Creating, socialising and measuring key performance indicators (KPIs) and taking action dependent on the value (or trend in value) of those KPIs is no trivial matter. Yet too often, organisations treat the building of an integrated system of KPIs to measure, control and advance their business as something of an afterthought. They allocate the task of creating KPIs to individuals and managers without ensuring those individuals and managers have the requisite knowledge and skills to do so. They allow business units to create KPIs in isolation of one another, sometimes adding a set of ‘Corporate’ KPIs on top with no discussion or thinking about how the various KPIs interact with each other to drive behaviour.
The result of these ad-hoc, uncoordinated, unskilled attempts at creating a system of KPIs ranges from frustration at the individual level to the demise of parts of the business.
Consequences of Creating KPIs in Isolation
In an organisation I worked in for many years, the business had invested in its own research and development and international sourcing of specialist products for the mining industry. The marketing arm in Australia set about lifting their market share in this profitable product area from the paltry level of 2% to something more fitting with their general share of mining market of 25%. To their credit, they increased their share to 50%.
The sale of the specialist products, and the services that went with them, resulted in strong ties between influential staff at mine sites and our sales and logistics staff. This meant we had a better understanding of mining companies’ needs, and we were able to raise our market share to more than 30%, thanks to employing the right specialist staff in the right roles. In other words, successfully recruiting the right specialist resources was a leading indicator for specialist product sales. In addition, the market share for these specialist products became a leading indicator for the market share of more general products, which we also sold to mine sites, as the mining companies became comfortable with the performance of our specialist products and switched to us as their preferred supplier for generalist products as well.
Essentially, successfully employing the right specialist product sales staff and account managers became a leading indicator for our performance and market share in the mining industry as a whole.
In addition, many of the mine sites we supplied were in regional or rural Australia, so managing our supply chain, which mostly originated in Europe or the US, was also important.
Around a year before this model reached the height of its success, moves were afoot in both the logistics and human resources business units. Both had been moving from local control to first zonal control from the Singapore office, and then to global control from the head office in London. With this new model came an increased emphasis on KPIs as a means to manage behaviour and performance. The logistics KPIs were all about stock turns, or proxies for them. The HR KPIs were all related to career paths and development.
Unfortunately for our established model, all the specialist sales staff were so specialist that they didn’t easily fit into the new HR KPIs for career advancement. Up until this point we had been able to circumvent any issues on that front by hiring those specialist resources as contractors, who were outside the usual strictures of HR. When, as part of a separate initiative, all of the specialist resources were brought in as employees, their poor fit with HR’s vision of ‘good employees’ meant that some left and others were lost to poorly-chosen career moves instigated by compliance with HR’s KPIs for career progression.
In the end, the focus on stock turns led to longer supply chains, which reduced our responsiveness in Australia. At the same time, because the specialist products sold in Australia only represented a fraction of the global market, supply chain disruptions here were not considered important enough to remedy. The recruitment of new specialist sales staff to replace those lost was far less successful as the recruits had to fit the new HR model. The development of, and compliance with, KPIs for both logistics and HR led to a decline in market share that lasted a number of years before a review was initiated to determine the cause.
Knowing the Critical Path to an Organisational Objective
The creation of KPIs by different business units in isolation of one another and in isolation of an overall goal meant that in this case, no one knew the critical path to reaching the objective. This was mainly because an objective had not been agreed upon. However, even if it had, it is unlikely that a critical path to reaching that objective would have been known, as the teams were analysing their positions in isolation.
This was a simple example of poor management of KPIs leading to business decline. If the business units were forced to work cooperatively to the one objective and create KPIs accordingly from the beginning, then it may have been possible to avoid any decline at all. The creation of the KPIs in that example would not have been difficult. Creating KPIs that actually measure the drivers of a business requires in depth thought about the critical path to reach that objective. It is insufficient to trundle out the usual suspects of KPIs that ‘everyone’ measures, or to measure everything. It is also not only insufficient, but wrong, to brainstorm KPIs. It is necessary to analyse and to think.
Take, for example, the open cut coal mining industry. What would be the KPI for their mining process, in the context of the goal of maximising profits? What is their critical path to profits? In my experience, the critical path to profitability varies. In one mine site where there was a constraint on shipping coal, a current indicator of profitability, there was a very long single conveyor system. The availability of the conveyor system or its ‘Up time’ was the leading KPI of profitability. It was the key constraint on the critical path. Of course, there were many other performance indicators which needed to be measured and acted upon if they varied from the preferred range, but the availability of the conveyor belt was key.
In another example, the mine site had a duplicate short conveyor system, but only one dragline. The dragline removed the overburden from the coal. A dragline costs in the order of $50-100 million to build. The mine site economics could not afford two draglines without a major expansion, which the company did not want to do at the time. ‘Up time’ of the dragline was therefore their leading KPI of profitability.
In Australia, and generally around the world today, a performance indicator of recruitment and employee satisfaction such as ‘Unplanned turnover’ may be a leading KPI of profitability.
Each mine site has its own constraints which hamper their ability to reach a particular objective. The objectives range from profitability to safe operating. Measurements of the performance of the constraints on each of the objectives are likely to be candidates for a KPI of the whole mining process.
Creating KPIs for your organisation to indicate the performance of a particular strategic objective, as they have done in mining examples above, requires you to understand what is constraining your achievement of the objective. Determine the constraints by conducting analysis and creating a critical path to the objective. In many cases, this will be an iterative process to arrive at the true critical path. Identify the constraints on the critical path and, if necessary, use trial and error to choose between candidate KPIs. The analysis however, must take into account the whole of the organisation and not be limited to analysis of departments in isolation.