Used well, KPIs, metrics and measures are a powerful instrument for improving business performance and empowering people to make better decisions. In theory, KPIs are a valuable navigation tool, giving everyone in the business an insight into current performance, and guiding the way for future performance. In practise, though, when they’re not used correctly, KPIs can have unintended negative consequences, including decreased performance and low morale.

When KPIs don’t work

Just because something can be measured, doesn’t mean it should be measured. Yet, a common error with KPIs is to track measures precisely because they’re easy to measure – regardless of whether they are meaningful for the business. When KPIs become disconnected from the organisation’s strategy in this way, they’re often little more than a box-ticking exercise, providing no real insights for boosting performance. In these circumstances, it’s easy to see how staff become disillusioned with KPIs.

Worse, though, than not aligning KPIs with business strategy is confusing KPIs with targets. A good KPI is a measure of performance, not a target for people to aim for. As soon as a KPI becomes a target, it’s no longer a KPI – and it can, in fact, have a detrimental effect on performance.

Take this example from an electrical wholesaler. The company created league tables measuring the relative sales performance of branches, and started rewarding the branches with the highest sales. As a result, some branches began competing with each other for the same customers, to the extent that they would undercut a rival branch that was actually closer to the customer, just to win the sale. This meant stores were having to make expensive deliveries to customers hundreds of miles away, despite there being a local store that could have served the customer much more easily. Because the measure became a target that people felt they had to aim for, it distorted their behaviour.

This is a common side effect when KPIs are hard-wired to a system of reward (higher pay, bigger bonus) and punishment (smaller bonus, negative performance review). A true KPI should help people understand performance in terms of where they are right now and where they want to be. As soon as a KPI becomes something individuals and teams have to hit to get a reward, they’ll go to all sorts of creative lengths to secure that reward (or avoid a punishment, for that matter).

Let’s not forget that KPIs only provide a snapshot of performance, and focusing on one KPI as a target leaves other aspects of performance in the dark. As a result, critical areas for improvement may go unnoticed, or key tasks may be neglected in favour of the one thing that’s being measured. It’s like if I ask my children to tidy their room and say that their performance will be assessed on the tidiness of just one corner. Do you think they’ll clean the whole room, as I wanted, or just the one corner that they know will be checked? Just the one corner, of course! You get what you measure, in other words.

How to get it right

So how can you avoid these potentially demotivating pitfalls and implement KPIs in a way that empowers and engages your people? Here are my top tips:

• Link KPIs to strategy. Instead of measuring what’s easy to measure, or what other company’s measure, focus on measuring the aspects of performance that are most important for achieving your strategic goals. Then, communicate this strategic importance to your teams. When people understand how various KPIs are linked to the company’s objectives, it creates a sense of everyone working together to achieve common goals, and that in itself can deliver an enormous boost to morale.
• Adopt a bottom-up approach to setting KPIs. People are motivated when they have more ownership and control over performance measures. So rather than management setting KPIs in a top-down approach, why not set out what the organisation wants to achieve, and then let teams and individuals decide how they can help to deliver those goals? From there, they can determine the best way to monitor performance.
• Don’t use KPIs to determine reward… Of course great performance should be celebrated, but this should have nothing to do with KPIs. Good KPIs are an information instrument – a tool for making better decisions that lead to improved performance.
•  …or punishment. There’s nothing more demotivating than KPIs that are used to control behaviour and ‘punish’ those who don’t deliver. For me, this comes back to strategy – it’s vital people understand that indicators are there to help them work towards the company’s strategic goals, and not to punish them for poor performance. And where KPIs identify areas for improvement, this should prompt an open, positive discussion on what could be done differently in future.
• Look forward, not backwards. KPIs are at their most powerful when they point to the future, not how someone performed last month or last year. Therefore, the best KPIs provide a clear indication of current levels of performance (and how that performance is delivering key goals). This insight should help people make better decisions that bring the business closer to achieving its goals.

By following these tips, KPIs become collectively owned indicators for guiding decisions and delivering strategic priorities. They become powerful enablers of improvement that motivate and inspire individuals and teams right across the business.

Where to go from here

If you would like to know more about KPIs and performance management, cheque out my articles on:

• Caution: When KPIs Turn to Poison
• What Are Smart KPIs?
• A simple KPI Template

Or browse the KPI section of this website or my KPI Library to find the metrics that matter most to you.