The second part of our goal setting series looks at Key Performance Indicators (KPIs), as well as the modern business hurdles none of the current approaches seem to be able to solve.
The Rise of Key Performance Indicators
An outgrowth of MBO and S.M.A.R.T. goals was the Key Performance Indicator (KPI), or a key factor in monitoring the performance of strategic objectives integral to an organization’s success. Like S.M.A.R.T. goals, KPIs make objectives quantifiable, providing visibility into the performance of teams and individuals and helping leaders take action in achieving the desired outcomes. KPIs are usually monitored and distributed in dashboards, scorecards and other performance-related documents.
Although KPIs made their debut on the world business stage in the 1980s, the KPI Institute suggests that they’ve actually been used for centuries. In 1494, for instance, Italian mathematician Luca Pacioli detailed a practice the Venetian sailors had in place to evaluate the performance of their sailing expeditions. This primitive KPI became the basis of the double-entry accounting system many companies still use today. Examples of common KPIs are:
- Percentage of net profit
- Revenue dollars
- Percentage of profitable customers
- Net promoter score (customers are not only satisfied, but endorsing a company, product, or service)
- Percentage of on-time delivery
- Percentage of projects on time, budget, and spec
- Percentage of processes optimized
- Percentage of employees engaged
British Airways: How 1 KPI Transformed a Business
U.K.-based performance expert David Parmenter shared his favorite KPI story. It’s about how Lord King, CEO of British Airlines in the 1980s, turned the downward-spiraling airline around by focusing on one KPI.
King apparently hired some consultants to investigate and report on the key measures he should concentrate on to save the airline. They came back and told King that he needed to focus on one critical success factor (CSF) – the timely arrival and departure of planes.
When the consultants proposed that King focus on late plane measures, he was unimpressed but took action anyway. From that point on, King was notified, wherever he was in the world, if a BA plane was delayed over a certain time. The BA airport manager at the relevant airport knew that if a plane was delayed beyond a certain “threshold,” they would receive a personal call from Lord King. It was not long before BA planes had a reputation for leaving on time.
Turns out, the late planes KPI was linked to most of the critical success factors for the airline. The importance the critical success factor “timely arrival and departure of planes” can be seen by its impact on all the six perspectives of a balanced scorecard. A balanced scorecard, by the way, is a framework combining strategic non-financial performance measures and traditional financial metrics so managers and executives can get a balanced view of organizational performance. In any case, late planes:
- Increased costs including additional airport surcharges, and the cost of accommodating passengers overnight as a result of late planes being “curfewed” due to noise restrictions late at night (financial perspective).
- Meant unhappy customers and alienated those people affected by the late arrival of the passengers – possible future customers (customer perspective).
- Created a negative impact in the wider community and thus reduced the potential pool of future employees (community perspective).
- Incurred food waste – hot food has a short serving window – and fuel waste as planes endeavored to make up for lost time and operated outside their most economical flight speed (environmental perspective).
- Had a negative impact on staff development as employees would repeat the bad habits that had created late planes (learning and growth perspective).
- Adversely affected supplier relationships and servicing schedules resulting in poor service quality (internal process perspective).
- Led to employee dissatisfaction as they had to deal both with frustrated customers and the extra stress each late plane created (employee satisfaction perspective).
Can These Methods Work for All?
As PCs and their software became mainstream in business, it was easier to track KPIs using spreadsheets and homegrown performance management systems. But even as processes moved online, connecting goals through the organization using disparate systems was a time-consuming and difficult endeavor.
We looked to automation as a solution, but this path has inadvertently resulted in less communication around goals. Today, goals are most often established by top executives and then communicated unilaterally into the organization. The automated system ensures that employee goals match the manager’s direction. Therefore, the goals are not always meaningful to the people doing the actual work.
Here’s an example. Suppose one of your CEO’s goals is to “reduce turnover by 5 percent.” In turn, your CIO might input a related goal to “reduce employee dissatisfaction by implementing a team-wide 24 hour response window.” When looking at the automated system, what choice do individual IT employees have but to set personal goals shaving down their own response times? Some of the smarter systems go a step further and suggest a related goal for the IT employee, such as: “implement an automated triage system to provide an initial response to clients within 2 business hours.” As you can see, there is little room for creativity or autonomy in a situation like this.
In many organizations too, MBO-set S.M.A.R.T. goals stagnate because businesses evolve, but annual goals are rarely updated. When they are revised, it’s in a vacuum and siloed systems prevent them from being incorporated into daily workflows. Because KPIs, MBOs, and other models found their homes in human resources departments and systems, goal setting has now been pigeonholed in the review and compensation process.
What is your goal setting protocol? How does it differ from MBO/S.M.A.R.T./KPI?Posted in Change Management | Tagged automation, balanced scorecard, British Airways, change management, Collaboration, communication, Decision Making, effective leadership, goal management, goal-setting, key performance indicators, KPIs, managing teams, MBO, productivity, project management, S.M.A.R.T., success factors