The downside of KPIs

The Law of Unintended Consequences says that intervention in one part of a complex system always causes unanticipated, and often undesirable, outcomes in another part of the system.

Establishing performance targets and KPIs play an important role in the strategy process. This is where we go from concept to making things happen.

This is also the part of the process where things can go wrong.

Putting in place measures and reinforcing achievements of targets is an effective way to shift effort from the workings of one part of the business to another. Just be careful that you don’t expect areas not under scrutiny to continue to work well, especially if there are rewards on the table for achieving other outcomes.

We’ve all seen the problems when large organisations unwittingly create tension between departments with conflicting KPIs.

The classic scenario is a Production Manager being told to increasing the output of widgets, while the Inventory Manager is asked to reduce the cost of holding inventory, and the Shipping Manager is given an incentives to reduce freight handling and delivery costs.

In this simple scenario, no one shares responsibility for the overall outcomes of the business, and they all end up working against each other.

In small business, the effect may not be so dramatic and obvious; however, there is a strong possibility that an important (sometimes unrecognised) aspect of the business will overlooked.

For example, cost reduction initiatives often flow through to the customer experience, in turn affecting loyalty and ongoing sales.

I think the trick in setting performance targets is to make sure they relate to the larger business outcomes rather than specific actions. You may also consider assigning shared responsibility for achieving a target, this encourages teamwork and innovation.

My final appeal is to please set performance targets for your business – it’s vital – but when doing so, just be mindful of the Law of Unintended Consequences.

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