KPIs, Why the “I”?

Originally Posted on October 26 2011

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Key Performance Indicators. We have already discussed them but let’s recall that a KPI is a metric (i.e. a measure sampled in time) which targets have been set for.

Maybe the most common of KPIs is the income/target ratio, good when greater than one.

In a coherent Performance Management System, there are tenths, or hundreds, of indicators like that, tied to targets and objectives, but each one is a single indicator, a single number.

 

Why? I mean, why a single number?

 

The question might appear weird to the people who do not have a scientific background, but it’s more than legitimate.

Mathematical models are designed to make forecasts; the best known example is weather forecasts that produce maps like this. The actual output s more complex but is always drawn in map format; otherwise the computer generated numbers sequence would be non-human readable.

Why business models like Performance Management Systems are made of, comparatively, much fewer numbers?

It might seem rather natural but the roots of this diversity can be traced in the idea of value. The human mind naturally gives a value to everything, and uses the idea of value to rank things and actions. This is a concept that lies at the roots of capitalism, and I’m not going to discuss it here (I’m not the best person to write a treatise on it). The key point is that every KPI maps to a value that, somehow, influences the economic results of a company. Actually, KPI’s are often ratios of values, to measure the performance against a goal, but, once again, it is a matter of comparing values.

The human brain instinctively judges the value of things if it is given a single number to deal with. Thus a KPI is a manner to implement this facet of human thinking.

Is this good or bad? None of the two, it simply explains why a manager is given a limited set of KPIs to be accountable for. It also explains why performance management systems can be rather simple even in a complex company. As usual, things should be as simple as possible, but not simpler.

Nonetheless, there is a subtler enemy ready to strike.

The most common company mental model is about small chunks of value, with a plus (revenue) or a minus (costs) attached. All these chunks together make the company financial statements.

This, in terms of performance management, may be deceitful as there are many inherently non-linear effects on the system. For example, dropping production efficiency below a specific level could trigger a late delivery wave that could drop customer satisfaction rates that, ultimately, jeopardize sales. So, a small chunk of missing value could potentially bring a company on the knees.

There’s a lot of exciting mathematics behind the scenes but I won’t bother you. I just use this example to state that the central point of the post: the performance management model should not be treated like a school report.  Being good in 8 out of 10 subjects is not necessarily a good performance. Relations among the indicators are as important as the indicators itself and often they’re not linear, i.e. not obvious. Every manager knows that some economic indicators are paramount, but the inner relations among all the indicators should be investigated too.

Are you confused enough? OK, I reached my target. I’ll be back on the subject in the coming future.

 

Have fun!