The State of Intangibles Measurement - KPI’s Are An Imperfect Answer

In the industrial economy, we had lots of ways of measuring our work. It was a mostly physical process so we could literally see what was going on. Our financial systems were built around this industrial model and we could also put dollar values on products as they progressed through factories and machines, converting raw materials into finished goods.

The shift to a knowledge economy has changed that. A lot of the value created today happens inside peoples’ heads or their computers. This is the case in service and technology businesses but even in manufacturing settings where it is the process, not the product, that creates so much of the value.

But there aren’t guages on the side of your employees’ heads. To the casual observer, a computer server is literally a “black box.” It’s hard to understand what’s going on inside.

This dilemma is driving new forms of measurement. One type that you hear a lot about lately is the key performance indicator (KPI). KPI’s are the equivalent of the dials on the side of a machine. They tell you the critical metrics that indicate that your process is working.

More and more groups are convening conversations on KPI’s. I was struck earlier this year when an accounting firm, Grant Thornton, issued a press release advocating the increased use of KPI’s. It all sounds great–helping businesses to identify the key drivers of strategic success to improve management as well as communication with external stakeholders.

Well here’s what worries me. KPI’s are by definition a small number of indicators. There is no guarantee that KPI’s are the right metrics. And they can be manipulated.

Here’s a great example from the field of education. In Did Clemson Game the College Rankings?, the Boston Globe reported how colleges make stupid decisions to improve  their standing in the all important US News rankings. Examples of this kind of gaming happen every day in business. They just don’t get reported in the newspaper.

Here’s a thoughtful alternative from Harold Levy in Five Ways to Fix America’s Schools (this quote is from the top of the second page):

Unseal college accreditation reports so that the Department of Education can take over the business of ranking colleges and universities. Accreditation reports - rigorous evaluations, prepared by representatives of peer institutions - include everything students need to know when making decisions about schools, yet the specifics of most reports remain secret.

These two points of view provide an interesting illustration of the top down and bottoms up approaches to measurement. I can’t help but see a parallel between companies that rely heavily on KPI’s and the approach our clients take with intellectual capital assessment.  They use stakeholders (including a lot of externals) to evaluate a company’s intangibles and performance, and let the results tell them what is important for the company’s “key” areas of focus.

Do they end up with KPI’s? Yes. But they are not pre-judging what needs to be measured. And they are making their decisions based on hard information rather than just gut and experience. Make sure your KPI’s are the right ones and they contribute to learning, not gaming.