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As the old saying goes, "what gets measured will get managed."
While this adage holds up well over time, the successful
implementation of Key Performance Indicators (KPIs) is anything but
a given and definitely falls well short of being a cure-all for all
that ails a business. Having KPIs tools in place and checking off a
box is not enough. KPIs are not, on their own, transformational.
They are simply tools, and there are a few basic pitfalls that all
too often can accompany KPI implementation.
The good news is that FP&A professionals can and should play
a major role in ensuring that well-designed KPIs end up being good
tools when placed in the right hands.
Quantity vs. Quality
Too many KPIs can defeat the very purpose of using measurement
to focus on key business driver improvement. After all, there
really is a limit as to how much information humans and their
organizations can digest. Simply stated, too many KPIs, or the
wrong KPIs, can detract focus and add hidden costs, as unnecessary
administrative burden is imposed upon those responsible for
collecting, summarizing, and analyzing KPI data. In extreme cases,
it becomes the classic case of analysis to paralysis.
Companies can maximize return on their KPI investments by paring
the number of KPIs down to the right handful of truly essential
measures. The selected KPIs and associated targets should together
paint the portrait of success that a company or business unit
seeks. FP&A professionals can and should take a leading role in
urging the organization to take a step back to assess or reassess
whether or not it has selected a manageable number of high-quality
Complexity vs. Clarity
Even the best of planning intentions can yield a set of KPIs
that the average employee does not fully comprehend. Financial and
technical measures are particular areas of risk in this regard, and
this risk multiplies considerably when a poor or non-existent
communication plan accompanies implementation. Not to worry,
though, as this only really becomes a significant problem if we are
looking for people to understand how what they do impacts
organizational success. As long as the top leaders in the company
understand the KPIs, it's all good, right? Unfortunately, companies
who believe this and think along these lines are destined to miss
out on employee engagement as a key lever of KPI success.
The smart money says companies are well-advised to keep KPIs as
simple and straightforward as possible so that employees have a
chance of actually doing things that they know will drive a few
simple, straight-forward measures in the right direction.
Conflict vs. Coexistence
It is entirely understandable that a company's top leadership
will want to maximize just about everything that is good and
minimize just about everything else that is bad. Consider the case
of a company that has already moved its production offshore to cut
its direct costs of production (no doubt one KPI nailed right
there!), while at the same time establishing KPIs to reduce
transportation costs, improve time-to-market, and maximize customer
service. Well, reality is chiming in to say that it may not work
exactly as planned. While each KPI is a good pursuit on its own,
this highly-combustible KPI mixture makes for the perfect storm in
terms of promoting competing objectives and sparking organizational
It pays dividends for companies to take the necessary time to
understand the potential conflicts and behavioral impacts that they
may unknowingly be designing directly into their KPI measurement
systems. Perhaps they may also be giving managers too much credit
for being able to mediate these conflicts on the front lines.
FP&A professionals can and should play an important role in
helping business leaders to quantity the KPI trade-offs that will
be required to keep highly-interactive KPI equations in
Call to Action
Current publications increasingly trumpet the emerging "star
power" of FP&A and its potential to really change the finance
world. Just like the high-potential athlete who has tremendous
natural abilities, it is clearly not a given or an automatic that
FP&A will turn out to be a game changer. KPIs are an excellent
example of where FP&A can and should play a major and highly
visible role in helping business leaders and their organizations to
succeed. What a great way for FP&A to achieve its full
potential and maximize its organizational relevance!
Thomas W. Smith, Director, FP&A Home Systems Division,
Legrand North America, is a member of the FP&A
newsletter editorial advisory board. This article originally appeared in the June issue of FP&A.