A key focus for many businesses is progressing towards goals. In many companies, however, a significant barrier to reaching objectives is that standard performance metrics often do not clearly point the way forward. Confusion about what performance metrics mean, differences in organizational roles and gaps between metrics and day-to-day tasks all combine to make metrics often more reminders of what was not accomplished rather than day-to-day guides of what to do to get better. This article discusses some challenges with implementing performance metrics and proposes a way that they can be used more effectively.
South Means North, North Means South
I recently read a very helpful article written by Chipp Norcross of Singularis University that provided an explanation of the difference between KPIs (Key Performance Indicators) and OKRs (Objectives and Key Results). I have to admit that I came away from the article with the distinct impression that these terms could easily lead to misunderstanding in practice, as the I in KPIs seems to mean results and the R in OKR seems to mean indicators. This definitional roundabout, where once you get in you can never get out, amounts to receiving directions where north is defined as south and south is defined as north. Chipp’s clarifying article that demystifies these terms is here https://www.linkedin.com/pulse/okrs-kpis-chocolate-peanut-butter-growth-chipp-norcross/
It appears that I am not the only person who has long labored under a misunderstanding about what these acronyms mean and, more importantly, how to use them in practice. Many companies have found that attempts to implement even the simplest performance metrics have not only created a painful record of repeatedly missed objectives but actually led masses of well-intentioned people in the wrong direction. Clearly performance metrics are in need of a performance review.
Performance Metric Challenges
The limitations of acronyms and definitional issues aside, performance metrics are very challenging to implement for several reasons. To begin with, metrics are typically focused on the how much but leave out the why and more importantly the how.
Reducing the amount of time it takes to prepare food in a restaurant and deliver it to customers is an admirable efficiency goal, but if it causes food quality to suffer it will probably not help improve sales. Quantitative targets that are part of performance metrics can easily set in motion behavior that makes those targets less rather than more likely to be hit.
Metrics are typically focused on the how much but leave out the why and more importantly the how.
Another challenge with performance metrics is that they can easily become distorted when they are indiscriminately applied across an organization with many functions that see the path to progress in different ways. The sales department of a firm may see a revenue metric in a very clear way, but a metric focused on increased sales volumes can send a very unclear signal to a risk management department that views its role as one of not to cause sales targets to be met at all costs but rather to ensure that revenue generating activity complies with the company’s risk management and compliance policies. A metric that means progress for one department may be functionally meaningless or worse yet represent regression that is to be resisted at all costs for another.
Second, organizational success is a product of many types of progress and this progress often comes, not from all people moving simultaneously in the same direction, but rather moving in a number of directions that synergistically combine to leave the firm in an increasingly better position.
Single-minded organizational focus on a metric, which sounds like a very powerful rallying force in theory, can encourage firms to jettison many types of vital processes and activities, such as internal debate or taking risks that have a high probability of failure but very positive consequences if they succeed, that may help a firm become much stronger in the long run. For many companies, the path forward is more often than not a self-correcting and slowly advancing circle rather than a simple straight line. Many firms advance not by sprinting through open spaces but rather by managing to fall forward in the face of different types of internal and external resistance.
Many firms advance not by sprinting through open spaces but rather by managing to fall forward in the face of different types of resistance.
Third, even for metrics that are very clear and applicable, there is often a large gap between what one does on day-to-day basis and the activity that a metric is designed to measure. In other words, at the individual level, metrics are often not defined narrowly enough to be a useful guide of how to be as productive as possible. Even the simplest tasks are often comprised of many sub-tasks and if these sub-tasks are not executed effectively it is very hard for the larger target task to be carried out well.
Fourth, an indiscriminate focus on metrics can lead to internal and external costs that undermine overall organizational progress. Internally, it may lead employees to adopt many types of behaviors that are not good for the employee, the company or the company’s clients. Further, breaking the time it takes to deliver food from a restaurant to customers into deviations from a target time may sound like a very logical efficiency metric but if it causes people who are delivering food to risk their lives or those of others the gain created by the metric may be far outweighed by its cost.
Towards Better Performance Metrics
Creating better systems of performance metrics requires recognizing that a system is only workable if: it can be implemented across a complex organization; it serves as a useful guide for measuring progress; it contributes to reaching goals; and it does not result in behavior that does more harm to a company than good.
The Yin and Yang of Metrics and Corporate Values. The very first step to improve metrics is to recognize that for the yin of any performance metric to work it must be balanced a strong yang: corporate values. There is an expression in Chinese that often a key result of measures is simply to produce countermeasures so unless an organization and its employees are guided by strong values metrics often create space for activity that may not lead to better business performance.
Interlocking Metrics Across Organizational Functions. A second step is that metrics have to be well structured so that they can take into consideration differences in organizational functions and operating realities. Rather than simply creating metrics that reflect the activities of one department, they should be designed to creating working synergies across all departments that can make a firm better.
Metrics are the language of firm progress; to work every department in the firm must speak the same dialect.
In many companies, performance metrics are heavily weighted toward firm “offense”, such as as sales and revenues rather than other functions that are vital for firm success, such as adminstration, human resources, technological support, legal and risk management. Metrics should be interlocking and intelligible across different departments so that departments are working with rather than against each other.
Actionable Performance Metrics. Third, any system of performance metrics must be designed so that it not only paints a target but provides a concrete path to reach that target. It is one thing for a football team to have a performance metric based on the number of games won, but if the team does not understand why they are losing simply articulating a goal is probably not going to leave a team in a better position to reach the goal than it was before the goal was announced.
On the other hand, if a firm is consistently losing because of an inability to stop an opponent’s passing game, metrics that can have a real impact on a how a team plays could include how much time the opposing quarterback is given to pass, number of passing yards given up and number of interceptions. Each of these tasks, if necessary, could be further broken down until the distance between the metric and action was effectively eliminated and the metric becomes the action.
Performance Metrics System Audit. Finally, any system of performance metrics should not simply be turned on, forgotten about and allowed to run on its own indefinitely regardless of where it leads but rather subject to regular audits to see if defined targets are being met and if not why not. A second important issue to consider as part of a performance metrics audit is what impact the efforts of firm employees to meet performance targets is having on such issues as work quality, employee morale and relatonships with clients.
Based on the results of this audit, a decision can be made as to whether a performance metrics system should remain in place as it is or adjusted given the firm’s situation or overall market conditions. This type of iterative, simultneously inward and outward looking approach turns performance metrics from a rigid all-weather system into a flexible framework that adjusts as the firm grows and faces new opportunities and risks.
Conclusion
While it is important for a company to define a clear path forward and have objective ways to measure progress, at times KPIs, OKRs and other performance metrics can lead a company in the wrong direction. By designing a performance metrics framework that is supported by strong values, fits into different organizational functions, serves as a day-to-day actionable guide for company team members and is subjected to regular audits it is possible to have performance metrics that not only increase the likelihood that a firm will hit its performance targets but also make the company increasingly stronger.