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5 Reasons KPIs Don’t Work
By Kevin Appleby
1 We Measure the outcome not the root causes
We love measuring results. Most of our metrics tend to be result based. What were our sales last month? How much profit did we make??
All our accounting data looks backwards, but if you really want to control costs and hit your objectives you need to look forward. That’s one of the key things we teach on the 4 day 0070 Budgeting and Cost Control course.
You can’t change what happened in the past. There’s an old saying about shutting the stable door after the horse has bolted. Knowing the horse is missing is all very well, we might even know it bolted at 4.23pm last Tuesday but knowing the lock on the stable door was faulty a week ago might have been a lot more useful.
The business situation is no different. Knowing sales were down last week is interesting factual information, but if we knew 4 weeks ago that the marketing campaign was bombing... The real question should be what are we going to sell next month, or next quarter? How can I ensure I hit the forecast? Will this drive the profit I need to see?
Historic information is often very interesting; because we know what we want to achieve we measure whether it has been achieved. We set KPIs around the outcome we want so that we will know when it has been achieved. Typically, KPIs that are shared with customers will focus on the outcome and these might reflect contractual requirements. This is fine as long as everything required is being achieved. This sort of KPI won’t tell you why the outcome is not being achieved and wont help you change the behaviours in the organisation to get back on track.
In short, the dashboard needs to focus on the things we need to get right to deliver the outcome and not the outcome itself. David Parmenter, the self-proclaimed “King of KPIs” distinguishes between a KPI and a KRI or Key Result Indicator. Key Result Indicators measure the outcome, KPIs measure the things that allow you to take action on a daily basis. The most important KPIs in the organisation need to be on the CEO’s desk every day so he can pick up the phone and take action as soon as anything moves out of line.
2 We monitor too many things
There’s another old saying that “you can’t see the wood for the trees”. The focus of the KPI report must be on taking action, instead we often create a cottage industry in collecting data and producing reports instead of acting on the information.
Dashboard reports should be easy to understand and have just enough information to point managers toward the things that need attention. If you are using a balanced scorecard then 3 or 4 measures per scorecard quadrant should be quite enough, provided you have been careful in selecting the right 3 or 4.
Visual presentation is also key. The eye needs to be drawn to the issues. Managers don’t have time to interpret complex graphs and tables of numbers. Keep it simple, highlight the issues with colours and symbols, and report by exception. If a measure is green do you really need to see the detail?
3 Don’t focus on the things that matter
If we know that we need to restrict the number of KPIs, then we better make sure we choose the right ones. We already know we need to focus on the enablers of success, and not the results. The key question to ask is “if this enabler is not performing well, then what impact will it have on my outcome?” If the answer is anything other than high, then I’d question whether the indicator is one of our short listed KPIs.
We also need to look at the likely hood of the indicator moving out of line. Has this area given problems in the past? Is it likely to do so in the future? Do we need to change current performance? If the answer is no to all three, it probably isn’t on the short list.
4 Measure things outside our span of control
Even when we have determined that something is important will cause us problems if it moves out of line we still need to challenge whether the measure has any utility to us. The dashboard is all about taking action, so if I’m unable to do anything to remedy a problem, then why would I want a KPI to tell me about it? We should only measure things we can exercise a high level of influence on.
I remember being involved in a business where profitability was very dependent on exchange rates. At the time raw materials were commodities priced in German Marks, a small movement in exchange rates meant a big difference to bottom line. There were strategies in place to mitigate the exchange risk. Naturally we monitored the exchange rate, but it wasn’t a KPI, because when rates moved the wrong way there was nothing, we could do to move them back again.
So, think carefully about what you can and can’t influence, and concentrate on KPIs that will allow you to make prompt and impactful interventions.
5 The management system is ineffective
We already know that a KPI is all about driving the right action at the right time. Getting a system in place so that the information hits the right people at the right time AND ensuring those people take immediate action is always a challenge. Lots of things need to come together. We need:
- The correct data in the IT systems to calculate the metric
- The data available on a timely basis
- The reports that intuitively show that there may be a problem. Clear visual management is very important here.
- The reports need to get to the right person or team
- The culture in the organisation needs to be one of taking action, and this might need a high degree of change management. We certainly don’t want a blame culture.
We also need to be careful that the measures we use generate the right responses. Often if measures are linked to a reward system then they end up being manipulated. When this happens we end up with key Political indicators and not key Performance indicators.
So, if your measurement system isn’t driving the right business results you might consider whether:
- Your indicators are driving performance or reporting results
- You can’t take effective action because you are monitoring far too many things
- The things you are measuring aren’t the things that have the biggest impact on the outcome you want
- You are measuring things you need to know but can do very little about.
- You need to drive some change in the business to get a better performance management system in place.
We discuss KPIs and measuring the right things on IASeminars Management Accounting Courses. If you want to find out more join us on one of our forthcoming events.
Related IASeminars Course:
Read more articles by Kevin Appleby:
- Improving your Budgeting and Cost Control – Essential Listening
- Improving your Budgeting and Cost Control
- Management Accounting – Skilling up for success
- Have you set your personal and professional development goals for 2018 yet?
- Accountants - Do you know what support your business team really needs?
- SWOT analysis: 4 easy steps to start a business plan
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