The five mistakes accounting leaders make in setting KPIs

Key Performance Indicators (KPIs) are failing to deliver to their potential. Far too often the measures in an organization amount to a random collection of metrics prepared with little expertise, signifying nothing.

How can you, as a Chartered Professional Accountant, lead your organization in establishing effective KPIs for accounting staff and departments — indeed, for the entire organization? How can you measure and monitor performance effectively, engage employees and lead the way to success?

One way is to avoid the five mistakes that accounting leaders make in setting KPIs:

1. Thinking all performance measures are KPIs.

Throughout the world, organizations have been using the term “KPIs” to refer to all performance measures. I believe measures fall into two groups:

Result Indicators (RI) are the many measures that summarize combined teamwork but do not help management as it is difficult to pinpoint which teams were responsible. If the RI is an excellent summary of many teams’ cooperation and coordination, I call it a Key Result Indicator (KRI). Examples would include return on capital employed, and customer satisfaction. 

Performance indicators (PI) can be tied to a team or a cluster of teams working closely together for a common purpose. Good or bad performance is now their responsibility. These measures are about activities and thus are all non-financial. When you put a dollar, yen, pound or euro in front of a measure you have placed a value on an action or event that has taken place. It is the action or event that is the driver.

If the PI is profound, I call it a Key Performance Indicators (KPI). Here, an example would include planes that are over two hours late.

2. Unaware of the dark side of every performance measure.

Every performance measure is like the moon. It too will have a dark side, an unintended, negative consequence. The importance of understanding this dark side and the careful selection of measures should never be underestimated. Well over half the measures in an organization may actually encourage unintended behavior. As performance measurement expert Dean Spitzer says, “People will do what management inspects, not necessarily what management expects.” 

3. Lack of linkage between KPIs and critical success factors.

Deriving KPIs is often viewed as an afterthought. These measures are often separated from anything meaningful. I firmly believe that KPIs exist for a higher purpose — to help align the staff’s daily actions with the organization’s critical success factors (CSFs). The first step in a KPI journey is to ascertain and communicate the five to eight critical success factors of the organization to the staff. It is the CSFs that should be the origin of all KPIs. 

4. Allowing anybody and everybody to give birth to a measure.

There will not be a reader of this article who has not, at some time in the past, been asked to come up with some measure with little or no guidance. I believe the performance measurement process, with your organization, needs a staff member trained who will lead the KPI team and vet all existing measures, abandon those that are broken, and derive new measures that link to the organization’s CSFs.

5. Linking KPIs to pay.

It is a myth that the primary driver for staff is money and an organization must provide financial incentives to achieve great performance. Recognition, respect and self-actualization are more important drivers. When KPIs are linked to pay, they can create key political indicators (not key performance indicators), which often lead to a manipulation of the measures to enhance the probability of a larger bonus. Real KPIs are too important to be gamed. Performance is expected, or as Jack Welch says, “It is a ticket to the game.”

Next steps:

1. Look at all your current measures and ask staff: “If we measure this, what does it encourage you to do?”
2. Abandoned measures where the dark side creates too much adverse performance.
3. Email me for a chapter on KPIs from The Financial Controllers and CFOs’ Toolkit.
4. Visit my website and watch a YouTube clip explaining the late plane KPI.
5. Read Dean Spitzer’s, Transforming Performance Measurement (AMACOM, 2007).

David Parmenter is a writer and presenter on measuring, monitoring and managing performance. He is the author of Key Performance Indicators and Winning CFOs. Reach him through parmenter@waymark.co.nz  or his website at www.davidparmenter.com.