When performance metrics fail
The article was originally authored by Christian Frantz Hansen.
We all know that you get what you measure. However, it is inherently difficult to define metrics that are proper proxies for what you actually want to achieve. A common issue is that KPIs can end up overshadowing the underlying strategic objective. That is, the KPI ends up being perceived as the goal substituting the underlying outcome it is designed to measure. This surrogate effect can lead to severe adverse consequences.
Let us take a look at two examples from large corporations.
I recently discussed performance management with a management partner from a large Scandinavian bank. As many other organisations these days, the bank had an ambition to become more customer centric.
Specifically, the bank wished for their clerks and advisers to become more proactive in ensuring recurring business and upselling to their existing customer base – completely valid strategic objectives that had been transformed into a series of key performance indicators. For customer-facing employees at the bank’s branches, the key performance metrics were a number of customer meetings per week. The target was set at 20 per employee.
However, the performance management instructions did not specify precisely what constitutes a customer meeting. Could a simple phone call to a customer be regarded as a customer meeting? What about a Skype conference call? Furthermore, the metrics did not mention anything about the quality or desired outcome of the customer interactions.
The unclear instructions related to the new metrics inevitably led to undesired behaviour. Bank clerks started substituting face-to-face interactions with phone calls without considering the potential business outcome. The logic was simple: why spend two hours on a single analogue meeting when you can conduct five “phone meetings” during the same period? Nobody stopped to ask if an analogue meeting would have yielded a better business result than those five random phone calls. After all, the number of customer meetings – not the ability to generate new business – was the key metrics which the bank clerks were facing.
An additional undesirable outcome was the unintended moral dilemma this posed to the employees. Each employee faced a choice: fitting more analogue, focused and high-yielding customer meetings into an already busy business calendar at the risk of not meeting the performance target (good for business), or maximising the KPI by conducting many quick pseudo-meetings over the phone (good for me). Obviously, many went for the latter.
Luckily, the leadership team recognised the unintended consequences of the new performance management setup and corrected the mistake before any lasting damage was done. However, customers, employees and overall business results were negatively affected despite the good intentions that underpinned the performance management initiative.
When running a finance transformation project at a large payment solution provider, I came across another example of metrics gone wrong.
In an effort to link employee well-being to the individual employee’s performance, the executive leadership team had signed off on a bonus programme that now tied the size of the annual payout to an employee satisfaction index, which in turn was calculated based on an employee satisfaction survey.
As you can imagine, it did not take long before the employees recognised that the answers provided in the annual employee satisfaction survey were directly correlated with the size of their bonuses. Obviously, this created an incentive to downplay or completely disregard any unsatisfactory workplace conditions in favour of boosting the employee satisfaction index through dishonest answers. In the end, this behaviour was not only contrary to the intended effect of the performance management system but also rendered the data from the employee customer satisfaction survey completely useless for other managerial and HR-related purposes.
When the management recognised that even disengaged and fundamentally unhappy employees scored their satisfaction as extremely high, the flaw was identified and corrected. However, the aftermath was felt for a long time after the incident as the trust in both the performance management system and employee feedback survey remained low.
As these two stories exemplify, even the best strategic intentions can easily have an undesirable outcome if the performance management systems are poorly designed and communicated.
A key piece of advice is always to conduct a comprehensive analysis of the behavioural impact of the performance management system you put in place. In doing so, you need to recognise that KPIs are only effective if someone in the organisation uses them to do something differently tomorrow compared to what they did today. As a leader and performance management architect, it is your job to understand what the behavioural change will be and define KPIs that incentivise the desired behaviour.
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