The Trouble with KPIs

March 3, 2015 — Leave a comment

By Bill Fotsch

A hammer is a useful tool. But if you hit your hand instead of the nail, it doesn’t mean you should throw away the hammer. You just need to use it the right way. The same is true of Key Performance Indicators, or KPIs. 

Business owners and managers naturally think about the metrics that indicate how various parts of the organization are performing. Those metrics are their KPIs. If you engage the rest of your team using open-book principles, the KPIs become visible throughout the company. Just as a baseball team tracks runs batted in, earned run averages, and so on, each team can track its most important KPIs. The list might include on time delivery percentage, orders filled per day, backlog, or cost per unit produced.

Each of these objectives can be important, but none of them is the real goal. The real goal is to improve the financial performance of your business. For example, you might determine that your goal is to maximize gross margin dollars in a given year. That’s how you’ll define winning that year.

It’s important to make the distinction between KPIs and the overall goal, because they sometimes conflict. Say a baseball team needs a sacrifice bunt, but the batter who’s coming up is wholly focused on his hits. He doesn’t want to bunt, since it won’t help his hits total. Yet the team’s goal isn’t to have more hits; it’s to win the game.

Nothing like that ever happens in business, right?  Hah.

When I was working with BHP Billiton’s Iron Ore Division, iron ore prices and demand happened to be very strong. Given the company’s  large fixed costs, winning that year was a function of the volume of safe tons it could ship each month. So my clients and I began looking at all the ways we could boost shipments. 

We noticed that one production area had been down several days, hurting output. We asked why. The head of production said, “Those idiots in stores didn’t have the spares we needed to repair our crusher.”

So we went to see the stores manager. He explained that his KPI, which drove his bonus, was tied to lowering the dollars of inventory in stores. So he naturally kept his inventory as low as possible, which meant that he didn’t have the spare parts required by production.

Having learned about the KPIs and incentives in this situation, I looked into how many different KPIs and associated incentives were in place in this company of 9,000 employees. The incredible answer was 203. A well-intentioned tool, like a badly aimed hammer, was killing them. They had apparently forgotten that KPI stood for key performance indicator, not key performance. 

Frankly, I am a KPI fan. But if your team is not clear on what metric defines winning for your company and how your KPIs either do or do not contribute to winning, beware. Like the mining company, you may get exactly the kind of behavior you don’t want.

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