Spending another weekend at home (as I write this article, we are still in the middle of a pandemic crisis), I spend more time reading the news and some analyses on how the world around us is changing. What I find interesting is that I’ve never noticed so many graphs in the news to explain a situation. How many new infections, how many deaths, how many people losing their job, etc. Beside to this data-based information, you can read (or watch) some dramatic interviews from people suffering from the situation. At the end of my read, I wonder if I’m more informed that I was an hour before or just more confused.
Well, let’s look at the sport section (which has never been so empty). I’m interested in offshore sailing. I like the fact that the sailors find themselves alone in extreme conditions and have sometimes to show remarkable resilience just to finish the race. So I look in some articles related to the Vendee Globe Race, a single-handed non-stop yacht race around the world without assistance, taking place every four years. The next race is supposed to start in November this year. Here as well it appears that data is becoming more and more important. I read that the latest generation of boats is built around some cockpit in which the sailor will sit observing screens and data (wind, sea condition, speed, pressure on technical elements of the boat, etc.). He/she will have to go outside only to change sails… That will definitely change the way of sailing and the preparation required before the start. Such modern yachts will most probably win the race and beat the record of the previous editions, but will it not take away this spirit of adventure that was related to the race?!
Well, it seems that all parts of the society rely more and more on data, and the development of the Internet of Things, will only accelerate this evolution. Here is an interesting topic to touch on in our blog. This is how this article got born.
KPIs to monitor performance
Leading businesses are already working for decades with data to generate valuable information. The use of Key Performance Indicators (KPI) is a well-established practice. A KPI is a measure that shows how a company is achieving its objectives. Such indicator can be set at the level of a company, of a department (e.g. sales), of a project or anything you might find relevant. The idea behind is to use data to monitor the performance of the company, and act accordingly – if required.
I remember having attended a business event a few years ago. A senior expert of a well-known insurance company was reflecting on the last 30 years of performance management. He explained that to determine the maturity of a business regarding performance monitoring, you have to look at the number of KPIs. If you have none, that would mean a very novice level. As Peter Drucker once said:
You can’t manage what you don’t measure
If you have a big amount of KPIs (30, 40 or more) then you are probably at an intermediate level. The risk is that you measure so many elements, that you can’t identify what really counts for your business. As a result you might miss to react to one changing key trend, which is being diluted in a large amount of indicators, graphs and other analyses. Well, after all the ‘K’ of KPI stands for Key, which should highlight that this is not the amount of indicators that counts, but the quality of the very few ones you monitor. I must say that at this point of the presentation I did disagree as I was convinced that the more information provided, the more insight you got into your business.
The more, the better?
The senior expert went on explaining that companies that are mature in performance management have a very little amount of KPIs (in his case: 5). The reasoning behind is that when you have only a few indicators to rely on, you will spend more time, and have more managerial attention to make sure that you actually measure what is really relevant for the success of your company. And most importantly, when one of these indicators starts to show a worrying trend, you act accordingly to correct it (and here I do not mean change your indicator, but take concrete actions to inverse the curve you observe).
Since that day, I’ve had time to make my own experience with KPIs. Although I still think that 5 is a very small amount of KPIs, I tend to agree more and more with the – now retired – expert. Indeed I feel that we often develop KPIs based on the data we can easily access or on the fact that ‘it would be interesting to know’. On the other hand, it is way more difficult to answer precise questions with a performance indicator when we do not own the data we would need for that, or when the data are scattered across the company making a consistent measure very difficult.
The ice cream shop
Let’s take a concrete example, an ice cream shop on the quays of the lake of Zurich. In my humble opinion, we should develop KPIs top-down. Therefore the first question is: what is the objective of my ice cream shop? Do I just want to sell as many ice creams as possible? Do I want to get the best reviews on the quality of my ice creams? Do I want to start with ice cream with the idea to diversify the products and sell an experience for the customer?
What do my customers value, and how can I measure it?
Depending on the objective, I will start to look for different KPIs. Obviously, it should be relatively easy to have an indicator on the number of ice creams sold per day, or on which product is the most popular. But does these indicators help me to run my business? Wouldn’t it be more interesting to know whether my customers are regular ones which keep coming again, or whether my customers buy my ice cream, but never come again. You might use data from social media to measure positive and negative comments. Yes, it is more complicated than counting how many scoops have been sold, but it might provide more insight in the success (or failure) of my business, which would allow me to react.
Once I have a couple of indicators, I should consider whether there is a correlation among the results I observe, and if a causal relationship could be established. For instance if my KPIs measure the sales, and the weather conditions. I might observe that when the weather turns cold and rainy, I sell less ice creams (what a surprise). To address this issue I might decide to start to sell hot beverages beside ice creams to compensate the potential loss induced by bad weather. What I want to emphasize here, is that:
Unless concrete decisions are taken when a negative trend is observed, the KPIs alone will not improve my business.
Obviously most businesses are more complicated than just selling ice creams. There are more uncertainties around the objective as many factors play in. These uncertainties, which we can translate as risks, might also be relevant to measure in some way. Therefore it becomes interesting to measure the factors that could potentially negatively impact the achievement of your objective. Such indicators are sometimes called Key Risk Indicators (KRI) and aims at helping organization to better understand and monitor their risk exposure.
In the case of the ice cream shop, I could monitor some indicators related to the attractiveness of Zurich for tourists and I might find out that when the tourism industry goes bad, it will impact my business as well since less people stroll along the lake.
The dark side of KPI
Are these indicators really always that objective that we can trust them ‘with closed eyes’? The answer is: no. The first question should be: Who did develop the KPI and with which intent? For instance let’s assume my ice cream shop becomes so successful that I have opened three new franchises and manage now my own brand. One of my shop managers might have – consciously or unconsciously – cherry picked what has to be measured. The KPI might for instance focus on the sales of a new type of ice cream that performs very well compared to the classic scoops. By solely focussing on sales only I might be missing is the raising amount of complaints on the poor quality of the cones, which appear not being stored adequately. That might not be reflected in the sales (yet), but people might not come again because of this issue.
Beware of tweaked KPIs
Another side-effect of KPIs might come from the management attention they attract, of when they are linked to incentives (e.g. a bonus). Once people realize the personal consequences of a specific KPI not showing the expected results (being questioned by their manager or not receiving the incentive), the goal might become to make the KPI look good, which might be counter-productive. For instance let assume that you measure the number complaints received in local ice cream shops and link it to incentives. Local managers might be tempted to stop reporting the complaints in order to reach the target set on the KPI. The problem might be a growing dissatisfaction of our customers, without me being aware of it.
These two examples show that KPIs are not always as objective as they should be and that they can create wrong assurance for those who use them to manage. Therefore they should be handled carefully, and taken for what there are, namely just tools (and not the holly truth).
When considering KPIs keep in mind the following three points:
- Setting the right KPIs is more difficult than we might think. However, it forces us to ask ourselves the right questions – what is our objective, how are we measuring our success?
- KPIs are to be considered as a management tool only. They can provide valuable information, but they will not replace personal contact with workers and customers from which you can take the pulse of the organization, hear the concerns, feel the fears or discover potential new opportunities.
- Last but not least, we have to be careful not getting stuck in analyzing, interpreting and reviewing KPIs, and delaying important decisions until it is too late. In the worst case your business might be at stake while you are too busy managing the numbers instead of looking for solutions.
Thanks for reading this article. Why don’t you treat yourself with a delicious ice cream.
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