Myth 16: Indicators Are Either Lead (Performance Driver) or Lag (Outcome) Indicators
I have lost count the number of times I read Kaplan and Norton’s original masterpiece “The Balanced Scorecard: Translating Strategy into Action” to try and understand the lead lag indicators argument until I realized my difficulty in understanding lead lag indicators was a result of flawed logic.
The lead / lag indicator differentiation should be consigned to the rubbish bin as 24/7 KPIs simultaneously are both a lead and lag indicator. Late “planes in the sky”, a common KPI for airlines has clearly arisen out of past events and will have a major impact on future events – the late arrival will make the plane late in leaving. Instead of lead/lag the winning KPIs methodology sees a measure as either a past (last week last month), current (yesterday’s or today’s activities – the here and now) or future (monitoring now the planning and preparation for events/actions that should occur in the future).
Myth 17: We Know What Good Performance Will Look Like Before the Year Starts and thus Can Set Relevant Year-End Targets
Jeremy Hope, of Beyond Budgeting fame was the first writer to clearly articulate that a fixed annual performance contract, such as the annual budgeting process, was doomed to fail. Hope and Fraser, pioneers of the Beyond Budgeting methodology, have pointed out the trap of annual budget process. If you set an annual target during the planning process, typically 15 or so months before the last month of that year, you will never know if it was appropriate, given the particular conditions of that year will never be guessed correctly. You often end up paying incentives to management when,in fact, you have lost market share. In other words, your rising sales did not keep up with the growth rate in the marketplace.
Relative performance targets measures are where we compare performance among peers and against external benchmarks such as the market share. Thus, the financial institutions that are making super profits out of this artificial lower interest rate environment would have a higher benchmark set retrospectively, when the actual impact is known.
As Hope points out not setting an annual target beforehand is not a problem as long as staff are given regular updates as to how they are progressing against the rest of the market. He argues if you do not know how hard you have to work to get a maximum bonus you will work as hard as you can.
You would certainly benefit by reading Jeremy Hope and Robin Fraser, Beyond Budgeting: How Managers Can Break Free from the Annual Performance Trap, Harvard Business Press, 2003.
You might like to order my new book “Key Performance Indicators For Government And Nonprofit Agencies”