Summary by James R. Martin, Ph.D., CMA
Professor Emeritus, University of South Florida
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The purpose of this article is to point out some serious problems related to management by key performance indicators (KPIs), or performance metrics, and to recommend replacing KPI management with process management. KPI management, or management by metrics is based on the idea of comparing key performance indicators with numeric goals. Process management uses the seven basic tools associated with just-in-time and the lean enterprise discussed frequently over the last twenty years by Schonberger and numerous other authors, e.g., check sheets, fishbone diagrams, Pareto charts, histograms, scatter diagrams, and process control charts. (See MAAW's Chapter 8 for more on these and other tools).
What's wrong with goal setting and KPI management?
Goal setting and the KPI, performance metrics dashboard or scorecard approach interfere with process improvement in the following ways.
1. Most goals are too highly aggregated to indicate how to respond when the goal is not achieved.
2. The people who set the goals are not the ones who know the most about the processes.
3. KPI management tends to cause acting too frequently on variations that are normal to the system. Deming called it tampering. (See the Funnel Experiment).
4. Most KPIs are influenced by factors, typically systems problems, that cannot be controlled by the work force.
5. Focusing on management goals and metrics reduces the focus on the processes and process data needed for continuous improvement.
Management by comparing key performance indicators to goals allows managers to manage intermittently at a distance from the real processes or work that goes on in the organization. Process management, on the other hand, emphasizes trends that track performance at the level where continuous improvement can take place. Some additional problems with goals on a scorecard, or dashboard, include the following:
1. Goals are merely hopes that may not be feasible within the current system.
2. Scorecard goals are highly aggregated and typically influenced by hundreds of causal factors.
3. Scorecard comparisons do not point to anything close to a root cause of a problem.
4. Scorecard results are poor substitutes for displays of continuous process trends.
Management by metrics produces perverse coping behavior where managers game the system to correct unfavorable comparisons, e.g., reducing overtime, scheduling longer production runs, and delaying maintenance and training.
How to fix a broken performance management system
Replace KPI management with process management and adopt the following:
1. Do not convert business objectives into static goals.
2. Use trend charts, rather than comparing results to goals, to measure movement towards continuous improvement at the process level.
3. Measure KPIs with trend charts, but don't try to manage them unless they are trending in the wrong direction over a number of periods.
4. Emphasize continuous improvement by making every employee into a flow tracker and data plotter on everything that can adversely affect their process.
5. Frequently visit the processes to monitor process problems and progress towards continuous improvement.
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Question: Are the managers who are using what Schonberger refers as the KPI, performance metrics dashboard, or scorecard approach following the recommendations of Kaplan and Norton? See the Balanced Scorecard Questions for some ideas and links.
Related summaries:
Ittner, C. D. and D. F. Larcker. 2003. Coming up short on nonfinancial performance measurement. Harvard Business Review (November): 88-95. (Summary).
Kaplan, R. S. 1998. Innovation action research: Creating new management theory and practice. Journal of Management Accounting Research (10): 89-118. (Summary).
Kaplan, R. S. and D. P. Norton. 1996. The Balanced Scorecard: Translating Strategy into Action Boston: Harvard Business School Press. (Summary).
Kaplan, R. S. and D. P. Norton. 2001. The Strategy-Focused Organization: How Balanced Scorecard Companies Thrive in the New Business Environment. Harvard Business School Press. (Summary).
Lipe, M. and S. Salterio. 2000. The balanced scorecard: Judgmental effects of common and unique performance measures. The Accounting Review (July): 283-298. (Summary).
Lipe, M. G. and S. Salterio. 2002. A note on the judgmental effects of the balanced scorecard's information organization. Accounting, Organizations and Society 27(6): 531-540. (Summary).
Martin, J. R. Not dated. Balanced scorecard concepts. Management And Accounting Web. BalScoreSum.htm
Norreklit, H. 2003. The balanced scorecard: What is the score? A rhetorical analysis of the balanced scorecard. Accounting, Organizations and Society 28(6): 591-619. (Summary).
Stivers, B. P., T. J. Covin, N. G. Hall and S. W. Smalt. 1998. How nonfinancial performance measures are used. Management Accounting (February): 44, 46-49. (Summary).
Tatikonda, L. U. and R. J. Tatikonda. 1998. We need dynamic performance measures. Management Accounting (September): 49-53. (Summary).