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Brad
Brad headshot for KPI article at Reflective Management website

Brad is a Technical Recruiter for a staffing and professional services company. He works in business development and sales, connecting employers with quality talent. Sales jobs in particular tend to be very KPI-driven. He asked :

Do KPIs really measure anything when the majority of your work is affected by outside, uncontrollable factors that KPI’s don’t take into consideration? e.g. client factors.

A KPI is a way of measuring if you are contributing to the business at the level that the business wants or needs. Or put another way “are you generating value for the business in a way we can measure?”. The idea of measuring employees grew out of efforts to make Industrial Revolution factories more efficient. One of the key innovations was setting and measuring employees against goals. In the example given in “Principles of Scientific Management” by Frederick Winslow Taylor, a worker called Schmidt is encouraged to increase his production of iron by being offered more money for producing more iron. We call this “Pay for Performance”.

The logic for Pay For Performance seems sound enough. You’re aligning incentives. Business owners want more “output” because they make more money. Workers want more money because it gives them more financial comfort / security. The business owner puts forth a financial incentive for the worker, the worker produces more output. The unspoken dialog goes something like this :

Business owner: I have limited resources within my business. I am allocating some of those resources to you as budget, equipment and people to use in the best interests of the mission of the company. In return for good use of those assets, I will reward you with pay and benefits.

Employee: Thank you. I will do my best to create enough value for you in your business that you will be glad you allocated those resources to me.

Business owner: I’m glad that you’re going to try, but I need some more certainty. If we put a measure on that value, we can both be more certain that you have generated that value.

That number is a KPI.

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Creative Vs Procedural Work

A procedural job is one that can be reduced to a set of repeatable steps that produce reliable results. One of McDonald’s early innovations was to convert the creative process of cooking a burger to a set of repeatable steps with predictable results. In “Principles of Scientific Management” the Schmidt’s job is to move pig iron from point A to point B. Procedural, easy to measure. The only variable is the amount of physical effort Schmidt puts into the endeavor. And you can motivate that with incentives. If you can’t reduce work to a set of procedural steps with predictable results, it’s creative work. It’s significantly easier to develop a KPI for procedural work than it is for creative work.

Brad’s job is to find companies who have employment needs, find people who are looking for work and match them. There is a procedural element to this:

  1. Find a company with an open position
  2. Scan database of people we can place
  3. If match, connect the two
  4. If no match, seek new employee

However, those steps don’t have repeatable results. This is creative work and it’s hard to measure. I’ll spend the rest of this post focusing on building KPIs for creative work that are good motivators and strengthen the relationship between employee and manager. I’ll deal with this primarily from the manager’s perspective since it is more typical for a manager to want to set a KPI than an employee.

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The Psychology of a KPI

One of my core beliefs is that almost nobody shows up to work with the intent of doing a bad job. People only do a bad job when they aren’t clear what the job is, or they lack the skills or motivation to do it. The incentives for doing a good job are strong. Good performance = reliable employment = able to provide for needs for self and family. Be aware when you set a KPI that you’re keying right into an employee’s sense of safety. As such, it can create a number of responses. If the employee feels that the KPI puts that safety in question, it can create a “fight or flight” response. The fight response might be attractive because people in “fight” are aggressive in trying to meet a KPI. But you can only trigger the fight response so many times before your employee burns out. It’s also lazy management.

A more desirable response is creating the desire to succeed and accomplish something.

How is that different? You’re keying into more sophisticated human need – the need to do something worthwhile. This is a much more long lasting motivator. So use KPIs as a tool to motivate and energize your employees by giving them a sense of accomplishment. In that sense, I don’t think that the KPI needs to be attached to a financial reward, although it’s fine if it is.

As a manager, also be aware of your underlying motivation for having a KPI. A KPI can be a shortcut for judging performance. Meet the KPI, good. Exceed it, better. Miss it, bad. It’s quick and it’s easy. And you only have to compile and monitor a number over time to assess performance. A KPI can give a false sense of certainty about whether an employee is doing a good job or not. Great managers invest time in their employees and understand how they are motivated, how they accomplish work, what lights them up. If you’re using a KPI in place of that effort, you’re not using KPIs appropriately.

I can’t comment on how Brad’s manager is using KPIs or managing Brad, but as an employee look at your KPI in the broader context of how you are managed. I’d be concerned about a manager who only cares about the KPI.

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Creating Safety And Balancing Risk

Ed Catmull, CEO of Pixar and Disney Animation, talks about finding balance in creative work in his book Creativity Inc. Pixar movies exude creativity. Their stories are beautifully told and have a strong emotional core. And remarkably Pixar have turned out hit movie year after year for 20 years.

Here’s two positions Ed could take.

Position 1: You have one year to make a movie about Toys that is a blockbuster, or you’re fired.

Position 2: Create a perfect move about Toys, we’ll release it when we’re done.

Neither of these positions really helps. Position 1 has tight bounds and high risk. Position 2 has no bounds and could lead to a never ending pursuit for a perfect movie. Ed recognizes that Pixar is a business that needs hit movies to survive. He calls this feeding the beast. On the other hand, movies are Pixar’s babies. They need to get to a point where they can stand on their own. And the trick is finding the balance. Think about your KPIs the same way, you need to find that balance between your hard business needs, and providing an environment where your employees are motivated and able to do good work.

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Four Conversations

I believe that value of a KPI is creating an ongoing conversation between you and your employee about what they are accomplishing for you, the challenges they face and how work is getting done. A good KPI is created with a clear view of the risks involved and an attempt to share or balance those risks.

Conversation 1: How does this KPI drive the business?

In this conversation you’re building commitment to the business by helping your employee understand how the work they do propels the business forward and how it aligns to your mission.

Most employees benefit from knowing that their work makes a difference to the business.

This is the part where you motivate. Does your business run on delivering cutting edge products? Or the lowest prices? Being first to market? Or the quickest to follow the market? Big margins? Cheap customer acquisition? Talk to your employee about how their work influences the business. The fewer steps there are between the employee’s work and the engines of the business the better.

For example, Amazon Web Services focus on providing low cost, reliable cloud infrastructure. Their mission is to save their customers money. If you write code that enables customers to be charged per minute, rather than per hour, you will save all your customers money. Bingo!

Contrast the Amazon example to working in a company that builds cutting-edge products. You work in the IT team and you support e-mail. You make sure the server is running well and secure, and roll out updates to the mail clients. The KPI is “time to respond to support tickets”. The set of steps between you and a cutting-edge product might be: you respond to a ticket -> specific e-mail issues get resolved more quickly -> people who build the cutting edge products have access to e-mail when they need it -> they have information when they need it -> they are more effective at their job because they have the information they need. The last connection is particularly weak. Cutting-edge products take years to develop. E-mail outages aren’t going to affect that ability, but they might affect your sales team’s ability to close business when minutes can matter.

As you get deeper into the organization, there will be more connections and they will be more tenuous. If you’re the CEO and one of your engines is “first to market”, you have the access to all the resources within the company to drive this engine. But someone who is an individual contributor with 7 layers of management to the CEO does something that eventually affects that engine, but only after a number of steps.

Conversation 2 : How well does the KPI measure the impact of the work?

Remember that creative work is hard to measure. On completion, how could you measure the impact of Michelangelo’s fresco in the Sistine Chapel? It would have been possible, but you might be tempted to create proxies. How much paint did he use? How many hours did he spend per day working? What area of ceiling did he cover per day? How many angels did he paint? All of these are eminently measurable, but are also meaningless in the context of the mission : “Paint a fresco for the ages”.

If you can’t create a KPI that effectively measures the impact of work, don’t bother. Be creative, discuss together but be willing to abandon a KPI that doesn’t measure impact.

Conversation 3: What are the factors that affect ability to meet the KPI? Which of those do we believe we can control, and which can’t we?

This conversation builds trust. One of the top factors in employee engagement is the relationship with their manager. This is an opportunity for you to listen and coach. Pick through the KPI together and discuss the work that is needed to meet it and what factors can be controlled and what can’t be. The goal here isn’t to create excuses or make KPIs easy, it’s about setting expectations. Brad’s clients will often change their staffing needs. A budget gets cut. A project gets cancelled. A job gets filled with a promotion instead of a new hire. There are a lot of ways that one position can be open one day and closed the next. Clearly we need to discuss that. Does this mean Brad needs to have a broader pool of open positions he’s trying to fill? Or build a better method of measuring the reliability of his clients? If client A often closes positions without filling them, an open position there has less weight than a similar position at company B, who keep positions open until they are filled.

As an employee of a professional services firm, Brad couldn’t be held responsible for major economic factors like a sudden recession.

However, if Brad was an employee at a bank or investment firm, he should be planning for changes in financial conditions because it’s more immediately part of the business.

I’ve spent a lot of my career working in software engineering organizations. Estimating how long it will take an engineering to create a particular feature is a type of KPI. Writing software is a creative profession akin to creating a painting. It changes and morphs as you go. I like the work the agile community have done in this area. One of the principles that underpin agile is that software is unpredictable, and the system is designed to drive forward progress, rather than penalize employees for failing to estimate correctly. Atlassian have a good guide here.

Conversation 4: What behaviors might the KPI drive, and are those acceptable within the culture of our company?

This is a conversation to reinforce the culture and values of your organization. A KPI drives action, and actions repeated over time are behaviors. Your culture is a sum of the behavior of your employees. The more an employee drives to meet their KPI, the more likely they are to take shortcuts. Those shortcuts may be counter to the interests of the business. For example, if the goal is “meet your sales number at all costs” might lead to channel stuffing or cutting margin. Worse, it might lead to flat out unethical behavior like stealing client lists. Or in QA, a KPI about “number of bugs file” could lead testers to file lots of low quality bug reports. Talk honestly about what shortcuts, hacks and other workarounds could be deployed to make meeting this KPI easier, and whether each of them fits within the culture and values of the company. This is a valuable discussion for Brad and his manager. If Brad has a KPI around number of positions filled, he might try to push clients to make hires they’re not sure about. Or he might find lots of low value, low margin, easy to fill positions. These tactics are neither good or bad, they need to be discussed in the light of the culture / values of the business.

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Wrap Up

KPIs can be a useful tool to motivate employees but they must be used with care. When misused, KPIs become psychological warfare which will motivate over the short term, but harm over the long term. When you set a KPI up through a series of open conversations they can motivate, they can build trust and they can reinforce culture. And that’s all goodness if you’re a manager.