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Metrics and key performance indicators are important performance management tools, but they're only as good as the behaviors they elicit. Unforeseen and undesirable behavior can and often does result.
Finance and IT managers typically drive performance management, but they tend to focus on reporting and decision support, says Frank Buytendijk, VP and fellow of enterprise performance management at Oracle and author of Performance Leadership. They often forget the need to drive people's behaviors, "yet they're always surprised when people don't respond as expected when they're confronted with a budget, scorecard, or key performance indicator."
Classic examples of undesirable behavior include pushing deals into the next quarter because targets have been met or "use-it-or-lose-it" spending against budget at year's end.
How do you promote positive performance behavior? Buytendijk suggests these steps:
Balance performance measurements: "If you only have long-term indicators, nobody has a sense of urgency, and if you only have quarterly targets, people run from little fire to little fire," he says. Develop a mix of long- and short-term indicators, as well as operational and financial ones, so you can see the consequences of day-to-day decisions. Balance quantitative and qualitative measures so high throughput, for example, doesn't come at the cost of quality. Manage with leading metrics and use lagging metrics for external reports such as financial statements.
Align corporate and personal objectives: Companies are typically measured based on profit margins, yet sales compensation programs often reward revenue. To drive desired behavior, align personal goals with the real objectives, but be prepared for hard work. Avoid "we've always measured this way" cop-outs or, worse, "it's too hard to come up with a margin-based compensation scheme."
Consider the "network effect": Performance management really pays off when it aligns networks, be it departments within a company or partners in a supply chain. Tie together metrics that measure handoff efficiencies from, say, production to distribution or marketing to sales and support, but you have to assign shared responsibility among managers with executive oversight.
In supply chain scenarios, for example, deep integration of logistical systems can to lead to just-in-time efficiencies, but they can also result in one-sided measures that punish one partner and encourage dysfunctional behavior, such as demanding service-level agreements that might tempt a supplier to slack off on quality control. Ensure that the measures drive mutual benefit. Accurate manufacturer forecasts, for example, will improve supplier efficiencies and lower costs for both partners.
Photo illustration by Sek Leung