Business Coaching

Unintended Consequences of Key Performance Indicators (KPI)

Before I get into a rant along the lines of "you couldn't make this up" I want to firmly nail my colours to the mask. I am a big believer in performance measures, key performance indicators and performance targets.

Poor communication is at the heart of much bad management practice and key performance indicators very effectively say "this is important, pay attention to it."

Unfortunately ill conceived performance indicators encourage the wrong behaviour and can be "gamed" (deliberately manipulated) to make the person or department appear to have much better performance than is true.

You Couldn't Make This Up

In the UK we have a government obsessed with targets and key performance indicators (good) which appear to have been designed on a fragmented basis without checking for consistency with the overall goals on the systems and processes.

Accident & Emergency (A&E) departments in National Health Service (NHS) have been set a target:

   All arrivals must be seen within four hours of being brought in.

It sounds reasonable on the surface. Anyone who has weighted in an A&E department knows that they are not the most pleasant environments and you only go there if you have a problem.

Unfortunately basic queueing theory says that new arrivals will appear on a random basis - a bit like readers of my blog - no one for several hours and then a rush of 20 people in 10 minutes.

Add to that the Accident & Emergency department has another issue to consider.

   Not all patient's needs are equal

Some people have trivial injuries while other patients appear in imminent life or death situations. No surprise because the varying needs are built into the name of the department - accidents and emergencies.

So why have a measure which doesn't differentiate on need?

Just as in battle hospitals, Accident & Emergency doctors have to operate a triage system. The important thing is to establish need and then treat based on that need.

Incidentally did you notice that the key performance measure says "seen" and not "treated" or discharged either to another hospital ward or back home.

The Carrot & The Stick

If you have performance measures, then what better way motivate action than to reward good performance and to punish the weakest.

You can see the logic but it may not be FAIR or APPROPRIATE.

Fairness is based on whether the performance is under the control of the person being assessed.

The NHS hospitals face punishments including restrictions on funding if they miss targets. That's right a bad hospital receives less cash when it is already struggling in terms of effectiveness and efficiency.

How does that work for the people in the local catchment area who pay their taxes and depend on that NHS hospital. Bad hospitals will become worse and that is not appropriate for the community.

Thanks to a poorly conceived KPI, the system has to be gamed.

The Unintended Consequence

So what would you do if you know that your target is based on the time lapse from admission to being seen.

Well you could try to speed up when doctors see patients (the intended result) but that depends on the priority of demands, the capacity of the department and the ability to flex that capacity with need.

Or you could delay admissions into the A&E department. That would keep performance within the target wouldn't it?

It is what is happening.

Seriously ill patients are being left in car parks and ambulances for hours to make sure the Government targets are met.

Let me think about this.

If there is a patient held waiting in an ambulance, doesn't that mean the ambulance can't be sent out to deal with other accidents and emergencies? So empty ambulances have to cover a larger territory and that means delays arriving on the scene to treat the need and give people the first medical response.

The Facts

Official annual statistics show that 7 out of 11 of England's mainland ambulance trusts suffered long delays in turnaround time at A&E units.

There were more than 44,000 delays in handovers reported. This is the time taken between taking a patient to an A&E unit and being ready for the next 999 call. In London 322 delays were for more than two hours.

What About Your Key Performance Indicators

I believe you must have key performance indicators cascaded down from your business strategy into targets for individuals and departments so I am not calling for you to scrap your KPIs.

But have you checked that they are appropriate and encourage the behaviour and actions you want or can they be gamed?

Can individuals play the system so they look good while causing problems elsewhere?

To Your Success

Your Profit Coach

Paul Simister

Business coaching for customer focused entrepreneurs

Take a "Success Inventory" To Discover Hidden Profits In Your Business

With the very kind permission of Scott Hallman, I am delighted to bring you my fourth posting of his Tuesday Profit Tips™ to help you Build-Grow-Manage-Profit™.

  Taking a "Success Inventory" To Discover Hidden Profits In Your Business 

The Valuable Lesson

Today I am going to share with you the first step in dramatically improving the results of everything you ALREADY do well - marketing campaigns, sales processes, lead generation techniques, upsells, referrals, collections, inventory management and so on.

I am talking about adding 5%, 10% or even 20% improvements to things like increasing your sales conversion rates by 20% or shaving 10% off the time it takes to perform key tasks.

Perhaps the best part is that none of these incredible added streams of profit will cost you a dime to implement, and you will meet little or no resistance from your staff, and only praise from your customers.

Often I see businesses get so focused on fixing things or scrambling for new business that they make the painful mistake of ignoring the procedures and systems that are the key to their success. But the fact is that these very systems are the easiest to improve and see instantaneous, measurable results.

Finding EASY Profits

The first step of the four part series we call "Leveraging Your Success" is to take a "Success Inventory".

This involves taking an inventory of everything that is working well in your company – marketing campaigns, sales processes, lead generation techniques, upsells, referrals, collections, inventory management and so on. Then evaluating your current procedures (whether in writing or not) to spot opportunities for improvement:

WOW! Scott that is a real revelation….well, yes. It is. And you will be amazed what simple breakthroughs you will make by spending just a few minutes on this process.

In working with thousands of companies, less than 2% have done this process (and only 4 have done all four steps of the Leverage Your Success System).

Let me use a real-life example to illustrate the power of this simple process.

A Physical Therapy client produces thousands of dollars in profit every month by cross-selling a medical device to their patients. Basically the process involved asking the patient, at the conclusion of treatment, if they wanted to purchase the piece of equipment that required a medical necessity and prescription from the patient's attending physician, and a pre-approval from the insurance company.

We revisited the undocumented "success best practice" and broke down the process. As we did this, we identified several simple ways to dramatically improved results – pre-approval was done day one. We streamlined the process and increased conversion rates by 27%. The important distinction here is that there was tons of improvement potential on something that was all ready super successful.

There are two areas to quickly spot improvements:

1) Systemization

This is where you have a process that works well but it is not being done consistently - essentially because you do not have written procedures to follow or a mechanism to measure and monitor outcomes.

Systemization also includes techniques or procedures that are being left to individuals to do "their own way" instead of modeling the best way. In these cases, you will experience tremendous variance in performance – as was the case between Negotiator A and B.

2) Process Improvement

Process improvements include procedures that are relatively systematic but where there is clearly an opportunity to improve certain elements or steps in the process that will make a measurable difference. This is often the fastest way to increase profits. After all, you have a documented procedure. Your staff follows the procedure and is getting results. Therefore, you can easily make changes (test) that often produce profound results.

ASSIGNMENT

What are some successful procedures where you can improve one or more elements that will incrementally improve results? Write down 2-3 tasks and then evaluate the process to spot easy improvements… then write me back with what profits you expect to gain from this simple exercise

To your success,

Scott D Hallman
CEO
Business Growth Dynamics, Inc.

PS The other three steps in the Leverage Your Success System can be found at the Small Business Growth Club.

Part 1 -Create A Success Inventory of What You Do Well Already
Part 2 - Document the Success Formula's You Use to Achieve Your Results
Part 3 -Optimize the Performance of Each Step in The Success Formula
Part 4 -Cement in The Improvements For Life By Creating Measurement Systems

Thanks Scott.

I have always believed that there are big gains available from a careful review of systems and processes. It sounds boring but when you can improve the efficiency and effectiveness of a process, your rewards for your efforts can be extremely high.

If you would like to know more about Scott's Small Business Growth Club then just follow this link.

To Your Success

Your Profit Coach

Paul Simister

Business coaching for customer focused entrepreneurs

Experience Curve And Your Cost Reduction Strategy

My last business strategy article explained the importance of economies of scale on cost levels but in the early to mid 20th Century people started noticing another cost phenomenon.

Even if the size of the factory plant didn't increase, unit cost levels reduced progressively over time.

In fact research has shown that as cumulative output doubles, unit costs often fall by between 20 to 30%.

See Wikipedia if you would like to read the technical issues of the experience curve and how to calculate it.

Seeing the experience curve in action for yourself

When you do something once you have to take time and reflect how to do it.

Perhaps you try one way and quickly realise it's not going to work as you had hoped. So you try another.

The next time you repeat the task, you now have a little experience and you do it using your second method because you know it works. But as you do it, you start seeing little things that are wrong or frustrating and you make a mental note to yourself.

When you do it again you'll remember the problems with the existing method and you'll look for ways to improve. You don't want to change too much because you need it done quickly but you can see some areas where you can save a little time.

Business Implications - Using The Experience Curve To Drive Your Cost Reduction Strategy

The experience curve comes from a few sources:

• People learning how to do the task and putting that learning into practice.
     
• Standardising the product or service to remove unwanted variations
     
• New work processes that are standardised and continually improved
     
• Task specialisation (also linked to economies of scale)

The benefits of the experience curve (it's a curve because costs start high and reduce by a proportion each time historic output doubles) are not automatic.

It's true that people will become more experienced but does your business have the processes, policies and procedures in place to encourage learning from experience and building that knowledge into your systems?

Clear focus on continuous improvement

Taking advantage of the experience curve starts with a desire for continuous improvement.

A desire to do something better than last time and as the experience curve is concerned with cost reduction, better in this case means the same quality output but for a reduced cost.

But can you see that desire for improvement and challenging existing methods in your team?

I'm sure you've got it but too often employees just go through the motions of turning up, doing what's expected and then going home when the clock strikes 5 o'clock.

Leading your team towards lower costs

Reduced  cost savings from the experience curve can come from:

• Better purchasing - you may find suppliers who charge lower prices or are more reliable in their quality and service.
     
• Increased productivity - doing what you do more efficiently.
     
• Innovation - changing what you do because you've found a better way to achieve the same end result.
     
• Better quality - lower waste from mistakes, production and process scrap.
     
• Faster throughput - reducing time taken from the start of the process to the finish, both in terms of activity time and waiting time.
     
• Increased flexibility of your employees and machines in terms of what they can do and how quickly they can change over between activities.

But you need to lead you team to achieve these savings and that usually requires three issues to be tackled:

1. Your team needs to understand why it is important that you progressively improve and reduce your costs.
   
   This is not just about boosting your profits.
   
   It is fundamental to the competitiveness of your business and the security of their employment.
   
   You need to clarify the overall direction and importance of continuous improvement and then set a good example. Employees listen to what you say but take notice of what you do.
      
2. You need the appropriate measures and targets in place.
   
   It may be a cliche that "what gets measured gets done" but it shows your team that you take the matter seriously.
   
   No measurement means that it's words not actions.
   
   It's only through testing and measurement that you can see whether any new idea is working.
      
3. There need to be appropriate incentives.
   
   Just as "what's in it for me" is the main question you have to answer in your marketing, it's the same with your employees.
   
   If you tell them to do one thing but your payment scheme says do another, your staff have a choice.
   
   And they will choose the option that is best for them. It's the only rational thing for them to do.

Standardising Your Products And Services

Standardisation is the driver of the experience curve and your cost reduction strategy.

The reason is simple.

Every time you produce a special, one-off product you start back near the beginning of the learning curve. You have to work out what to do and how to do it.

But if you provide standard products and services then learning and experience matter and you give your staff something to work with.

Even if you pride yourself on your customised products and you believe that it brings a flood of customers to your door, all willing to pay a massive premium, you should still try to find ways to standardise the early activities in your processes.

In one of his books, Michael Gerber talks about having his hair cut. Even if he saw the same hairdresser they would do it differently each time he went but this was customisation that he didn't want.

Systematising Your Activities

Once you have a standardised product or service you can then start designing your business to deliver it consistently, effectively (it produces what the customer wants) and efficiently (it is produced at a low cost).

But the first task is to eliminate or reduce the amount of variation going into the system and coming out of it.

The principle is simple.

If something works, keep doing it while experimenting at the edges to find a better way to do the same thing with a better result or a lower cost.

Dangers Of Relying On The Experience Curve

History shows that there are various dangers or mistakes that you can make if you rely on the experience curve in particular and cost reduction generally as your focus for your business strategy.

1. Pricing based on the experience curve
   Big mistakes have been made in the past by companies believing that if they price aggressively they will win market share, gain experience and costs will reduce to give a comfortable margin.
   
   The big problem with this type of thinking is that it often assumes that your competitors won't react to your special deals and lower prices. But can you really afford to price at levels that they are not prepared to match?
      
2. Loss of proprietary knowledge
   You can lose any advantage you have from the experienced based knowledge in two ways. Either your competitor gets to know it or you lose it because it's in the minds of your team and not recorded in your systems.
   
   Both can happen in one move if your star employees leave you and join your biggest rivals.
      
3. Technical innovation
   Your knowledge may become obsolete as technology overtakes you and everyone has to start learning the new rules at the same time.
      
4. Globalisation
   A focused cost reduction strategy is an important element in fending off competition from the low wage economies but it may only take you part of the way.
   
   You may be 5 times as productive in terms of output per hour but if their wages rates are only 10% of yours, you still have a major cost disadvantage.

Summary

The experience curve is part of the answer for your business strategy and you need to be encouraging your team to deliver the cost savings that should arise.

As you will see in later blogs, I believe that the biggest benefits of business strategy come from focusing on your customers and creative a distinctive position in your market by being different.

Have you seen the benefits of the experience curve or do you know anywhere that it has been a major source of cost savings? If so then please share your story as a comment.

The next article in the series looks at What is Industry Analysis

To Your Success

Your Profit Coach
Paul Simister

Business coaching for customer focused entrepreneurs