Are KPIs really the Key to a Successful Business? Mark Deavall
Over this past weekend I have been trying to figure out why it is that South Africa has too little capacity to produce electricity. It seems as if every project that Eskom has undertaken to “rectify” the situation has been a dismal failure – just take Medupi as a case in point. However, we heard on the news that Eskom executives have awarded themselves a R31 million bonus! When I heard this I was shocked.
This is unbelievable. So I started to research a little and came up with this thought: If the executives of Eskom are earning bonuses while the country has a shortage of electricity, it must mean that their Key Performance Indicators (KPIs) are completely unrelated to the production of electricity, which happens to be the core business of Eskom! There simply can be no other explanation. I recall a conversation that I had with a company CEO a little while ago. He does not believe in KPIs at all and would not allow them to be established in his business. Yet his business is hugely successful. He based this success on the single “job description” that everyone in his business subscribes to – “you will at all times do everything in your power to positively influence the productivity and profits of this business.” It works! The figures of the company prove it. For many years I have been counselling companies against “KPI management for KPIs sake”, and rather toward KPIs aligned to the overall responsibility that the employee carries.
This simple change in focus has then led to increased productivity and profitability. So it was really good when, a short while ago I came across an article written by Barry Marcus called “How Performance Management may be to Blame when Companies Fail.” For me this article placed the whole business of KPIs into stark perspective. Barry asserts that “the development of KPIs is nothing short of outmoded fixed job descriptions”. And the only thing a job description has ever achieved is to give employees the power to say “it’s not in my job description”. He goes on to say that this practice of measuring individuals against fixed , pre-defined objectives, has led to an emergence of a culture that encourages employees to do only what is required to achieve these objectives. As the achievement of KPI objectives governs the payment of performance bonuses, taking on additional tasks, even when these are crucial to the effective performance of the company, actually works against an employee, because those additional tasks are taken on at the expense of achieving their current KPIs.
They reduce the chance to achieve the KPIs and therefore, in most cases, are quietly ignored. Is it possible that the performance measures of KPIs unaligned to the overall responsibility of the executives, are partly to blame for the failure of these companies? The Royal Bank of Scotland provides a perfect illustration of the KPI paradox. This bank’s doors should have been closed by now, but the consequences of allowing the bank to fail would have put the economy at even greater risk. So the government bailed them out. The first thing that the bank did on receiving the taxpayers’ bailout money was to use about ten percent to pay bonuses to the executives! To an outsider the news of massive bonuses to executives came as a shock. Bonuses for what? Bonuses for bringing the business to its knees? AIG in the USA, is another example of the walking dead.
The insurance giant saw fit to pay out massive bonuses amounting to approximately US $165 million. Why? The executives had achieved their KPI objectives. How is it then possible that the Chief Executive Officer and his co-executives have met their objectives if the business has failed? The answer is that the executives did not do what was required when required. Instead, they merely complied with what was required by their KPIs! A KPI driven organisation does not do what is needed. Employees and the executive follow one route. They do what the KPIs specify. This will earn them their bonus. They will not “waste time” pursuing anything else. All sorts of contracts govern the issue of bonuses, and the achievement of a high rating on the defined performance measures, assures the earning of that bonus. So here is the answer to the Eskom paradox.
The executives are paid bonuses not for the successful generation of electricity, but rather because they seem to have met their KPIs. This is borne out by the statement made by the minister’s spokesperson that “the Eskom executives cannot be held responsible for things that are out of their control”. The huge number of company failures and astounding bonus payments should provide ample illustration that the system doesn’t work. Yet companies around the world continue to spend millions each year to implement systems whose only purpose is to measure Key Performance Indicators. So in reality the focus of a company should be less on KPIs but rather on “doing what needs to be done, when it needs to be done” In other words, KPI’s need to be written with the focus on the responsibility that the employee carries, rather than on the work that has to be done. Is it really possible to identify everything that must be done within an organisation in terms of KPIs? Clearly this is not the case. Changes to the environment will be ignored. Some elements will be overlooked. Building a quality organisation requires the building and ongoing refinement of the business processes. It is clear that the success of a business can never depend on KPIs.
So are we doing the right thing by establishing and monitoring KPIs, or are we just reinventing the old “job description”? In order for a business to be successful, the things that need to be done, need to be done regardless of whether or not they have been reduced to a KPI. That is the mindset we need in business. You may have met all your KPIs but if that result does not “roll up” together with everyone else’s KPIs into the final result that the company is looking for, it means the focus was only on the KPIs and not on “getting done what needs to be done”. I trust that you have found benefit in this article. If you would like to contact me or have me talk to the people in your company, please call me on 27 11 609-1264, or e-mail me on firstname.lastname@example.org This article is protected by international copyright law. If you would like to copy this article for any reason, please be sure to copy the entire article including this line.