How to tame the destructive nature of your targets - Ten rules if you are still compelled to use targets

It is recommended to read the earlier article first.

Rule #1: Do not set an annual target

The only sure thing is that it will be wrong. It will be either too soft or too hard. To fully understand this important argument read Jeremy Hope and Robin Fraser’s Who Needs Budgets? Paper in the Harvard Business Review 2002 .

Rule #2: Consider whether you need a goal, a standard or a target

A goal is something that you set which is for a period longer than a year. It is intended to be transformative and is not linked to pay.

A standard refers to a set of criteria or guidelines that define the level of quality, performance, or behaviour that is considered acceptable or desirable.

Rule #3: Agree on a set of criteria for a target

Because there has been so much carnage with targets you need to set some strict criteria before you give birth to them. As a minimum your criteria for targets should include:

• Targets are not to be designed as a binary target (succeed or fail).
• Target are to be designed through collaboration and thoroughly tested (three pilots is the gold standard) to ensure there are minimal negative flow-on consequences.
• The team associated with a target can do something that has an almost immediate positive effect.
• The necessary resources required to meet and exceed the target already exist or can be acquired.
• Changes in performance can be adequately measured.

Rule #4: Be clear on what you are trying to improve

Use the ‘Five Whats’ to get to what you are really after and therefore be able to ascertain whether a target, goal or standard is the best option. It is a derivative of the Kaizen ‘Five Whys’ used to get to the root cause of a problem.

Ask what (1) are we trying to improve? The answer I hear you say, “That’s easy, we want growth in revenue by 20%.” I then will ask, “What (2) are you trying to improve so that you increase revenue by 20%”. “More sales from our key customers,” you answer. So, then I ask, “What (3) are you trying to do to increase sales to your key customers.” Eventually you will unmask the real actions that need to happen to increase performance and who can and should do it.

Rule #5: Progress is monitored through at least 16 data points to take account of environmental fluctuations

Quarter by quarter comparison in tables can lead to knee jerk reactions. For years statisticians have been giving us guidance on what constitutes a trend. They have suggested at least 16 data points are required. So, it would be logical to have four years of data if looking at quarter end results and 18 months if looking at monthly results.

Statisticians even created a chart called a “Process Behaviour Chart or X chart ” to show what you should be looking at. They added three lines to the commonly used timeline:

1. An average (the green line)

2. A lower natural process limit (the lower red line)

3. An upper natural process limit (the upper red line)

Rule #6: Look for patterns before you jump to conclusions

As the saying goes, ”One swallow doesn’t make a summer”, nor does one outlier data point make a signal worth investigation (unless it is outside the acceptable limits). Statisticians need to see more evidence than typically we do before they talk about a major shift.

They use these simple rules when looking for a signal in an X Chart including:

• any single point outside the control limits
• eight or more consecutive points inside the control limits but all above or below the centreline
• a trend of at least six consecutive points either up or down

Rule #7: Targets are only set and reported on by a skilled in-house resource

In my KPI work I have argued for some time for a Chief Measurement Officer who would be responsible for developing, testing, implementing and using winning KPIs. Target setting would naturally be within their portfolio. Their role would be:

• To work with the team or individual responsible for achieving the target to ensure it reflects the information they know and gets their commitment.
• To ensure that they are knowable in statistical analysis and can train a resource to maintain a XmR chart which is a Statistical Process Control chart.

Rule #8: Adopt an ongoing abandonment programme of broken targets

One sales team who sold farm equipment were paid commission on the total revenue of the sale, no account was given to the loss made on the over generous valuation on the trade-in. On realising their error, management changed to paying commission on the net revenue, were the trade-in value was taken off the gross revenue. This led to the sale person, who gave the most generous trade-ins, to resign and move on to create havoc at the less aware competitor.

Rule #9: Do not develop performance measures from targets

Performance measures should be derived from your organisation’s critical success factors and not from targets. You will need to trust me on this one unless you what to invest 2-4 hours reading my work on this important issue. See my website, DavidParmenter.com

Rule 10: If you are connecting pay to the target make sure you THINK, TEST, IMPLEMENT in that order.

You can rest assured that most incentive schemes in your sector are flawed. So don’t adopt them without a rigorous analysis of the consequences.

For sales targeting and commissions, I would read the HBR paper called “Motivating Salespeople: What Really Works”. For bonus schemes access my chapter on it, “Performance Bonus Schemes” from DavidParmenter.com

This is an extract from my working guide "How to tame the destructive nature of your targets" available from DavidParmenter.com