What Is The Cure To The Side Effects Of KPIs?

If there is one topic in business literature that has been covered exhaustively, it is Key Performance Indicators (KPIs). But if you’re not careful, the indicators you set might inadvertently encourage behaviours that can be dramatically damaging…

By Josep Suria/Shutterstock

“In 19th-century India, the city of Delhi had a snake problem. A rather large population of cobras slithered the streets with impunity. The British government decided to get rid of the snakes through crowdsourcing. Officials offered a bounty for every dead snake that locals brought in.

But something unexpected happened.

Soon after the British started to pay for every dead cobra, they realized that local entrepreneurs had begun to breed snakes in order to get paid.

The government canceled the program. So, the cobra farmers released their worthless snakes into the streets.

It turned out the British didn’t want dead snakes; they wanted fewer live snakes. By incentivizing the wrong thing, they inadvertently doubled their problem.”

The Biggest Threat To A Growing Company’s Culture, By incentivizing the wrong thing, growing companies can create more problems than they solve.

If there is one topic in business literature that has been covered exhaustively, it is Key Performance Indicators (KPIs). In procurement it’s no different; just do a Google search on “Procurement KPIs.”

KPIs have become an integral part of business, but they should still be approached with caution. Because business is human by nature, there are many pitfalls to consider when defining KPIs. If you’re not careful, the indicators you set might inadvertently encourage behaviors that can be dramatically damaging, and lead to a very different outcome than the one you expected.

KPIs can have negative side effects

The story at the beginning of this post is the origin of the term “Cobra Effect” and illustrates the potentially negative impact that poorly designed KPIs and incentives can have.

In the world of Procurement, some KPIs may create similarly problematic situations. For example, the following two KPIs are used or mentioned quite often:

  • Number of suppliers per £/$/€ million third-party spend
  • Number of Procurement FTE per £/$/€ million third-party spend

First of all, both KPIs are useless without context and, what’s more, they can also foster dangerous behaviors and outcomes. For example, spend consolidation or supplier reduction programs are quite common in Procurement, and they can lead to over-dependencies by creating situations of quasi-monopoly. Therefore, such a leading indicator (supply base concentration serves an objective, it is a means, not an end) should be considered in a broader context and need to be counterbalanced with other corresponding leading indicators, such as, for example, the impact on savings and on risk exposure (dependence, single-sourcing, etc.).

Another classic example is related to payment terms. Whenever organisations try to improve their cash management/flow, they also question whether or not to extend payment terms with suppliers, even though it has been proven time and time again that the impact of extending payment terms is minimal. Despite bringing some short term benefits, choosing to extend payment terms could create long-term issues, as suppliers will not consider such procurement organisations as a “customer of choice.” In that specific scenario, it would be much more beneficial and valuable to improve Source -To-Pay processing times. This would improve the management of liabilities and cash by, for example, using supply-chain finance, which is a more effective way to improve cash management and, at the same time, relationships.

Purpose is the most effective way to influence behavior

The science of motivation is a complex topic and there are numerous studies in the field of behavioral economics that demonstrate how people are biased and often unconsciously make irrational decisions. Therefore, organisations must use caution when designing KPIs to avoid the folly of rewarding A, while hoping for B.

Luckily, there is a well-known and proven safeguard against pitfalls like these: create a sense of purpose and give actions meaning.

Rather than just focusing on a target, this approach focuses on outcomes (‘why’), which will facilitate adoption and alignment across the organization. Then, people will be able to define the ‘how’, and engage in the appropriate activities (‘what’) based on the context they are in. This form of “commander’s intent” also gives collaborators and suppliers more autonomy (the topic of KPIs and  their impact also applies to contracts as a measure of the deliverable or outcome). They need this autonomy to adapt their actions in a dynamic and volatile environment.

“When a measure becomes a target, it ceases to be a good measure.” –Marilyn Strathern, British anthropologist

If Teams Become Self-directed, What’s Left For The Managers To Do?

How do you enable and oversee without having control and visibility? This is the challenge of leadership and focusing on adopting or refining these three key attributes will help get you on the right path…

By Monkey Business Images/ Shutterstock

We have all heard the words and most probably used them ourselves many times over; Empowered, autonomous, self directed. Thousands of articles, publications, books, podcasts and yes, even blogs have been written about the power of enabling this type of cultural environment. And to help us get there, we have a plethora of insights, tips, roadmaps and strategies to make sure we can navigate our path through this organisational utopia. It’s how we all want to work, and how we want our teams to operate.

Despite this consensus it remains a challenge for many organisations who are struggling to find the balance between the what of the work that needs to be done, and the how which determines the way in which it actually gets done. Why exactly is this the case? With all of the research backing it up, this should be a no-brainer to want to do, and with all of the practical guides available, it should be a matter of simply applying and executing to get it done. However, given the human element, it is never quite that easy or simple and that accounts for organisations and managers who have tried and not been successful, or have chosen to not try at all.

It could be argued that if we all want to work in that way, enabling others to do so is the not only logical but also effective. But words do mean different things to different people and sometimes depending on the context, the same words also mean different things to the same people. If we can have alternative facts, we can surely have alternative interpretation. A google search of the word empowerment returns over 293 million results. Self directed tops that with 438 million. I am pretty confident in my assumption that while results may be similar, they will not all be consistent. With that in mind, the challenge can start early, because what we need to understand is that while the intent is there, that in itself may not be enough. It needs to be the right intent and the right execution, to deliver the right outcome.

Irrespective of where you are within the organisational hierarchy there is always someone in a position to direct your focus, priorities and actions.  What tends to be different is the level of direction and who the messages are coming from. In typical, traditional structures, decision making and direction tends to be determined by functional role and reporting lines. In organisations that have transformed to respond to digital challenges, are working with Agile or for digital natives, that may be more a function of expertise and specific project engagement. Notwithstanding that, even CEOs have boards to answer to, and boards in turn have shareholders to answer to. While we have seen many recent examples around the world of interference, lack of probity, and good governance in organisations and government, oversight, direction, external perspective are important foundations for effective operation.  And that in itself can become a derailing factor for many. Because how do you enable and oversee without having control and visibility?

This is the challenge of leadership and focusing on adopting or refining three key attributes will help get you on the right path:

1. Understand and embrace risk

This is not about ignoring what is known to create a problem. Organisations need to be confident in their ability to get good outcomes in the right way without careening towards a disaster that could have easily been avoided or mitigated. The risk for many in stepping away from decision making and allowing individuals and teams to make their own decisions in relation to what is done, is problematic.  It can be seen as a leadership failure; that we somehow didn’t “own the problem”, or didn’t “step up to the plate”. Life, much less work situations are never really that simple. And enabling self directed teams is not an abdication of leadership responsibility. There are so many factors to consider including the information that was available at the time. It can also come down to a question of trust in that person as much as trust in our own judgement. It sometimes involves letting others find their own way, even if we know that it may not be the best way, or more pointedly, the way we would have done it. And equally important, it also comes down to assessing the consequence of things going awry and adding that to the factors determining whether the risk is acceptable in the context.

2. Understand capability

Applying equally to ourselves and our teams, the capability question is an important one. And a fundamental attribute of leading is assessing strengths as well as development needs in individuals and responding by making time and offering enablement to help those individuals build on their strengths and improve in areas that may need more attention. It takes time to actually spend time working on ourselves and helping others who are looking for development and improvement. In a choice between a meeting with an agenda focused on task allocation versus a meeting to develop and discuss development plans and progress, there is little question of which one would produce the more engaged employee. And with enthusiasm being contagious, it’s not a bad outcome for the rest of the team or client either.

3. Create a learning environment

Every organisation is in the process of either considering a transformation or has begun one. In the digital world, we have only started to explore the impact of the fourth industrial revolution and others are already speaking of the fifth (a great topic for another blog!) It is hard to keep up with all of the business-as-usual activities, much less everything else that is now an expectation; new projects, external research, feedback loops, workshops, to name just a few. Enabling teams and individuals with the opportunity to manage their own work and themselves to the extent that works for them and the organisation gives them a chance to learn through practical means, by hearing about the experiences of others, and in turn sharing their own stories. It fosters trust in the culture of the team and the organisation and a willingness to go beyond the simple instruction that they would have otherwise been given. Diversity. Creativity. Productivity. They can all thrive in this environment when leaders understand the opportunity of truly leading.