Principle 5: Improved Decisions (Item 6)

Effective use of facts, data and knowledge leads to improved decisions.

Why this is important

Most companies do not measure to see if they are being successful.

If you did only one thing that will make a huge difference it would be this one: measure your progress towards your important objectives and Goals.

When you do this, it implies

• that you are interested in success and therefore may achieve it
• that you know what success is for you
• that you understand that your strategies to achieve success may fail.

Effectiveness and success

The most important measurement you can make is to see if you are reaching your objectives, ie being effective.

Many companies make the mistake of thinking that doing things is the same as success. An analogy might help. You watch a documentary on TV about cheetahs. A cheetah chases an antelope – lots of action, animals running, swerving. Is this success? It might be if the cheetah catches the antelope. However, antelopes get away very often. We will let our cheetah catch its antelope. Is this success? It will be if the cheetah is able to eat it. Often a lion or hyena will take the antelope for the cheetah. Success (for the cheetah) is an eaten antelope and a sleeping contented cheetah. [On the other hand, success for the antelope is escape. For the lion, success is a stolen and eaten antelope.]

The vast majority of companies do not think through what success is. They mistake the chase (action) for success.

Every company must work out what success means for it – and then measure to see if that success is being achieved. Every project, every strategy must have an objective – so that you will know what success will look like. You must measure if the action on the project or strategy is achieving (or has achieved) success ie reached its objectives. These objectives must be linked to the overall success of the company.

Key performance indicators

We saw in Principle 2 (`Focus on Achieving Results') that measurement is a useful method to provide focus. In their analysis of what will make them successful, most companies decide on five to six major objectives. These are often called Key Result Areas – areas where it is strategically important to get results (KRAs). Common KRAs are improved

• financial performance
• customer satisfaction
• operational performance
• employee morale.

In order to give focus to these, you should measure your success in achieving those objectives. These measurements are usually called Key Performance Indicators (KPIs).

As we saw in Principle 2, KPIs will be of two types – measurements of success (are you achieving the objective) and measurements of implementation (is everyone doing it who should be).

As well as their KRAs, companies should also write down their Mission and Vision Statements and Statements of Values. KPIs should also be developed for progress towards the Mission and Vision and implementation of (or adherence to) the Values.

The set of KPIs you use should cover all your stakeholders and all your KRAs.

There are a number of very useful approaches to this currently on the market. One of those is the Balanced Scorecard approach originally proposed by Kaplan and Norton. You need to identify and develop under each heading the KPIs that are relevant to you.

Choose carefully — what you measure is what you get

What you measure will significantly affect the behavior of your employees. People will behave so that they look good (or at least not look bad) in the measurements.

Because the KPI is asking significant questions of the company and will significantly drive behavior, choosing the KPIs are important decisions.

Do not be afraid to change, modify or drop KPIs – although such changes should not be done lightly. Too frequent changes indicate instability and lack of focus. However, getting them right is very important.

Here are examples of KPIs that usually do not work.

The old thinking of mainly measuring cost containment gave certain types of behavior – especially a focus on efficiency, cost cutting and downsizing. We now know these to be harmful to the long term Goal (eg, make money now and in the future) of the company. Nevertheless, for a long time they have driven the way companies behaved.

Here are other examples of poor KPIs:

• For many years, the major telecommunications provider in Australia had a policy that 95% of service calls would be dealt with on the day the service was booked. They measured this indicator and they mostly achieved it. However, what of the 5% they did not get to on the day. Unfortunately, there was no indicator to pick them up. Everyone was working flat out just to get to the 95%. Every day a new batch of customers `arrived', 95% of who had to be serviced. There was no way to get back to customers who they did not reach on the day. There was no indicator to measure when those stranded customers where eventually serviced. They were lost to the system. And extremely dissatisfied. Not surprisingly, most major complaints came from these customers.
• When activity is measured but not effectiveness, almost inevitably success is judged in terms of activity. For example, "We need to establish an Internet site to increases sales". Establishing the Internet site becomes an end in itself and someone's pet project. The objective, "increasing sales", is forgotten. That the activity, "establish an Internet site", is just an experiment to try to increase sales is never acknowledged.
• When costs are measured but not effectiveness, almost inevitably success is judged in terms of cost. In many companies, the penalty for overspending expense budgets is often more severe than failing to increase revenue. This would imply that the Goal of a company is to save money. Madness!
• Companies often fail to understand what a 95% success rate means. It sounds high doesn't it? "95% of our customers are extremely satisfied!" It also implies a 5% failure rate. A 5% failure rate becomes a big problem when you have a large number of customers. If you have 20 million customers and 5% can tell a story about a terrible experience they had with your service, you have 1 million people who can be called on to testify. Using a percentage in this case is masking the problem, ie 1 million war stories.
• A common conflict occurs when team goals are set but individuals are rewarded. Eg, "We must all work together as a team. Those people in the sales team who get 100% of their sales quota get to go to Hawaii." This means that the people who work in the background to support the sales reps, and on who the sales reps depend, cannot be rewarded. Why should they help?
• The strangest is when companies plan to kill or injure so many employees each year. "Our target for lost time injuries is 20% lower than last year". What do you do when not enough people are killed or injured? Kill or injure a few more?

Measure your implementation

Measuring the extent of implementation is extremely important. Without these measurements, people assume that implementation is uniform across the company.

Measuring the extent that initiatives or policies are deployed can be a very powerful method of achieving alignment in large companies. For example, a police service introduces a policy of always arresting offenders at domestic violence incidents. Measuring the extent that this is carried out in each division or precinct can show considerable differences in the way the policy is implemented.

In line with Principle 4 (`To Improve the Outcome, Improve the System'), this can lead to questioning why it is not happening – what systems are preventing it.

Evaluation checklist

There are many issues to consider when developing your KPIs and deciding what you need to measure. Below is a checklist that we have found useful in determining the kind of issues for which you need measurements.