(10) KPIs – What are the Potential Pitfalls?

As mentioned in an earlier article, “What gets measured gets done”. When designing a set of KPIs, you need to carefully consider whether they will be goal-congruent in two additional respects:

1. Will the KPIs encourage any unwelcome behaviour or decisions?

2. How could each KPI be manipulated to give a better result than expected?

Only once these issues have been considered should the KPIs be adopted, calculated and reported. Experienced thought and judgement is required. Two specific issues to highlight are:

KPIs in the form of a fraction or percentage

Particular care needs to be given to KPIs that are in the form of a fraction or percentage, N/D, where the numerator N is divided by the denominator D. Examples include revenue per employee, and ROCE (% return on capital employed, being profit divided by capital).

Whilst in these cases the principle performance measures are revenue and profit, the ratios can be improved more easily by reducing the denominator D. As an example:

Let’s imagine revenue of a business unit is £10m, with some 50 people. Revenue per employee is some £200,000. If staff can be reduced to 40, this produces an immediate improvement to £250,000 per employee, but with no improvement in revenue.

How can headcount be reduced? Two possible ways are out-sourcing and automation. If these actions are good for profits and the business generally, then that is fine. But costs could increase or control be reduced. If chasing a revenue per employee target is likely to drive decisions that would not have been made for usual business reasons, that metric may not be appropriate as a KPI. Such disadvantages need to be considered against any advantages of using that KPI, in the light of any other KPIs that would tend to drive good decisions.

How KPIs are reported

The way a KPI is reported can also have an affect on behaviour. For example a league table is good for the competitiveness of those near the top. But it can be very demoralising for those near the bottom, especially if there are particular reasons for the situation. If and how any league tables are published needs careful thought.

Similar care should be given to how other KPIs are reported.

In Conclusion

So before collecting and reporting a set of KPIs, it is vital to consider whether they will actually be goal congruent overall. How will they affect the decisions, morale and behaviour of the people in the business? And how could each KPI be manipulated? On balance will those KPIs drive improved business performance as intended?