The Use of Benchmarks and Key Performance Indicators(KPI): One Part of Executing Better
By Jim Struck, Leadership Vision, LLC
Published in Mr. Struck’s column in Management Trends, May, 2009
Much of our life in the business world is about keeping score. Keeping score is a necessary tool to tell us how we’re doing as individuals, departments, with our clients, and as organizations. It is a key component in the broader topic of how we execute on our goals and initiatives as an organization. In 2002, Ram Charan and Larry Bossidy wrote a landmark book called Execution, the Discipline of Getting Things Done. In the front of the book they define Execution as:
- the missing link
- the main reason companies fall short of their promises
- the gap between what a company’s leaders want to achieve and the ability of their organizations to deliver it
- not simply tactics, but a system of getting things done through questioning, analysis, and follow-through. A discipline for meshing strategy with reality, aligning people with goals, and achieving the results promised
- a central part of a company’s strategy and its goals and the major job of any leader in business
- a discipline requiring comprehensive understanding of a business, its’ people, and its environment
- the way to link the three core processes of any business – the people process, the strategy, and the operating plan – together to get things done on time
If your organization struggles to execute (get things done) the book is a good read. For many it can be the start of making changes in how you lead. For our purposes, I am only looking at the measures we use in this process. I will address additional aspects of execution in subsequent columns.
Are you really good at measuring the important aspects of your business? Think about your answer. The challenge I will give you is that less than 30% of the agencies I work with do this well. At the individual level many use benchmarks as a way to control rather than motivate. “You didn’t produce X, now you’re in trouble.” I will talk about this in a subsequent column, but for now I want to move on to talk about using measures.
So, why aren’t we better at either keeping score or selecting the right things to keep score? You have my e-mail address. I’d be interested in hearing your experience and thoughts.
Before I continue, let’s make a distinction between a benchmark and a KPI. For my purposes a KPI is something we want to measure that is key to our operation. A benchmark is the target number within that KPI. If we decide we want to track dollars collected as a KPI, then the amount we want would be the benchmark.
My experience suggests that we aren’t better at keeping score or the right score for a couple of reasons. First, we don’t critically think about the importance of the measure in helping us to achieve the results we want. For instance, we tell a biller, or a collector, you must bill so many claims or make so many calls in a day, week, or month. The benchmark may resemble reality and be achievable. If it is then it will serve as a motivator for most. If the benchmark is not based in reality, but is simply what we want or think people can achieve, then the benchmark can be a de-motivator.
I was on a client site working in their insurance department and asked what the goal (benchmark) was for claims worked per day. The conversation went something like this. “The goal is 50 per day.”
I asked, “Is this for certain payers or applied across the board?”
“Our people work all payers so it is an average across the board.”
“How was this number selected?”
“I don’t know it was here when I got here nine years ago.”
“Has anyone ever hit this number?.”
“How close are people today?”
“My highest producer hits around 30 – 35 per day. Most are between 25 – 30.”
“Is the fact that no one is close to 50 a function of talent or is the goal too high?”
“I think the goal is too high. People ignore the goal because it isn’t attainable. It’s a downer.”
“Have you shared this with anyone?”
“No, do you think I should?”
She did share this information and the goal was eventually dropped to 40 and people were paid to hit 40. Funny thing, more people began to hit 40.
This situation illustrates my second point. We don’t critically think which KPI’s we should measure. In this instance the agency paid people to hit 40 claims. The focus was on activity not results. They paid for more activity, but there wasn’t a corresponding jump in dollars collected. The same thing can happen when we pay collectors on calls made, or salesmen on accounts referred. As an organization we are seldom paid on the basis of our activity with the possible exception of early out programs or pre-collect letters. If we focus our people on activity then many times we get activity. A more meaningful KPI in these cases are dollars collected, or accounts resolved.
Exception: we may want to select some activity measures at the individual/team level to help them make the connection between activity and success, but we want the bulk of how they are paid to be based on what they produce, which relates to a key measure for organizational success. Contests based on activity MAY be okay, but I would still prefer to see those things that are more meaningful around dollars/fees generated.
In general, we don’t need a lot of KPI’s, but we do need an assortment. We need a couple/three that are leading indicators, predicting our success. A leading indicator might be promises made, calls made, contacts achieved, accounts worked. For leading indicators to work well we have to have a base line of the measure and how it predicts success (i.e. so many promises achieved led to so many dollars collected, etc.). You don’t need all of them, just the ones that you have found are the best predictors. Hint: they are the ones (and the corresponding behaviors) that you would look to change mid-month in order to impact month end.
Lagging indicators telling us how we did. Dollars collected, fees generated are both common lag indicators. They are important to tell us what we are doing well and what we need to improve. With leading indicators we can identify specific behaviors we need to work on in order to impact the bottom line. It is more meaningful to a collector to tell them they need to improve their promises made, average payment size, then it is to say we need to improve collections for a client/organization. They need to know the overall goal (bottom line), but they also need to understand what they can change individually that can get them to the overall goal(s).
I’m going to stop here. I want to hear from you. How do you think you do with measures? Are you more accountable with what you are using? Are they the right measures? How do you know? What are you doing and what works for your department and/or organization? I’ll share the information and add some additional thoughts next time. Thanks. I look forward to hearing from you.