Tuesday, December 3, 2013

Do KPIs Stifle Innovation

KPIs are critical to the test-and-learn process.

Key Performance Indicators (KPIs) are part of an effective bridge between the desired business objectives and execution of strategies. Good KPIs make management more as science than art, however, due to the ‘creative’ nature of innovation, do KPIs stifle innovation?

Companies need to spend a lot more time distinguishing the "performance" of execution and the "objective" of innovation, before they try to fuse them into "the performance of innovation". Innovation KPIs can become a problem if they are poorly developed. The main outcome of adopting KPI from an innovation perspective is to improve the quality of knowledge and learn faster from mistakes. KPIs in such perspectives can be seen as representation of what the innovation actually is (or does) for business: a kind of scale model or framework. The dangerous part of this discourse is the attractiveness of the "dark side" metrics and performance systems: they tell you what you want to be told. Innovation instead tells you things differently.

Performance indicators should focus on both business objectives and desired behaviors. Further, before performance indicators are designed, the necessary and complete set of desired behaviors should be clearly established. If performance measures are to have the required impact, all of these behaviors should be assessed effectively. Otherwise, the behaviors that remain invisible will be sacrificed to raise scores on others that are being closely watched. A "good" KPI is judged both by its connection (even loosely or qualitatively) to the business objectives and by the behaviors it reinforces (or in some cases, discourages). But the even better KPIs are the ones that have been developed to positively reinforce desired behaviors.

The problem does not reside in the KPIs, but in the lack of wisdom on its crafting or use. Inappropriate KPIs do kill innovation. Particularly when traditional, operational excellence based corporate KPIs are applied to innovation efforts too early. The appropriate innovation management KPIs are more activity and directionally oriented. However, as KPIs have been used for many executives as a tool to foster results through linking “indicators” to reward and recognition systems, managers became trapped into the paradigm that a simple “indicator” should be the measurement of success for the lack of a better tool in terms of management. 

KPIs are the best tools available for innovation managers that wish to promote continuous innovation within any organization. If innovation managers are not prepared yet to understand the difference between fostering creativity and rewarding end-results, that is another issue to be dealt with. The fact is traditional management focuses on the performances achieved upon the tangible assets; it ignores in its reporting and rewarding system for the intangible assets & resources (that include talents, alertness, vision, innovation capabilities, etc.), it means that they miss out the main drivers of out-performances. Reward systems that target on results are excellent for “on going” operations where execution is the main goal. When managing innovation, reward and recognition systems that aim at promoting engagement and creativity are more important. Therefore, KPIs must be applied here too, not solely on execution. For instance, you have to change the rigid way that rewarding and recognizing through KPIs in terms of management, and pursue a more advanced performance system in “the new innovation era”.

KPIs are critical to the test-and-learn process. The starting point is to define what you want to measure to improve the process.They focus thinking, effort and resource allocation. What's important is for the business to acknowledge that new KPIs, germane to the initiative, may need to be established and that these may fall outside current cultural norms and scorecard comfort zones. Likewise, for the process to be meaningful, it's vital that one is actually measuring and reporting KPIs, as opposed to just metrics. Pay more attention to dark side of KPIs, which discourages you to make mistakes. To quote Tagore " Where the mind is without fear and head is held high for the river of reasoning to flow..........."

Therefore, if a KPI may kill innovation, it simply means that this is not a good KPI for innovation effort, it takes wisdom and practices to craft the right set of KPIs in order to stimulate advancement and manage innovation project more systematically.


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