Leaders: measure what really matters to your business

October 8, 2017

The stated and implied Key Performance Indicators you bonus or reward your teams on will determine the success or otherwise of your entire strategy. This is because they determine where your people will focus all their energy. If strategy changes, but the KPIs stay much the same, then you have a problem. Worse still, if you are rewarding bad behaviours - presenteeism, the person who closes the sale at literally any cost, the campaign that generates high sales but crippling return rates, the team that gets through their call list fastest, the guy that took credit for other people's ideas - then you are using data to inspire, reinforce and reward behaviours that will decrease overall business success. 

 

These implied or inferred KPIs are especially dangerous because they will magnify any silos, communication issues and inefficiencies already in the business. Employees quickly adapt their behaviours to what success is supposed to look like, even if you have got that wrong, or are blissfully unaware of the signals they are (mis)reading.

 

It does not matter how good your analytics capabilities or technologies are if the company is measuring and rewarding the wrong things. Your strategy will not succeed.

 

So how do businesses - especially at Board and executive level - come up with appropriate and effective measurements and KPIs that align to plans and ensure there is a decent chance of success?

 

1. Trust people with the big picture, including your dreams for the company, your vision of what success looks and feels like and your expectations of them as individuals. Obviously, that only works if you're not evil. Assuming you're not evil, please at least ditch some of those bad corporate habits you may have picked up along the way. Banish all "need to know" or "above your pay grade" thinking. Credit your employees with - #goshdarnitnoshitSherlock - intelligence and capability for independent thought. Make sure that they all understand what mountain you are all running up and why, and then continue to reinforce that message. They'll likely know before you if you're drifting away from that vision, so encourage them to call out nonsense and support them when they do. Even if they've simply misunderstood you, misunderstandings indicate gaps or weaknesses in your communication or inconsistencies in management's understanding and implementation of your plans. Very valuable data!

 

2. Looking after the money should be everyone's business. Teach everyone in the organisation to understand the company financials and the vocabulary associated with them. (The ability of otherwise smart well-educated people to confuse gross and net is astounding - and up to you to fix. Handy tip: "gross" is big and fat because it contains everything, whereas as a "net" has holes through which some of the valuable little fishies escape, making the overall catch smaller. Or whatever works in your world). Expose them to summary accounts, explicitly teach people the difference between top line "vanity" numbers and bottom line "sanity" numbers. Show them how both sales and costs are levers of profitability. Yes, that actually involves people seeing stuff you may have spent your career hiding up. Yes, that may scare people, especially when money is tight - but again, it is your responsibility to educate them through that. People are naturally drawn to the biggest numbers they see, hence the permanent appeal of gross sales - costs are essential to provide context.

 

Most employees will not treat company money with the same care as they would their own if they assume it to be limitless. It isn't and all the little, often wasteful, spending decisions made by individuals right across the company ultimately add up to destroy profits or cost headcount. (I recently met a startup who had wasted the equivalent of three heads per month because a key part of their tech infrastructure had not been shut-off when no longer required). A similar thing once happened on my watch.  In fact, this happens all the time. But only when employees see costs alongside sales do they start to think commercially, and so their decision making improves. People can't really be properly accountable for what they don't understand - so let's all get a little bit more into accounting! (Does it sound sexier if I call it financial data bondage?)

 

3. Apply 'cheat the system' thinking - ideally with the help of some people who are younger and/or junior to you, therefore more likely to find themselves on the receiving end of your daft requests. Ask them: "if this was your KPI, how would you hack it? How would you get the best results for the least effort? What would you do if it was clear you couldn't possibly make the target without duplicitous means?"

 

You need to figure out if you are setting up a measurement system that will do more harm than good. Could it be twisted around and used in malice? Or unethically? If KPIs and targets are unrealistic and the culture unhealthy, people will cheat and lie to survive if they have to. The Volkswagen emissions cheating scandal is an absolutely classic example of this - when it was apparent to engineers that they couldn't make their emissions targets without cheating, they cheated. Volkswagen became the target of regulatory investigations in multiple countries, the stock price fell by a third, the Group CEO resigned, and the company has already committed €16.2 billion on rectifying the emissions issues. (Just in case anyone was thinking measurement wasn't a big enough deal to be on the Board's radar).

 

4. Blow it up to 100% -  If people were to do what you are demanding or take the behaviours you are rewarding to such an extreme that everyone did nothing but them for 100% of the time would the consequences for the business be primarily good or bad? For example, the only effective way to guarantee increased conversion rates month on month for two quarters is to introduce no new sales into the pipeline. Conversion rates will soar with no pesky new leads to drag the ratios down. Are you sure that is what you wanted? Are you sure that is what you meant to ask for? When you decided to get everyone use a time tracking tool, was part of the plan that people would now track that they were spending two hours a day tracking their time? Really? Take what you're proposing to the extreme and think through the consequences if followed to the letter, in all isolation from context. Because when a declaration comes from the top, that is what will happen.

 

When you are the boss, people take you literally - even your half-baked brain belches. This is actually quite weird when you first realise it because it means you have to separate you the person and you the professional persona (especially when you the person is still just winging it and making it up on the job, like pretty much every CEO ever). People literally do what you say you want or what they think you want, or what someone else claims to know you want. (I used to call it "the law of Vicky says..." and encouraged people to call it out whenever they heard it invoked).

 

I love the example Sheryl Sandberg gives about how she accidentally banned PowerPoint at Facebook, after her request not to use presentations in one on one meetings with her was taken as "Sheryl says no PowerPoint ever" and so it was also cut from sales meetings with clients (problematic!) It's easily done and usually completely unintended on your part - but you need people to be safe enough and brave enough to know they can call it out. Otherwise, they might just kill the company in order to meet their metrics.

 

5. Break silos, don't build them. The two obvious centres of measurement and data within a business are typically finance and marketing. But critical business analytics mustn't stop there, or you can end up with blame games, counter-intuitive decisions and general chaos. I'll give you an example from retail. (At least four different companies will now think I am talking specifically about them, but this is an example so common as to be generic). In my last business, we built an excellent data technology that would predict if a specific customer would return a specific item after purchase. Returns are a hugely costly problem, and all the costs, hassles and KPIs associated with them are normally the domain of people working in the supply chain, including operations, logistics and returns management. However, the primary cause of returns is the customer - via a complex interplay of targeting, marketing offer, product depiction and past purchase patterns. At its most simplistic, marketing causes returns and supply chain are responsible for clearing up the mess.

 

In a non-siloed organisation, the playing field is relatively level - everyone is measured net of returns. In the far more typical siloed organisation, marketing gets rewarded on KPIs that relate to growth and topline sales - they have literally zero investment in whether the product actually stays sold, in fact reducing sales but improving net goods kept, and therefore profit would harm them. I presented one retailer with a simple choice - to make your profit target you can either reduce your returns rate by 4 percentage points or increase sales by 25%. The outcome will be the same, but one is significantly more attainable, sustainable and efficient than the other - especially in a flat market where growth has flattened out.

 

The lovely, non-C-Level, team I was talking to had literally no way they could go for the efficient option of returns reduction and keep their jobs, because they were all being measured on sales and growth related KPIs, despite the business having shifted into a profit maximising direction. That team will do the "right thing" according to their brief, yet the brief is wrong as those metrics no longer actually support the business-wide strategy. Everyone loses.

 

6. Set the destination, budget and the purpose of the trip your business is on, then step back to allow functional experts to solve the problem of figuring out how you're going to get there and what you'll need and precisely how you'll know when you've arrived. Your team almost certainly know more about the detail and the best methods of measuring execution than either you or your board do.

 

There are established KPI and measurement playbooks out there for different business stages, strategies and business types - you do not need to completely reinvent the wheel or roll in the management consultants for this. But if you start telling people exactly how and what to measure in order to please you and/or be rewarded, they will do just as you say - and you'll get the worst possible thing, which is exactly what you asked for, rather than what the business needed. 

Your analysts, data scientists, marketers, planners have detailed (and often expensive and up to date) technical skills. Their main challenge, especially early in their career, is communicating upward effectively in meaningful commercial terms. They struggle to focus on the important or to make the important understood by people who are less technical than themselves.

 

As a leader or manager, this as much your communication problem as theirs. I was working with a group of CEOs and COOs a while back, with some of the biggest names in hotels and food around the table. After a brief workshop on the strategic power of analytics and measurement, one said to me "you mean I've been seeing all these stupid reports about page views and social influence when the same team could have told me about the contribution of every hotel booking website to each square foot of profit?" 

 

Well yes, they most likely could. But only if they know that this is how the leadership drives the business. And only if they know what the total square footage actually is. And how profitability is calculated for the board. And only if anyone ultimately notices or acts on their findings. This top-down communication is the only way measurement gets past meaningless reporting, gets past interesting insight, and becomes the driving process for carefully aligned strategic action.

 

7. Resource the measurement function, especially with executive and board time. Team time, but more importantly executive and board time. Measurement is your business navigation system, it's an ongoing learning process, not a one-off job, a plug-in technology or an afterthought. Just because you "do data" somewhere in the company, doesn't make you data-driven at board level. Data is complex, data is political, data is nuanced. It can be technically correct, yet erroneously interpreted. It can be completely inappropriately or unethically interpreted. This is especially risky when a board is relying on second and third-hand interpretations, rather than able to draw their own conclusions or challenge underlying assumptions directly.

 

Maybe its because I have a data analytics background that as a CEO I've always felt particularly confident to say "hang on, that is not what the numbers are saying here - we have to look at this differently and change path".  But most board directors don't have that advantage - instead, they have a few hours to process highly summarised and pre-interpreted information on which they must then base decisions about a company's strategic direction. At worst their decision making can be manipulated into a specific direction by an individual with an agenda, but more likely the "right decision" is simply missed by all because the true risk or opportunity within the information simply isn't apparent given the time, information format and skillset available.

 

The board meeting isn't the place to query how a metric is calculated, that should be done with ongoing executive and team interactions, but it overarching is the place to challenge assumptions around whether the data really does support the arguments. And data sure as hell needs to trump ego driven assumption (not that any board ever has had a surplus of that). The only boards this advice doesn't apply to are those made up entirely of data analysts (you know who you are my friends!) - you need less data, less analysis and more decisions - everyone else, close your eyes/ears.

 

8. This data thing really is a thing, even outside tech firms. Upskill now to remain relevant. Analysts are not simply abstract, clueless geeks. Tech entrepreneurs are not simply chasing the latest shiny thing (at least not all of them, all of the time). AI is neither about to destroy the world, solve everything, or go away in a puff of hype. And board directors are not simply clueless technophobes (though they may not fully understand just how much the tech stack has changed and ways of collaborative working have evolved in recent years). Mostly the board, entrepreneurs, execs and analysts are simply speaking different languages, focused on different priorities, and all failing miserably to communicate - meaning no-one can fully execute and optimise the business strategy.

 

Ultimately, though, this is not about making analysts and data scientists ever better at communicating upwards (though let's not drop that ball, you'll be running the show soon enough). It is the board/execs who set the company's path and the analysts who measure the effectiveness of the navigation and whether the underpinning assumptions remain valid. So I passionately believe that it is boards/executives who must make more time to understand the fundamental numbers and terminologies of a data-driven business - otherwise how can you ever act effectively based on what your people are telling you? 

 

Data is not just the new oil, it is the new electricity - you are literally holding your board meetings in the dark without it. Even in a non-tech company, these data-driven numbers (far beyond basic financials and whatever narrative the FD opts to spin) are the fundamentals on which decisions are made and by which you are assessing the progress of the company. It will only become more so. So it is fundamental to commercial awareness, risk-management and governance that all parties understand and speak the same basic language of KPIs and performance metrics - because then your "so what does this really mean?" becomes incredibly powerful and useful. There are playbooks for every path, but you need to understand them in order to pick selectively and challenge wisely.

 

I'm currently working with boards and individual directors to get up to speed with the basic technologies, data practices, terminologies and calculations required to reduce risk and enable success - so now is your chance to ask and learn, with no judgement involved. If you - or someone making your life harder than it needs to be - could use some professional help, then contact hello@vickybrock.com

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© 2019 by Vicky Brock

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