Mar 2009

KPI conundrum

What organisational metrics measure must not be confused with what the organisation needs to do about the metrics. Metrics are data points; they are not the goal. Confuse the two, and an organisation can loose track of the real goal.

Most, if not all, large organisations track various organisational metrics internally. And they designate some of the metrics to be key metrics, also known as key performance indicators (KPIs).

KPI is a double-edged sword

One story goes that, a few years ago, a chief information officer (CIO) of a large global company set a long term goal. The goal was that the ratio of information technology (IT) cost to sales, year over year, will be held relatively constant or lower. A very laudable goal, but the implications have proven to frustrate the organisation in the past few years.

One example is in the area of new IT projects, among others. Whenever “business” wants to implement a new enterprise software, IT would push back and scale down the scope of features. And then when implementation options or vendors are being considered, IT would push hard to select certain “standard” technologies or “strategic” IT vendors instead of the solution that appeals most to the “business” users. Arguably, there are valid points to this particular approach, from the perspective of cost management, but that is not the point.

The point is that when the above is motivated by the goal of controlling “IT costs” to the expense of “business cost”, then it harms the entire organisation. There are cases where this caused business process efficiency to suffer in this particular organisation which turns out to be more expensive than the supposed cost saving that was sold by IT. In other words, “IT costs” looks good, but the total cost for the organisation does not.

Senior management's first instinct (and this has become common practice) is to compare their KPIs against industry average or direct competitors' KPIs. Then a benchmark goal is set for the organisation to pursue as performance goal without solid understanding of what causes their metrics to be different from the benchmark. And this is when tensions can arise. A proactive effort to change the KPIs can potentially trigger a win-loose relationship within the organisation. Managers look out for their own interests, sometimes openly and sometimes subversively.

Does that mean that it is wrong to benchmark KPIs? No. Benchmarking is a legitimate management practice and it is a good starting place for investigating improvement opportunities. The conundrum lies in how they are implemented.

KPI is an indicator – not a goal

Many organisations are fixated on the KPI as a performance goal / objective. The root of such practice, probably, comes from one interpretation of the axiom: “You cannot control what you cannot measure.” (1982, Tom DeMarco) Thus many in management think they have to measure and set goals against business performance that they measure.

And there are caveats to this thinking. First, when KPI is “fixed” by means of performance goal, it creates a superficial trend. The real trends are obscured or disguised or “faked”, because when bonus depends on it, organisations may justify the means to make the number. And this misses the more interesting question: what do the (real) trends tell?

Second, rarely is a KPI an island unto itself. Often, it consists of a hierarchy of other metrics that collectively aggregate into one KPI. And each metric is usually interdependent with other business metric(s) which may have either reinforcing effect or counter effect.

Third, there is a danger that people starts to believe that the converse of what DeMarco posited is always true, but it is not necessarily so. Just because you can measure something, it does not always mean you can control it. Measurability does not guarantee controllability or manageability.

Lessons learned from KPI implementations

Although metrics appear on the surface to be an easy number crunching exercise, effective use of KPIs require thorough analysis and planning.

KPI is a highly useful management tool, but the implication of poor KPI implementation can be detrimental to the organisation. It pays to give it the attention that is due for it.

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