Indicators and the green parrot effect

Key performance indicators and the green parrot effect

There are many papers on indicators but this time I want to share some insights, contribute with another point of view, about the construction & use of KPI's and, with some humor, share the existence of what I call the "Green Parrot Effect".

Indicators

Indicators exist because the necessity to measure a variable in its context, a way to alert if something is going out of pre-defined value or limits for our convenience.

All starts with the physical data gathering (distance, time, volume, weight, temperature, luminosity, GPS position, pressure, price, pieces, etc.), that can be mathematically transformed into something different (speed, acceleration, etc.). All values have a meaning by itself because the context (traveling time, cooking time, etc.) and, if we define limits, we can talk about indicators (travel time, pressure within limits, stock price bellow forecast, inventory level, etc.).

Performance is related to a service or a particular activity that can be measured.

So, a performance indicator is the measure of a service or activity and it’s deviation, out of pre-defined limits, for the convenience of an organization (company, government, etc.). Other use is to evaluate if the company is reaching targets, find potential problems with the values or have just plain indicators.

We can define indicators for products in the aim to measure quality and can be integrated to performance indicators as part of a process. The problem is when a company defines Quality, because the temptation to include non-measurable values, like “good-flavor”.

Finally, Key Performance Indicators (KPI) are the ultimate set of measured values that shows how well the top level processes and functions are running. KPI’s are normally made by other key indicators from different departments and sub-organizations, as Supply Chain, HR, IT, F&A, Help Desk, Purchases, etc.

Finally an indicator has normally levels of accomplishment that are related to colors: green (all Ok, within limits), yellow (some problems experienced but under limits) and red (problem to solve, out of limits).

The first rule to define performance indicators is that they should have a real purpose (based on company objectives), be simple in its definition and up to 10 indicators (per level).

How many times an indicator is defined without a real objective? You’ll be surprised how companies defined their KPI as well as the number of performance indicators created in companies. The set should be less than 10 and should be meaningful. For example, for some retail companies, define the price per square feet as indicator but may not be valid if some of their products are subsidized by others.

Another common problem is that exist several indicators to measure a specific process but are not KPIs, are plain process indicators.

The second rule is, indicators should be automatically obtained (quantitative) and can be forecasted.

Here is very straight forward, no hands on data. The best is data extracted directly from the source system or the data reservoir and then automatically processed. That’s relevant when putting together a Business Intelligence (BI) tool which is the common system to present KPIs.

On the other hand, if you can’t predict a behavior, a future value, then you need to review the definition.

The third rule is, indicators should be assigned to the real owner or owners without splitting the value.

Let’s take a real-life KPI from an organization, “number of tickets attended before month-end”. In the real-life example are different organizations that attend tickets and have the same KPI, but, at the end, the ticket is with Help Desk (HD), Country Local Support (CLS), Infrastructure (IS), Systems Support (SS) or closed. The HD creates tickets the first time (based on a user call) and, if can’t solve, passes it to any other organization (depending on the problem). If the ticket is incomplete or incorrectly assigned, then, that organization sends back the ticket to HD for correction.

What can go wrong?

The very last day of the month, HD sends all their open tickets to any other organization giving the image that attended all tickets on time which creates a green indicator for HD (“for the photo”) and other organizations fall to yellow or red because could exist a more-than-a-month ticket. This can happen because there are many owners of the same indicator and the ticket, one ticket in any moment, is in the hand of just one organization. So, the KPI should be defined differently or split with a correct definition to avoid ticket jumping.

Tricky, without a doubt. And yes, it happened.

The fourth rule, performance indicator it is not a performance evaluation, see the full picture.

This is the biggest problem with KPIs. When talking about performance, companies try to compensate the best performer and devote minimum time for evaluations (not all companies). But, on the other hand, people don’t want to be seen as under-performer, people want to be promoted and/or earn more. So, practices to be in green, like the one in the last paragraph, are common.

If a personnel evaluation is based on pure KPIs then is worth to think into change it, and use indicators as “what did you do when the problem showed up or came up constantly”. Make time to think.

An indicator is pure data, performance is action under certain circumstances (human action). Evaluate the corrective action taken by an employee when an indicator pointed out a problem.

If the evaluation is based on actions (decision making) then, any employee, can rely on a well understood evaluation process. Otherwise you will find surprises, not the good ones and in all level positions.

If you think that an indicator can't change behaviours then let me take you to the next real-life story.

The Green Parrot Effect

Paul was working in a non-US country as inventory manager. He was scoring a perfect-green indicator on inventory levels. Every material had a different reorder point and the replenishment policy stated that all materials inventory should be refilled to a 100%. One of the materials was extremely expensive (several hundreds of dollar per kilo), it was imported and was used once for a very unique project and was included in the system with the levels required for the project. It was never intent to be reordered. A very small and unique project started by mid-year and required almost nothing of that material but enough to drop and reach the reorder level. The purchase order was around $95,000 USD. On the other hand, the country currency had a pretty bad month and the exchange rate was really high making US dollars very expensive (an extra 25%). What Paul will do?

Paul placed the purchase order.

At this point you may think several things. He knew the story of that material. He could check if the material wasn’t that necessary and could delay or cancel the purchase. He could agree with his local Director to not buying till the exchange rate were better. He risked his position as his action seemed as having an agreement with the supplier. Etc.

In the Directors meeting he was requested for an explanation.

“I followed the policy”, Paul answered.

Paul had his year bonus because he followed the policy and no-body could challenge that. Which is fine, but some real money could be saved…

The story behind the curtains is that he wanted to keep the indicator in green, otherwise he couldn’t have his year bonus. Stop or delay the purchase implied to fall in yellow and the necessity to explain why, with the risk to not obtain the bonus. It was easier to keep it green by placing the purchase order.

Green Parrot will try to put everything in green ("look I am all green"- but his beak is red or yellow), especially when indicators are evaluation and bonuses. If that wasn’t the case, Paul’s story could have a different end? On the other hand, KPI’s can be used as punishment for good performance employees? That could be good material for another article.

Final thoughts

Challenge increases with company complexity and many times common sense is not that common. Having KPI’s are very important and is a matter of time to construct them (some are very straight forward) while making the corresponding adjustments with the help and agreement of all departments, directions, owners and investors. KPIs must be constantly reviewed because that is the sense of the business, many are daily.

You can change, split, eliminate any of them if make no sense. Keep in mind that KPI’s demonstrate your time reaction and they are your business semaphores not the route. Otherwise you will have a recorded map of the semaphores rather than a business decision making tool. And beware of the green parrots.