Are Your KPIs Dri­ving The Cor­rect Behaviours?

It’s the last month of the year, a time when Key Per­for­mance Indi­ca­tors (KPIs) and tar­gets are being dis­cussed in meet­ing rooms around the world. At the risk of sound­ing dra­mat­ic, this can be a tricky time – the KPIs being set for 2022 can make or break a company.

I am a true believ­er in KPIs. After all, I work on them with my clients every day. Every organ­i­sa­tion should mea­sure their per­for­mance and keep a close eye on whether they are mak­ing progress towards their goals and strate­gic pri­or­i­ties. How­ev­er, I’ve seen how bad­ly designed KPI’s or the wrong tar­gets can affect out­comes.

We once worked with a telecom­mu­ni­ca­tions com­pa­ny that received a bad grade for its cus­tomer ser­vice. The puz­zling thing was that on paper, the depart­ment was meet­ing its tar­get to resolve all trou­ble tick­ets with­in 24 hours.

We lat­er dis­cov­ered the rea­sons why. And it wasn’t due to stel­lar ser­vice. Employ­ees were sim­ply clos­ing trou­ble tick­ets that weren’t resolved with­in 24 hours so that they could “meet” their KPI!

When we looked through their call records, we found one case of a poor man who’d called 15 times for help, but his tick­et was shelved each time. Imag­ine what this was doing to their brand reputation.

Anoth­er exam­ple was at an insur­ance com­pa­ny where agents were giv­en a KPI to sell 30 poli­cies a month. Many agents, once they had sold 30 poli­cies, hid extra poli­cies sold and only sub­mit­ted them in the begin­ning of the next month because there was no incen­tive to sell more than 30 poli­cies a month.

Although the employ­ees at the insur­ance and telecom­mu­ni­ca­tions com­pa­nies tech­ni­cal­ly met their KPIs, in one instance they were dam­ag­ing the busi­ness and in anoth­er, they were not moti­vat­ed to per­form beyond the target.

This is one of the prob­lems with incen­tives and KPIs. If there is a cap, peo­ple often just give up when they reach it.

But the most dan­ger­ous result of badly-designed KPIs is when it gives a com­pa­ny a false sense of security.

Dis­guis­ing the truth

In the course of my work, I have had clients who proud­ly boast­ed that they were per­form­ing at more than 100%.

This usu­al­ly makes me sus­pi­cious because even the most advanced oil refiner­ies on the plan­et strug­gle to reach 97%. And most process indus­tries hov­er around 80% to 90%.

When a process plant is run­ning at greater than 100%, what we find is that the equip­ment has been mod­i­fied or upgrad­ed for more out­put, with­out chang­ing the mea­sure­ment stan­dards. And as a result, every­one is bam­boo­zled, includ­ing the CEO, believ­ing that the com­pa­ny is killing it with fan­tas­tic performance.

In one process plant that claimed that they had 110% effi­cien­cy, a tech­ni­cal impos­si­bil­i­ty, we found out that they just had their equip­ment upgrad­ed. How­ev­er, they hadn’t upgrad­ed their expec­ta­tions. When we fixed the stan­dards, the equip­ment was actu­al­ly run­ning at around 75% effi­cien­cy. Com­par­ing the per­for­mance of the plant after the upgrade with pre-upgrade num­bers did not give them the true pic­ture of how bad­ly the plant was actu­al­ly performing.

Unfor­tu­nate­ly, we also encounter com­pa­nies fudg­ing the num­bers – it can hap­pen in all sorts of indus­tries, and the con­se­quences can be disastrous.

Let’s take the con­struc­tion industry.

In con­struc­tion projects, cash flow is based on the com­ple­tion of build­ing quan­ti­ties. It can be mea­sured with mea­sure­ments such as tonnes of steel and miles of pipework.

Some com­mer­cial teams over­claim on the quan­ti­ties ear­ly in the project to ramp up the cash flow to make it look like the project is prof­itable and doing well.

But then what hap­pens when you get to the lat­er stage of the project? There are no quan­ti­ties left to claim, so, the project starts run­ning out of mon­ey – and this is when we start to hear of bud­get over­runs and unex­pect­ed delays et cetera.

This is short-termism and hid­ing from real­i­ty – all in the inter­est of cash flow. If they had con­trolled per­for­mance and tack­led the fun­da­men­tal prob­lem of cash flow from the begin­ning, the chances of hit­ting their tar­gets would be improved.

The human factor

Every organ­i­sa­tion wants to set KPIs that incen­tivise employ­ees to per­form better.

How­ev­er, bad­ly designed KPIs may end up rein­forc­ing the wrong behav­iours, as we have learned. This can lead com­pa­nies down the rab­bit hole of lost pro­duc­tiv­i­ty, bad morale and ruined reputations.

While it’s impor­tant to con­sid­er whether KPIs align with your strate­gic goals and whether they are achiev­able tar­gets, it’s impor­tant to eval­u­ate how it will impact the behav­iour of your employees.

How do you want them to per­form? Are your KPIs encour­ag­ing that good behav­iour… or are they mak­ing them act in ways that will result in bad outcomes?

It can be chal­leng­ing to pre­dict human behav­iour, which is why I believe KPIs should always be mon­i­tored and changed when the sit­u­a­tion demands it.

Krish­na Pau­pamah has worked with com­pa­nies glob­al­ly to trans­form their busi­ness for over 35 years. He is the Founder and Group CEO of Renoir Con­sult­ing. He can be reached at [email protected]renoirgroup.com.

This col­umn was first pub­lished in Busi­ness Today.