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What are the values most important to a company? Can they be told by Key Performance Indicators (KPIs) alone or can the wrong incentive lead to the wrong outcome for a company? MIT's innovation expert Michael Schrage shares his thoughts on how to approach KPIs, using a classic example from the call center industry to show how dangerous an inexact business performance goal can be.

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MICHAEL SCHRAGE

Michael Schrage examines the various roles of models, prototypes, and simulations as collaborative media for innovation risk management. He has served as an advisor on innovation issues and investments to major firms, including Mars, Procter & Gamble, Google, Intel, BT, Siemens, NASDAQ, IBM, and Alcoa. In addition, Schrage has advised segments of the national security community on cyber conflict and cybersecurity issues. He has presented workshops on design experimentation and innovation risk for businesses, organizations, and executive education programs worldwide. Along with running summer workshops on future technologies for the Pentagon's Office of Net Assessment, he has served on the technical advisory committee of MIT's Lincoln Laboratory. In collaboration with the Center for Strategic and International Studies (CSIS), Schrage helped launch a series of workshops sponsored by the Department of Defense on federal complex systems procurement. In 2007, he served as a judge for the Industrial Designers Society of America's global International Design Excellence Awards.

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TRANSCRIPT:

Michael Schrage: There are several questions, essential questions that leaders and managers should ask themselves when they look at how they want KPIs to have an impact and influence on their organizations.

The most important one is obvious: What’s most important to the organization? Where is value really created? Where is value really created for us internally and for our clients, for our customers, for our users, whether they be business or consumers? How do we want to measure that? What kind of performance leads to those kinds of outcomes?

The big challenge, the difficult challenge, the challenge that my colleagues and I and my clients and I and my students and I debate and argue the most is: when are KPIs means, and when are KPIs ends?

Sometimes we want to have key performance because that’s what excellent means. We’re always greeting customers with a smile. We’re always trying to provide the easiest most convenient, the best possible user experience.

There are other times when the outcome is really what matters the most which is we get a profit on this. We get a sale for this.

What are means and ends?

Sometimes the KPIs link. Here’s how: “We’ve dramatically increased our sales.” That’s fantastic. Sales, sales KPI. “We’ve outperformed our sales KPI and expectation.” Oh, “three weeks later, three months later, the returns for what we’ve sold are larger than ever before; The customer satisfaction scores or the net promoter scores have dropped precipitously!” Oh my gosh, we have to manage tradeoffs between KPIs?

The leadership challenge, the management challenge is not just “how do we do a better job of identifying, cultivating, deploying KPIs,” it’s “how do we identify and manage the tensions and sometimes conflicts between them?”

Again, that’s why this is such a fun subject, because sometimes there can be changes where the KPIs converge or a new KPI emerges from your observation of means and ends.

So there are many stories and anecdotes that can be told about KPIs that really positively and constructively transform how an organization behaves. And there are also sadly (but obviously) examples of what one might call pathological KPIs, KPIs that make sense in the moment but when you review their ultimate impact internally and externally – bad, bad.

A classic example from 10-15 years ago, back when we had call centers instead of contact centers, was “time spent on calls.” That many call centers were compensated. The key performance indicator was “how do we keep the call down to two minutes, three minutes, five minutes?”

And so throughput calls per hour, calls per day were a dominant KPI because that’s what productivity was going to be. What did you end up with? High throughput, very unhappy customers, even oftentimes if their situation was resolved because the feedback was “I felt rushed. I felt they were in...

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