The five most overrated KPIs

There are KPIs for

Accounting, Sustainability, Corporate Services, Finance, Governance, Compliance, Risk, Human Resources, Information Technology, Knowledge & Innovation, Management, Marketing & Communications, eCommerce, Project Management, Portfolio Management, Commerce, Production Management, Quality Management, Sales & Customer Service, Supply Chain, Procurement, Distribution, SHOP BY INDUSTRY, Agriculture, Arts & Culture, Construction & Capital Works, Education & Training, Financial Institutions, Government, Local Government,  Healthcare, Hospitality & Tourism, Infrastructure Operations, Manufacturing, Media, Non-profit / Non-governmental, Postal & Courier Services, Professional Services, Publishing, Real Estate / Property, Resources, Retail, Sport Management, Sports, Telecommunications / Call Center, Transportation, and Utilities*.

Of course this is a non-limitative list. There are many different types of KPIs but fortunately many KPI experts already made some choices for you as to which ones are the BEST. Just Google KPI and you'll find some gurus telling you the TOP 5 KPIs everybody should use. That triggered me to list the TOP 5 most overrated KPIs. Here they are.

5. School grades

Schoolchildren are constantly assessed throughout the year by their teachers, and report cards are issued to parents at varying intervals. Generally the scores for individual assignments and tests are recorded for each student in a grade book, along with the maximum number of points for each assignment. In the US most often these scores are translated to a letter grade. In other countries (in Europe) the 1 to 10 scale is used.

At the end of the year most often an average is calculated to give an indication on the average performance of the kid. It is all too easy to assume that aggregate or average marks give a reliable assessment of overall performance or that the process is as objective as counting. Fortunately many teachers will tell parents this. They know that it is only an indication or a "photo" and is not telling anything on future performance. It is however difficult for parents to not see these grades and think that their kids are either "doomed" or "future professors". Especially in high-school much depends on these grades (status within the group, development of future plans, possibilities for universities). The system is hard on children that bloom on a late age.

4. Net Promoter Score

Would you recommend our company to a friend or colleague? That is the question many companies will ask their customers on a regular basis. Why? Because the answer is apparently telling you all about your customers feelings towards your company or products. A Net Promoter Score is generated based on this question, ranging from 1 to 10. The resulting score is supposed to indicate whether there is a huge risk of losing customers or whether there are loyal. The NPS has become one of the most important drivers in the area of customer intimacy strategy.

You might remember the blog on the APGAR score that suggested to make your KPI as stupid and simple as possible. The NPS is indeed simple and easy to understand. However the performance it is trying to measure is by far too complex to capture via this simple score. Especially when it is used for complex strategic choices which on their turn might effect future results. Furthermore the score is most often bases on what a sample of customers is saying. I won't go into detail but many issues arise when sampling your customer base.

In a White Paper called “The “Net-Net” on the Net Promoter Score” the authors surmise that “the NPS approach is incomplete at best, and potentially misleading at worse. It is unwise to rely solely on one survey item (likelihood to recommend) to establish customer loyalty strategies. While [the creators of NPS] provide sound advice on some aspects of customer loyalty measurement and management, he seriously overstates the case for relying on that “one number” to grow a business.”

3. Key Risk Indicators

When people are asked to give three examples of the most disruptive innovation of the last decades they come up with Computer, Internet, or the Mobile phone. All these innovations had a huge impact, but were all unpredicted, unplanned and their impact was underestimated at the time. Same goes for most manifestations of risks. When we try to predict risks we use risk models to predict likelihood of occurrence and the impact the particular risk will have if it actually manifests itself. Unfortunately all actual impactful events of the past decades were most often not predicted and if someone was lucky enough to have mentioned them, the impact was underestimated at the time. When we were in the midst of them the impact was not recognized by experts. Consider for example the latest project you were involved in (could be any type of project). Of course things went wrong, they always do. Would you have been able to predict them upfront? In other words: the gross of (impactful) risks come from outside the predictive models.

2. Employee Satisfaction

People can be satisfied with their jobs for several reasons. Asking for these reasons is a valid and useful thing to do. However using these results to measure performance is risky, especially when questionnaires are used. Even if the survey anonymous, employees might not wish to reveal the information or they might think that they will not benefit from responding (thinking perhaps even to be penalised by giving their real opinion). Even if employees fill in the survey honestly, you are still measuring individual opinions and not really their behaviour. 

It is already difficult enough to objectively understand and know your own intentions and motivations, let alone answering questions about them from someone who is paying your salary. Furthermore an anonymous survey is likely to reveal warts and all.  Management should be prepared for discovering that the top down view can differ from the bottom up view.

1. Stock price

The overall idea is that the stock price of a certain company is telling you something about how that company is doing. This is because it is assumed that investors digest all possible information about a company and this will be reflected in the price. This is what is known as the Efficient Market Hypothesis (EMH). The EMH assumes that all investors perceive all available information in precisely the same manner. However this is of course not the case. Furthermore it is impossible to say what information is already incorporated into the price. Not all information is available and the most impactful events are difficult to predict and therefor a surprise for everybody (see also the Key Risk Indicator paragraph).  

Investopedia.com summarized it as follow “Companies live and die by their stock price, yet for the most part they don't actively participate in trading their shares within the market. If performance of its stock is ignored, the life of the company and its management may be threatened with adverse consequences, such as the unhappiness of individual investors and future difficulties in raising capital”.

*list is extracted from kpiinstitute.org

NEXT TIME: Cognitive Biases and their impact on KPIs