that inspires the workforce. Hence close monitoring and control by the hierarchy becomes inevitable.
KPIs At Lower Levels
The lack of clarity of the firm’s principles (goal, structure of work, and dynamic) creates even greater confusion at lower levels than at the top of the firm. Analysts, department heads and managers find themselves entangled in maze of obfuscations relating to the mix of PR-type goals that are talked about for public consumption while the actual goals implied by the firm’s actions and processes are quite different. Here too, the discrepancy would be “embarrassing” to reveal, and hence is hard to talk about.
There is thus often a gap between the goals the unit or team is meant to espouse and what is actually driving behavior in the firm. This in turn leads to the familiar Dilbert-style management in which managers try to see which way the wind is blowing before making a decision.
Managers may say for instance that there needs to be an atmosphere of trust in the organization, but that doesn’t by itself lead to actual trust. There may be KPIs that are fine intellectual constructs about trust, while actual trust levels may be completely different. There may be a certain feeling of satisfaction and even relief at having formulated a goal related to the trust, along with an inner doubt as to what they have done. There may follow an extended period of muddling through as staff try to make sense of what they are saying and what they are actually living. The KPIs tend to add to the confusion: the goal of the exercise often becomes getting through the exercise with the least personal damage possible.
20th Century vs 21st Management
These findings should not be surprising because most firms are still in the grip of 20th century management, in which firms follow the familiar set of principles—a goal of maximizing shareholder value, bureaucratic work structures and steep hierarchies of authority.
Relatively few firms have made a full transition to 21st century management, where the primary goal is delivering value to customers (not shareholders); where the structure of work is truly designed to unleash the talents of all the workers, with small teams working short cycles focused on customers; and the firm dynamic is a horizontal hierarchy of competence, where information flows in all directions and new ideas can come from anywhere.
When a firm is practicing such 21st century management, the firm can afford to be open about its principles, both inside and outside the firm, and eliminate the obfuscations of 20th century management. A first step therefore towards solving the problem of KPIs has to begin with a shift to 21st century management.
The Shift From Internal To External Indicators
The shift to 21st century management can also begin to deal with another important drawback of KPIs in 20th century management, namely, that key performance indicators tend to be based on internal measures. Internal measures lead to perverse incentives and unintended consequences as a result of employees working to the specific measurements at the expense of the actual quality or value of their work to the eventual customers.
Improvements on internal measures may indicate that the bureaucracy is going faster and more work is being done, but the risk is that it is unproductive work. Since the work structure is bureaucratic and internally oriented, any relationship of the work to external customers will be hard to assess or measure. Various categories of employee—flunkies, duct tapers, box tickers, taskmasters—will be able develop impressive KPIs, which show ironically, not that performance is improving, but rather that more and more work is being done. In such cases, KPIs measure the speed of the bureaucracy, and hence are inversely proportional to actual productivity.
Perversely the lack of contribution of the work to actual performance creates incentives for manageres to ask for even more KPIs, while staff are also induced to respond by offering a blizzard of KPIs in an effort to prove how productive they are.
By contrast, in 21st century management, the firm is oriented towards delivering value to external customers. Each team in principle has a clear line of sight to the external customer who will benefit from the work. If there is no such clear line of sight to an external customer does not exist, then the team should be asking: why are we doing this work at all?
In 21st century management, it becomes routine that KPIs are focused on external measures and thus represent a true measure of progress.
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