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Friday, May 16, 2008

Key Performance Indicators -- unintended consequences

It took some searching (because link backs aren't obvious from the blog), but I traced Jerry's Blog to Jerry Tice (see his page) and The Appalachian Group of Companies.

Ford Harding graciously sent me a link to this posting "Is accountability a performance management issue: Unintended Consequences" in Jerry's Blog -- Striving for Organizational Excellence. The writer addresses the problem that setting measurable targets can distort business practices and result in dangerous excesses; sometimes serious ethical breaches, or possibly seeking short term gain at the expense of long-term viability.

As everyone in business knows – if you don’t measure it, you can’t manage it. But what happens if you are measuring the wrong thing? Well obviously it can drive the wrong result. Worse still is that it may drive exactly the result you hoped it would, but it drives it way too far or drives other undesirable results along with it that are not seen until something hits the fan. In nearly every one of our consulting engagements we work with our clients to set up a set of metrics that can be measured directly on the floor in very short intervals, typically 1 to 2 hours. We do this to enable front line managers to drive barriers to performance to the surface so that they can be resolved on the fly instead of building up to unrecoverable levels. Often, probably more times than not, we discover after a few days that the measure that the client told us was the one to watch turns out to be the wrong metric. Either its focus is too narrow and other important metrics suffered (the old production vs. quality dilemma for example) or the focus of the metric is way too broad and we never achieve the intended result. I see the same thing on the verge of happening on a grand scale with a trend that is developing in the talent and performance management fields.
Ford Harding, in comment, writes:
This is a serious issue for professional firms pushing for growth. As the incentives to sell go up, so must the controls to avoid both selling something the firm shouldn’t and providing advice to a client more geared at selling more work than looking after the client’s best interests. Note that in Andersen’s case the partner in charge of the Enron account successfully challenged the firm’s controls.
Firm management may exhort its partners to sell, sell, sell, but it seldom balances that message with a reminder of the need to use good judgement, behave ethically and abide by controls while doing so. They take it for granted that the partners remember and care about such things. Unfortunately, not all partners do.
Good post,
Ford Harding
Jerry's initial solution -- that is to make sure the measurement cycle is short and fast enough to quickly determine if something wrong is happening, is a good approach, of course, for production-line or fast acting situations, but our business (I think) operates on a longer cycle and in any case, our staff are highly decentralized, often working from home offices with much autonomy. So how do you determine an appropriate fast acting and quickly repaired measurement cycle?

However, I shudder to fear when we get down to setting out our KPIs that we mess this up -- and fall into the traps described here. This is a problem that needs attention; but I am (alas) still at a loss for a good solution. Hopefully, our short term internal KPI (something I don't think should rightfully be broadcast outside our organization) is valid, and we can review/implement it without damage pending our full-scale planning meeting in the fall.

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