Performance Management and the use of Key Performance Indicators (KPIs) in particular, has brought the science of management back to the rather outmoded use of fixed job descriptions. In a KPI driven company every employee from the messenger to the chief executive is measured against a set of pre-defined objectives. This has led to the emergence of a culture that encourages employees to do only what is required to achieve these objectives.
Achievement of KPI objectives governs the payment of performance bonuses. Taking on additional tasks, even when these are crucial to the effective performance of the company, actually works against an employee. Additional tasks are taken on at the expense of KPIs. They reduce the chance to achieve objectives.
Is it possible that these performance measures are partly to blame for the failure of these companies? The Royal Bank of Scotland provides an illustration of the KPI paradox. This banks' doors should have been closed by now. But the consequences of allowing the bank to fail would have put the economy at even greater risk. The first thing that the bank did on receiving the taxpayers' money was to use about ten percent to pay bonuses.
To an outsider the news of massive bonuses to executives came as a shock. Bonuses for what? Bonuses for bringing the business to its knees? AIG is another example of the walking dead. This one was in the USA but a very similar scenario. The insurance giant saw fit to pay out massive bonuses amounting to about US $165 million.
Why?
The executives had achieved their KPI objectives.
How is it possible that the Chief Executive Officer has met his or her objectives if the business has failed?
The executives did not do what was required when required. Instead, they did what was required by their KPIs.
A KPI driven organisation does not do what is needed. Employees and the executive follow one route. They do what the KPIs specify. This will earn your bonus. Don't waste time pursuing anything else. All sorts of contracts govern the issue of bonuses. Achieve a high rating on the defined performance measures and you are assured of that bonus.
South African energy giant Eskom executives also achieved their KPIs at a time when South Africans were suffering frequent power cuts.
Presidents and Prime Ministers have been outraged at the bonus payouts of bailed-out corporations. In some cases, the bonuses have been returned.
Others have risen to the defence of the bonus payments. They argue that the executives have met their objectives and have therefore earned their bonuses.
The huge number of company failures and astounding bonus payments should provide ample illustration that the system doesn't work. Yet companies around the world continue to spend millions of dollars each year to implement systems whose only purpose is to measure Key Performance Indicators.
W Edwards Deming was instrumental in effecting the transformation of Japanese industry into a formidable opponent to Western technology. Deming's view of management and production emphasises the primacy of teamwork and process flows. Employees are required to take on whatever needs to be done in order to achieve optimal results. The environment is an empowered one where an employee is willing and able to take on additional responsibility as and when required in order to get the job done effectively.
Deming was against performance management . Management "needs to understand that the performance of anyone is governed largely by the system that he works in". It is the process that governs performance, not individual effort. The individual's performance could simply be the result of natural variance.
In his book The New Economics , W Edwards Deming states that "Statistical calculations and predictions based on warped figures may lead to confusion, frustration, and wrong decisions." Performance management or management by objective leads to fear. "Fear invites wrong figures. Bearers of bad news fare badly. To keep his job, anyone may present to his boss only good news."
In Out of the Crisis, Deming restates his 14 points of management. These are the fundamental ideas that led to the success of Japanese industry in the 1950's and beyond. He emphasised Leadership, education, building quality into the product, continuous improvement and putting an end to performance management. Teamwork and process flows are of prime importance. Doing what needs to be done when it is needed is a primary focus.
Statistical measures are used extensively in Deming's methodology. They are used to improve quality, not to penalise or reward an employee. Quality failures are caused by a defect in the process. When detected, correct the focus.
The West has largely failed to introduce the highly successful systems of Total Quality Management, Kan-bans and Just-in-Time production. These were methods that enabled Toyota to produce a car in 5% of the time taken by its American counterparts.
Western business has instead reverted to the outmoded an ineffective system of management by objectives or KPIs. Targets are achieved through fear and huge pressure on each employee.
Performance management has failed. The reasons are many. Performance management promotes dishonesty. Vast sums of money are at stake and statistics will be manipulated to ensure that KPIs appear to have been achieved.
Performance management promotes fear. Fear prevents the achievment of an optimum environment. Performance management promotes an inflexible environment. KPIs are only changed once a year. Performance management has holes.
Is it really possible to identify everything that must be done within an organisation in terms of KPIs? It is evident that this is not the case. Changes to the environment will be ignored. Some elements will be overlooked.
Building a quality organisation requires the building and ongoing refinement of the business processes.
The success of a business can never depend on KPIs.