There’s an old legend in Russia that goes like this: The government created performance targets for a state-owned nail factory and started measuring the production by weight. The factory changed its process to create fewer — but heavier — nails. As that wasn’t the intention, the KPI was changed to measure the number of nails produced. To meet the new standard, the factory produced massive amounts of very small nails.
While technically meeting the goal, neither attempt to improve output produced the desired result.
Whether this a true story or not is the subject of debate but it highlights one of the challenges of setting goals. When you’re designing your Key Performance Indicators (KPIs), you need to be careful. Choosing the wrong ones can give you a false sense of accomplishment while actually detracting from your real mission. Some of the most basic KPI mistakes are also the most common.
Gaming the System
You need to be careful in how you set up incentives based on KPIs. Employees can be incredibly resourceful in figuring out how to work the system to their advantage. This may be especially true when bonuses are at stake.
Salespeople tasked with meeting prospecting goals will often fill up their call sheets with customers they know will never be sales-qualified leads. Call center employees that are measured on customer call durations may be incentivized to cut conversations short without fully resolving customer concerns. Marketing teams measured by website traffic might worry more about the number of people that visit the website and not engagement or conversions.
It happens more often than you might think because KPIs either sending conflicting messages or aren’t well developed.
Lack of Alignment
Mismatched KPIs are also a concern in companies that haven’t aligned their sales and marketing goals or have departmental silos.
Here’s an example. You have multiple teams that contribute to your company’s email marketing list. Marketing teams may be tasked with growing the list and lead generation. While marketing focuses on signups and the volume of leads, sales only cares about qualified leads. Marketing might hit its KPIs while sales teams spend their time working low-value leads.
The list grows but it gets filled up with the wrong type of people. That’s one way to burn out an email list quickly. The other way is if the marketing team is measured on the volume of content posted rather than quality and conversions. If there’s a mandate that they send a certain number of emails monthly, the volume may drive subscribers to opt-out.
The wrong KPIs can be counter-productive.
When developing your KPIs, make sure goals are aligned with the important drivers for your business and that teams are aligned with each other. When these two things happen, businesses can flourish. Organizations that have tightly aligned sales and marketing teams have 36% higher win rates and 36% higher customer retention levels than their peers.
Developing Effective KPIs
KPI development should take into account five basic principles:
Five Principles of KPIs
KPIs should be straightforward so that everyone can understand the goal.
KPIs must be relevant to stakeholders so they are invested in the outcomes.
KPIs should focus on strategic goals for the organization. They must be aligned across teams and departments to avoid conflicts.
If KPIs appear unattainable, it can be a demotivating factor. KPIs should be aggressive but realistic.
KPIs also have to be measurable and specific. For example, improving brand recognition is subjective while improving the Net Promoter Score by X% is measurable.
Defining your KPIs
Too often, companies will pull together key stakeholders and produce dozens of KPIs that they believe will move their company forward. Months later they’ll review the metrics and quickly be disappointed that they didn’t reach any of them.
Creating effective KPIs needs to take a strategic approach to focus on the most important variables that impact your business. Focus on a few high-priority KPIs rather than a long list. Each KPI will include action steps for achievement, so even a handful of KPIs is going to generate a significant number of steps. Taking the long view will help you reach your end goals with a stronger foundation, so be strategic and patient.
Step One: Define the Outcome
Developing effective KPIs start with defining the desired outcome. Is it about the number of leads generated or the quality of the leads? Is it about first-call resolution rates or is it about customer satisfaction?
It can be as simple as thinking “What problem do we need to solve?”
Step Two: Break Down the Actionable Steps
While your KPI becomes your overachieving goal, you need to define the actions needed to accomplish these goals.
A KPI of improving overall revenue by 5% won’t just happen on its own. Once the outcome is defined, you’ll need to create the action plan to make it happen.
Each step in the process should be measurable.
Step Three: Test for Perverse Incentives
You need to ensure your KPIs don’t cause conflicts or create a solution that makes current problems worse.
Perverse incentives are also called the Cobra Effect. The term comes from India, which had a problem with venomous cobras in Delhi. The government offered citizens financial rewards to kill and turn in dead cobras. It worked well at first until people started breeding cobras to make more money. When the government ended the program, the breeders let the snakes loose — which created an even bigger problem.
This happens often in sales where companies focus on new product rollouts and lose focus on the core products that bring in the largest monthly recurring revenue.
Step Four: Measure and Revise
Create regular milestone and measurement points to evaluate progress against KPIs and the actions you created to achieve them.
You’ll evaluate not just progress towards the overarching goal, but whether the action steps to accomplish the KPI are achieving the desired results. If not, it’s time to reevaluate and revise.
Examining performance against the underlying action steps will often reveal bottlenecks. You may find teams may need better tools or more training to reach their goals or that certain steps get in the way of progress in other areas. By evaluating the steps, you can continually optimize the process.
Take the Time to Plan
Developing effective KPIs will take time and strategic planning. KPIs must be aligned with the organization’s mission. You must also make sure that there is clear alignment between various teams and departments so everybody is working together to achieve the goals.
Effective KPIs will get you the right nails — not just the most nails or heaviest nails.
And, whatever you do, don’t increase the cobra population.