How Being Driven by Key Performance Indicators (KPIs) Destroys Value Creation

Setting and pursuing KPIs is good. However, delivering on KPIs is not a guarantee for, and shouldn’t be done at the expense of, creating value.

Key performance indicators (KPIs) are measurable values that demonstrate how effectively a company is achieving its key business objectives. They are relied upon in all types of organizations to define and evaluate success at reaching targets. Meeting KPI targets is good for business, thus, everyone in the organization focuses on meeting or exceeding them. This is good practice, except when KPIs are delivered at the expense of creating value for the organization. And most times, this is the case.

A few weeks ago, there was a virtual training organized for officers in one of the clubs I volunteer for. The training was facilitated at the regional level and required all clubs to ensure that all their officers were present. The KPI was clear, 100% club officers' attendance. However, on the day of the training, I had some personal issues to attend to. So, I informed the club Vice President that I will not be able to attend with full attention. Her response could have been to focus on what I had to do and plan to attend the second session of the training, or that she would request that the session is recorded and then send to me. However, she said I should try log on, make sure I had my name on the attendance, and could then drop off. That exactly is what is wrong with being driven by KPIs, it hinders value creation, most of the time.

Going by her steer, my club would record 100% attendance and the regional officers would be quite pleased with the attendance. They would then expect value from implementing the learnings from the training in managing our club - the learnings I would not have gotten because I would have just logged on, marked attendance, and then logged off. Thus, the club would continue to wonder why despite the series of training provided for the officers, there is no corresponding improvement seen in the administration of the club. This is the situation of most organizations with a culture of being driven by KPIs. Targets are met and celebrated; however, it doesn't translate to any value for the organization and its stakeholders. A good example is a situation in General Electric described by their former CEO, Jack Welch, in his autobiography.

A major KPI used in one of their businesses is the average time it takes to deliver a product to the customer. Thus, their Six Sigma improvement efforts were focused on reducing this time to meet their KPI targets. They achieved it, and celebrated it, thinking that reducing the delivery timeline from an average of 16 to 8 days translates to 50% improvement. However, this does not translate to anything with the customers except variance and unpredictability - the customers would get their orders either earlier or later than they wanted them.

The business thought they were improving, yet no value was being generated for the customers - their major stakeholders as far as the product business is concerned. It was until they noticed that the customers are not feeling all their Six Sigma improvement that they stepped back, worked from the customer's end, and moved away from averages to focus on minimizing variation - reducing span. Thus, they were able to deliver products to customers when they wanted them, not earlier or later. Then, everybody was happy and satisfied.

The message is simple. Targets are to be met, but do not get so driven by KPI at the expense of creating value.

How can this be done? I have a few suggestions.

The starting point is to ensure that everyone in the organization understands what value means, how it is generated, and then set the right KPIs in such a way that meeting the targets translates to creating value for the company. Imagine if the KPI for the club training was not attendance but a measure of implementing the learnings, this would change the behavior and subsequently lead to an improvement in the club. Likewise, the improvement efforts in GE would have been effective from the onset if the KPI was a measure of customer satisfaction and not average delivery time.

When the right KPIs are set and pursued, the organization should not just be comfortable about achieving results but also, be concerned about how the results are achieved. In my company, we call it to scratch the "greens" because they could be "watermelon green". The approach is to question the KPIs delivered to be sure that the intent is met and thus, value is realized. Beyond questioning the "greens", the organization should also be willing to embrace and not punish the "reds". It should be understood why the targets are not met so that learnings could be taken and performance improved.

Lastly, and definitely not the least, I agree with John Maxwell that everything rises and falls on leadership. Leaders set the targets and objectives for the organization. They define what success means and decide what to celebrate. Thus, it is expected that they set the tone and create an organization driven by value creation for all stakeholders. Management should be clear on what drives the organization, reward positive behaviors, support the people to deliver value, and continuously seek to learn and improve.

KPIs should therefore be treated as a means, and not the end. Every organization should seek to create a culture where KPIs are not delivered at the expense of generating value but are used to define and evaluate success, continuously learn and improve, and ultimately deliver value for the organization and its stakeholders.