The use of Key Performance Indicators is standard procedure in most companies today. Let’s look at why they are so universally used and then see some of the unintended results.
KPIs allow management to conduct employee reviews with an air of objectivity as goals are turned into numbers. It provides evaluation based on numbers and, of course, numbers don’t lie — or do they? This can certainly help avoid those messy subjective discussions that concern opinions and values – even though such in depth evaluation could be so helpful to the employee.
Another use of KPIs is to allow senior management to micromanage the workplace. KPIs can heavily weight which projects and actions will have priority. This can become a very top-down tool. I had dinner with the CFO of one of my retail clients and explained to him that I thought the company’s KPIs were often in conflict and keeping the company from maximizing its potential. The CFO said that could not be since his office created the KPIs. This was exactly my point. He was the problem!
So, what is the trouble? KPI objectives for the various corporate departments are often in
conflict with each other. In fact, this conflict is built into the system. For example, KPIs for the logistics group may require driving down the cost of transportation for each shipping container. This could lead to routing the containers on ships with multiple harbor stops, creating an unnecessarily long lead-time before the products are received. The result at store level is to beef up inventory levels to accommodate the longer shipping window. This hoarding runs counter to the store’s KPI of increasing inventory turns. This creates a hostile situation between the logistic department and the stores, not to mention creating a feast/famine inventory position that impacts the ability to serve the customer in a timely manner.
The various corporate departments tend to focus only on their own KPIs, which often will conflict with those of other departments. This encourages each group to create its own silo or ivory tower, which must then be defended against the rest of the organization. Communication turns inward instead of reaching out to the rest of the company for cooperation and coordination. Sadly, customers are neglected while the war wages, simply because the KPIs were never focused on serving them in the first place. The senior management of many companies will often acknowledge and despair of the warring silos within their company, yet they continue to demand conflicting performance metrics that exacerbate the problem.
An expenditure of $10,000 may be able to show a savings of a $100,000 to the corporation. However, since the $10,000 cost occurs to Department A, but directly benefits Department B, it is determined by Department A to not be feasible.
This is not to say that the KPI tool must be dysfunctional to the company. It is a problem when a dysfunctional departmental KPI becomes the primary goal rather than the proper goal of customer satisfaction. The company culture can evolve an attitude that it is OK to game the system. It is therefore critical that KPIs are developed by starting with delighting the customer and having each department build their commitment and Key Performance Indictors to achieve this most overriding objective. It is important that the culture of a company puts customer satisfaction as the driving ‘better good’ for every department in the company’s hierarchy.
Productive annual reviews should be based on the right criteria which must include customer centric objective and subjective elements.