Just imagine you put some KPIs in place and instead of measuring and improving performance, they lead to the opposite: A mindless chasing of numbers, resulting in reduced performance.

KPIs (Key Performance Indicators) should be the most important measures used by companies, business units or project teams to track their progress against strategic goals. A well-designed set of KPIs ought to provide the vital navigation instruments that give everyone an understanding of current levels of performance. However, in practice, these well-intended KPIs can turn toxic.
One reason why things go wrong with KPIs is that they sometimes turn from a measure into a target. I believe that when a KPI becomes a target it stops being a KPI. Let me give you some examples:

• An electrical wholesale group put KPIs in place to measure the relative sales performance of branches. It then created league tables and rewarded the best performing branches. The result was, stores that were hundreds of miles apart chased the same customers and even undercut the geographically closest retailers to the customer. In many instances, deliveries were made from the central warehouse to the shop hundred of miles away, only for this shop to drive the parts back near the warehouse where they undercut the prices of the local store.
• A police force introduced KPIs to measure its performance. The government then turned some crime statistics into targets and measured every police force against these targets. As a result a lot of gaming took place to improve the numbers, but not necessarily the underpinning performance. For example, one police force was told by their chief to prioritise burglaries of multiple-occupancy households because the system would count each occupant as a separate solved crime.
• Another classic example comes from a Russian nail factory. When the government centrally planned the economy it created targets of output for the factory, measured in weight. The result was that the factory produced a small number of very heavy nails. Obviously, people in Russia didn’t just need massively big nails so the target was changed to the amount of nails the factory had to produce. As a consequence, the nail factory produced a massive amount of only tiny nails.

For me, a KPI should help to measure how well we are delivering on our key goals and strategic priorities. The data generated from the KPI should then inform decision-making and where appropriate, lead to actions. This means, the purpose of a KPI is to inform, or provide some objective data.

It is really important to understand that no measure is perfect or complete. There is a hint in the name KPI, where the I stands for indicator – it indicates performance, but never provides a complete picture.

I often use the analogy of comparing KPIs to a torch. You are trying to light up a room but your torch will only give you one spotlight. The same is true for a KPI, it will only give you a spotlight and leave other parts of the room in the dark. If we have a number of torches we can light up more of the room and get a better picture. This again is similar to using a set of KPIs that shine the light on different aspects of performance.

If we now use this imperfect measure as a target it means people can deliver great results on the spot that is lit up, but ignore the large areas that are left in the dark. This is a bit like telling children to tidy their room and then saying that you will only check this one corner of the room, and if that is tidy then they will get a treat. We all know what will happen, the one corner will be spotless, but all the toys will be stuffed under the bed and into the cupboards. And believe me, as a father of three I know a thing or two about that.
If we use KPIs as targets then we get what we measure, and nothing else. However, if we use KPIs as indicators used and owned by everyone to identify areas of improvement, then they become powerful enablers of improvement. A subtle, but vitally important difference.

There is one added complication. In order to be meaningful, every indicator needs a target or benchmark. But this target is more of a reference point to tell us what good or bad looks like and not the overall goal to aim for.

KPIs are powerful tools if they are used as indicators to measure the delivery of the goals. However, if the KPIs become the goals, then they turn into toxic material that will inhibit performance improvement.