Understanding the Measurement That Matters Most

Long ago, management guru Peter Drucker gave the business world Management by Objectives, or MBO. The insight was this: give employees measurable goals. Instead of waiting around to be told what to do, team members can agree on how to meet the goals and then get right to work. 

The idea freed up company leaders and empowered employees, spawning an alphabet soup of offspring. Plenty of companies have tried OKRs (developed by Intel CEO Andy Grove and embraced by Larry Page, co-founder of Google); SMART Goals; and of course good old-fashioned key performance indicators, or KPIs. They all rely on the same original premise. 

MBO or its adaptations can of course be beneficial. They can also be misused. Often, for example, the objectives themselves become the be-all and end-all. People lose sight of the measurement that matters most–the economics.

The problem is clearest when KPIs bump up against each other. Maybe different groups are watching different indicators. Maybe employees disagree on how to best reach an objective. Entrepreneurial companies run into this kind of conflict all the time: quality versus on-time delivery in a manufacturer, time per call versus customer satisfaction in a call center, labor costs versus service quality in a restaurant. Unresolved, these conflicts can create more work than the objective is worth. 

Big companies are hardly exempt. Some years ago, one of us–Bill–worked with BHP, a mining company with operations all over the world. KPIs were stirring up chaos and contention from top to bottom in the company’s Australian iron mining unit, with 9,000 employees tracking a whopping 203 separate performance indicators. Each KPI was attached to an individual incentive. Each had been defined in the executive suite. 

And wow, did they run smack into each other. The parts department’s KPI was minimizing the money tied up in spare-parts inventory. The production department’s KPI was throughput. Not surprisingly, when a machine went down, the parts required for repair were frequently unavailable. That not only stalled production; it also soured relationships between the departments.

So we posed some questions to the division’s managers. In a knowledge-based economy, who has the best feel for operational challenges? They agreed that it was the folks dealing directly with operations. And who defines the economics of a company? They agreed it was the customer.

The managers began asking frontline employees how to move the ball forward. Since many of the company’s costs were fixed, increasing shipments was the simplest way to reduce cost per ton and significantly drive profit. Customers would be happy, as the company was behind on its volume commitments. Together, management and employees decided on a single company-wide goal: volume of safe tons shipped. 

After that, all the arguments were settled with the only metric that mattered. Which approach gets us more safe tons?

If the answer to every question becomes the economic outcome, performance indicators become just that–indicators. At BHP, production soared, cost per ton dropped, and departments aligned. With a single metric of success, collaboration became easy.

There’s another insight here. When goals are handed down from on high, as they often are, some employees will regard them with skepticism or downright incomprehension. Maybe that beats having no direction at all. But defining objectives at the senior level means missing out on key perspectives. You don’t just lose the knowledge and nuance employees provide, you lose their buy-in.