"What gets measured, gets managed."
Peter Drucker is often attributed with this quote but he probably wasn't the first to say it and the origin of this expression is up for debate. Whoever said it first, I disagree.
Like many cliches, "what gets measured, gets done" is half right. Right enough to be believable. Wrong enough to be mislieading. If we measure our weight, will it change? We can quantify the velocity of planets, but does that mean we can control them?
What changes outcomes are worth measuring
In modern business, we use the term Key Performance Indicators (KPIs) so often that we seldom pause to reflect on the meaning of the words anymore.
The three most important elements of KPIs are the things almost nobody does:
Keep the existing management system
Predict the behaviors that support objectives
Incentivise and measure those behaviors
That's it. KPIs should change behaviors in ways that shape outcomes. That's 90% of what you need to know about KPIs. The last ten percent is to use existing management systems. You can go back to Facebook now if all that is clear. If not, keep reading. If you'd like to know a little more about how to use KPIs to change behaviours and shape outcomes, read on.
1. Keep the existing management system
Don't reinvent the wheel. It is wasting everyone's time to use performance scorecards that have no link to existing management systems. If you create a new framework for measuring KPIs, it won't matter how awesome it is. You will lose time and momentum promoting it, and your KPIs will languish. But, if you can slip those KPIs into existing measurement systems, you will save yourself a lot of work. Choose employee performance metrics, financial metrics, health and safety management systems, or whatever.
Almost any management system that you can align with will get more traction than crafting a new one. Put your thumb out and hitch a ride on the back of the current system. You'll get there faster. What do you do, though, in the unlikely event that your organization doesn't have an existing framework? My suggestion for a good place to start is Balanced Score Card (BSC).
BSC is a proven measurement framework, introduced by Robert S. Kaplan and David P. Norton in 1992. It's designed to provide a comprehensive view of an organization to align activities with the achievement of stated goals. There is also a well-established body of literature to guide managers in the adaptation and application of BSC to their environment. Linking a Balanced ScoreCard with KPIs, and other measures, is relatively simple.
2. Predict the behaviors that support objectives
Plato suggested that "Human behavior flows from three main sources: desire, emotion, and knowledge.” We have a lot more data and research available today, but 'knowledge, desire, and emotion' sum it up nicely.
Our knowledge can be increased with study, or with the right marketing. Emotions and desires, are more fickle, but one thing remains true, "Incentives are the cornerstone of modern life," said Steven Levitt and Stephen Dubner in Freakonomics . They went on to say that " ... understanding them – or, often, deciphering them – is the key to understanding a problem, and how it might be solved. Knowing what to measure, and how to measure it, can make a complicated world less so."
The reason incentive are so important is that incentives drive behaviors, both positive and negative. We've witnessed the savings and loans debacle, global financial crises, and similar economic disasters over the past decade and more over the centuries. For all the complicated talk about root causes, it's not hard to link quarterly and annual bonuses to certain types of behavior. If you incentivize people to cut corners and focus on short-term performance, then that is what they will do.
Take the examples from the start of this article: measuring weight and the trajectory of galaxies. If we aim to lose weight, then, yes, it is useful to weigh ourselves. But more beneficial is measuring how often we go to the gym, or how far we can run. In other words, measuring our mass is less meaningful than measuring our behaviors. If you disagree, think about it some more before you write to me. Measuring planets is pointless unless it supports a change in behavior which supports outcomes. The goal might be to learn more about quantum physics, understand our origins, or encourage people to extend humanity beyond earth. In that context, we can shape behaviors. But we are not going to change the trajectory of planets, at least not anytime soon.
3. Incentivise and measure those behaviors
It should be evident by now, but if you don't know which behaviors you are trying to influence, you won't hit your targets.
Sales managers and salespeople know this. On a commission sales management system, the objectives are clear. Profitable sales. Incentives (sales commissions) are also clear, and they exist to drive behaviors (sales calls, being one example). Outcomes will flow from the right behaviors. Desired behavior will flow from the right incentives.
So much has been written about incentives but the key is to understand how incentives motivate your stakeholders, and which incentives.
"Well you can say, 'Everybody knows that.' Well I think I’ve been in the top 5% of my age cohort all my life in understanding the power of incentives, and all my life I’ve underestimated it. And never a year passes but I get some surprise that pushes my limit a little farther."
- Charlie Munger
Without a good understanding of incentives, you may well be introducing risks, rather than managing them. The world of unintended consequences await the unwary so measure what matters.
Final Thoughts On KPIs
KPIs can be wonderful. But the three most important elements of KPIs that people (not people like us) rarely consider, can determine if KPIs are helpful or just extra work:
Keep the existing management system
Predict the behaviors that support objectives 3. Incentivise and measure those behaviors
It's all very well to measure stuff, but if there is no link to outcomes and incentives, it won't count for much.
"Incentives and behaviors that change outcomes are worth measuring."
- Julian Talbot
All else is questionable at best and detrimental at worst.
