Thursday, February 27, 2014

The KPI Promises & Pitfalls

The KPIs are indicators of your progress towards achieving business objectives.

You can only manage what you measure, defining the right set of Key Performance Indicators is important for managing project or business effectively, and measuring KPIs to keep track of progress makes a certain level of promise for success.  However, there are also big pitfalls when selecting or measuring the wrong KPIs. What is a good process to determine the right KPIs, and what is the process to change it when they are no longer relevant?

It is critical to identify the objectives before one embarks on quantifying the performance.  Otherwise, a misguided KPI becomes a distraction. It is crucial that the KPIs selected have to be adapted to the specific objectives that you want to achieve. Without properly aligning the objectives with the indicators, monitoring KPIs will not add much value. If you start from understanding your objectives and then identify the KPIs that will provide an indicator as to whether you are progressing towards achieving that objective, you are more likely to succeed.

Successful KPIs must be connected to performance evaluation at the operations level. You should start that after verifying that the KPI is effective and measures what you want to measure to monitor the progress of the critical success factors. You should use change management to ensure successful implementation and closely monitor the impact and modify as required until businesses achieve an effective linkage, satisfied staff, & an improved business process. A frequently overlooked benefit of KPI is rather psychological - what's measured usually gets done/addressed.

Evaluate the potential risks from a KPI. Wrong selection of KPI could get the devastating effect on business. The most dangerous part is when KPI/performance system is connected with motivation system on an operational level. At first look, everything is OK, the chosen KPI looks like it was well connected with business strategy, but in most cases, it leads to negative behavior from employees, it is crucial that organizations select KPIs in a balanced manner in order to protect against behavior such as gaming, sandbagging or tunnel behavior. The one way to find out that the KPI is bad is by looking at the behavior and culture the KPI is driving. If behavior and culture are off, and politics is becoming more and more dominant, then you know that KPI is just not the right one. Remember also to evaluate the potential risks from a KPI, PEOPLE DO WHAT YOU INSPECT, NOT WHAT YOU EXPECT!

KPIs are not static, but adjustable to adapt to strategic dynamic. Any KPI must be relevant and actionable for management today. Even if you choose the right KPIs, you must change them from time to time accordingly. Otherwise, your business is going to be driven by that specific set of KPIs: you are going to focus on them only, but ignoring the bigger picture. Any KPI must support strategy, which means there must be a strategy, the strategy is more dynamic in today’s digital torrent, therefore, KPIs may also need to be adjusted accordingly. Having poorly aligned KPIs is, at best, wasteful of time and energy and, at worst, destructive to the business.

A feedback mechanism needs to be taken in place. You should start by devising a change management plan to address impacted parties and closely monitor the impact and modify the measurement process until you are sure that you are effectively measuring what you want to measure without negative side effects. Even if one is able to strike the right KPI with its correct measurement methodology at a point of time, a feedback mechanism needs to be in place to make sure that both the KPI and the methodology remain current with current business. Also, one needs to get into prudent decision making as to whether KPIs need to be modified or business process, as altering the wrong one might get the results of that particular KPI on track, but other KPI and business would suffer.

Further, there is no concept of one size fits all in business; the procedure to set KPIs must be defined for the achievement of the objective & its measurement. At the operational level, the requirement of KPI, when not well understood, results in friction. This may mean that you need to collect data you have not collected before or look at your existing data in a new way. A KPI by definition should tell what action needs to take place and by which team. Wrong KPIs or incorrect methodology to collect data for relevant KPI's spells doom for business if not corrected quickly.

Selection of KPI is the tricky part & selection must be aligned with the objective, and as a business strategy is more dynamic than ever nowadays, therefore, there’s no one size fits all, you may have to adjust KPIs from time to time accordingly. The Objective is what you are looking to achieve, the KPIs are indicators of your progress towards achieving it. 



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