There’s a problem with current KPI models.
Depending on how they are implemented, it is uncertain whether they truly enhance performance or just serve as ways for managers to feel more organized.
Ironically, this is partly due to KPIs being talked about so much that people just assume they can “handle it”. That is, familiarity has bred contempt.
In this article, we’ll cover the major problems companies run into when implement KPI models, and how to fix them.
Introduction to Key Performance Indicators (KPIs)
4 KPI Challenges That Companies Face
Introduction to Key Performance Indicators (KPIs)
KPI stands for “key performance indicator”. It measures performance as well as progress towards a specific goal over a period of time. In this manner, it also helps businesses meet their primary goals.
Companies use KPIs at various levels for evaluating their performance in meeting targets. “High-level” KPIs often focus on the overall business performance, while “low-level” KPIs often focus on specific departmental processes such as in marketing, HR, sales, and so on.
What are Some KPI Examples?
Some companies – especially newer ones, but some larger, more established ones as well – have trouble outlining clear KPIs. To offer some clarity, here are some common KPI examples.
Sales KPI examples
Average time for conversion
Number of new deals signed per quarter
Dollar value of new deals signed per quarter
Operational KPI examples
Time to market
Order fulfilment time
Employee churn rate
Financial KPI examples
Gross profit margin
Net profit margin
Current accounts receivables
Supply chain KPI examples
Inventory to sales ratio (ISR)
Number of on-time deliveries
Carrying cost of inventory
The Start of KPI Problems
Analysts begin, at the organizational level, with the firm’s objectives and how they will be achieved.
This is where the KPI challenges begin. Many companies’ goals are unclear. Often, there is a big difference between what the company’s objectives are stated to be, or assumed to be, and what objectives are actually driving the company’s actions.
Some are confused as to how this could happen. After all, the ambitious, educated people in charge of these companies, often educated at elite universities, spend a lot of paid time in discussing KPIs.
However, there are certain unspoken functions in organizations that can cause unease or even public outrage if aired. You wouldn’t be hard-pressed to guess the kinds of problems that arise with not speaking about goals and priorities.
For instance, in practice, many companies’ goal remains maximizing shareholder value. However, this goal is politically and socially unacceptable – it is unaligned with goals both employees and customers generally value today, such as those pertaining to environmental, social, and governance (ESG) issues. If C-suite executives were to publicly declare that goal, it probably wouldn’t do the company’s reputation any favors.
Therefore, such companies will not talk about this kind of goal in public, or even in private, as private documents and recordings can be leaked.
Rather, they will make wishy-washy statements about catering to “all” the stakeholders, and employees will be left befuddled as to what the real goals are.
4 KPI Challenges That Companies Face – And How to Fix Them
1. Internal vs External Indicators
We live in a digital era – management styles have had to change to suit it.
The previous type of management is limited in today’s environment. One of the drawbacks of this kind of management is basing KPIs on internal measures.
Internal measures can lead to unintended consequences or perverse incentives due to employees compromising quality or value to meet those measurements. More work may be done – but there is a risk that this will be unproductive work.
Because the company work structure is bureaucratic, the relationship of the work to actual customers will be difficult to assess, measure, or even talk about.
There will be categories of employees – such as those who tick off boxes and those who create unnecessary extra work for others – who will be able to develop admirable KPIs. However, these will only show that more work is being done, not that performance is improving.
It’s a vicious cycle – the lack of actual performance will create incentives for managers to demand even more KPIs, which will, of course, yield no fruitful results.
How does one fix this? In today's era, companies are more oriented towards delivering value to customers. If your teams focus on the measurable value they are providing to customers, they are far more likely to actually improve performance.
2. Measuring Everything
Yes, we know. You can’t manage what you can’t measure.
However, it is a mistake to assume you need to measure everything. Having too much information will only serve to confuse your teams, and will scarcely be better than having too little information.
Don’t damage your business by wasting money and time on things that aren’t even having a positive impact.
3. Not Updating Your KPIs
Not challenging KPIs is one of the major problems that many companies face.
Once KPIs have been created, they are often left to languish in in some spreadsheet that no one updates, never being challenged or changed even when it is necessary.
This can impact the company’s productivity, since KPIs don’t always remain relevant or linked to the current business strategy.
If you don’t update your KPIs, or at least review them periodically, they can easily become just another box to tick.
Hence, any time there is a change in business strategy or priorities, you need to review and challenge your KPIs to ensure they remain aligned with your business needs.
4. Work Structure
Generally, when companies are asked about their work structure, they reply that work is structured around helping employees achieve their full potential. This is the politically acceptable thing to say.
However, in the actual work structure of the companies, bureaucracy runs rampant, with a rigid hierarchy, in which information flows only one way – downward.
Needless to say, this will leave you with an uninspired, demotivated workforce that’s always thinking about how to jump to another company.
To fix this, ensure that there is an open company culture, where ideas flow freely and concerns can be raised without fear of punishment or automatic dismissal.
Relatively few companies have shifted the focus of their goals towards delivering value for customers, instead of maximizing shareholder value.
In this modern structure, teams work short cycles focused on clients, work structure caters to maximizing employee potential, and the hierarchy is based on competence, where information and ideas flow freely and employees aren’t afraid to voice their concerns.
Furthermore, with this structure, the company can be open about its principles and eliminate the murky smoke and mirrors of outdated management styles.
Implementing the right KPIs can be challenging. However, with the above steps, you will be better prepared to do so.
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