The KPI Fallacy
You might have heard or even accustomed to the acronym of “KPI”, you probably use it to track your own business results, hell, you might have even invented a couple of KPIs for your team/org to track. Assuming you are one of these cohorts, I would like to ask the following question: How many KPIs do you use to measure your operation?
Key Performance Indicator (KPI) — A measurable expression for the achievement of a desired level of results, in an area relevant to the evaluated entity’s activity. KPIs make objectives quantifiable, providing visibility into the performance of individuals, teams, departments and organizations and enabling decision makers to take action in achieving the desired outcomes. Typically, KPIs are monitored and communicated through dashboards, scorecards and other forms of performance reports.
-The KPI Institute
I once asked a candidate in his hiring interview to tell me how many KPI’s would he choose to track given the problem that I have just presented to him to ensure a positive outcome and eventual improvement of it. His answer? 20. I was baffled, his response not only surprised me, but made me think about these crazy people living among us who think that measuring 20+ KPI’s is a good way of managing. After that, I started to be more observant on dashboards across companies I’ve worked with, most of them looked pretty much like this:
It seems like the common denominator is to have the most amount of graphs and numbers in the shortest amount of space possible, almost like a challenge.
The problem with this approach is what I call the KPI fallacy, in which common reasoning follows this logic: “The more KPIs I have, the more control I possess over my operations”. This is false.
K stands for Key
The most common misconception of all is to assume everything is key or important. And as the saying goes, “when everything is important nothing is important”. But let’s dive deeper into this concept and pretend we don’t want to follow the wisdom of a simple ancient quote.
Have you ever asked your team or even to yourself, how many things at once can you do with 100% of your concentration power? The answer shouldn’t be more than 3.
According to the American Psychological Association,when we do more than one thing at the same time, our productivity drops to 40% and lowers IQ by 10%.
Then, why do we suppose that tracking more than 3 KPI will yield extraordinary results?
Switching gears in every weekly “KPI” review meeting to focus on one metric that deviated from target after half correcting the metric that “broke” last week generates the same results as multitasking. You lose focus, your team and organization losses control over what’s important, and most likely you’ll find yourself playing the whack-a-mole game within months and asking, “why is this problem happening all over again and again?”
One of the most powerful concepts to have in mind is Essentialism, which teaches us that we will obtain powerful outputs when focused on the essential things, the concept looks like this:
If I don’t need to convince you further into focusing on less, then let’s move on, if not, you can read the entire book and see it for yourself.
Why only three KPIs?
Glad you asked, three is a very powerful number. It is the most persuasive number in communications. It is well established that we can only hold a small amount of information in short term, or ‘active,’ memory. In 1956, Bell Labs reached out to Harvard professor George Miller who published a classic paper titled, “The Magical Number Seven, Plus or Minus Two.” Miller argued that we have a hard time retaining more than seven to nine digits in short-term memory.
So, if you really want your team to understand the core of your operation, try boiling it down to three KPI’s to understand how are you performing against your goals, it may seem challenging, and of course, you might even need some guardrail metrics:
Guardrail metric: They track and provide data on the operation standard business processes but are not the most important metrics your organization needs to measure, monitor, and perform against to make progress against your strategic plan.
By setting up your management to three KPI’s (yes you can have four or five, but less is actually better). You will grasp the current situation quickly, and focus efforts on that one KPI that is deviating from your target, further analysis will be needed to improve it, think of it as an iceberg, you only need to see the tip and evaluate if is at the correct height, if it’s not, then some deep diving needs to be executed below the iceberg in order to adress the root cause of the problem.
This is where problem-solving methodologies come in handy.
When taking this approach you will find yourself less overwhelmed and more focused on the core issues, trying to resolve in a more efficient manner with your teams. If the KPI you chose to track isn’t giving a good broad panorama, switch it, change it, make sure you are measuring the correct pieces of information. Don’t lose focus.
Depending on your business you might define different KPI’s accordingly, but a good rule of thumb is to use as reference the QDC methodology, which advises us to have one KPI per pillar: Quality, Delivery and Cost.
So next time you are in a business review meeting ask yourself: Do we really need to track all these 24 KPI’s? Which ones are essential to my operation?
If you want to be updated with future blog posts, suscribe to the newsletter.