Matthew Mohr, CEO, Dacotah Paper: For optimal performance, ‘measure the right things the right way’
FARGO – Most organizations have a set of criteria which they use to measure progress toward achieving specific goals. Today, industries have developed these criteria into what are commonly called key performance indicators or KPIs.
KPIs are useful in two primary ways: one is to measure progress, another is to measure performance. Establishing them can give leadership a more concrete way of determining whether the organization is moving in the desired direction or slipping.
In addition to using internally developed key performance indicators, a business will also want to look at their KPIs versus those of their industry.
A number of years ago, a national organization that I’m involved with started talking about a service performance measurement as the group tried to help its members improve growth and profitability. I agreed the criteria made sense, pushed my organization toward the new set of goals and created evaluation criteria to judge our progress. And in addition to creating the measurement criteria, we put rewards in place for those involved.
After a short while, it appeared we were doing quite well because the numbers were getting better. But as time progressed, certain employees started complaining about one of the people who was being rewarded based on this performance measurement.
To my dismay, we discovered that the manager was changing a key input to make the measurement look good. This manager had "outsmarted" the system in order to get a financial reward, even though his or her real performance didn't deserve any rewards. On top of cheating the system and the business, the manager's actions were very frustrating to co-workers.
After the manager's departure, some people expressed happiness and as is human nature, some felt sorry for the manager. But today the group works better together and keeps stricter numbers; and as a result, the particular KPI is better than it was when the cheater gamed the system.
Health care providers at one time focused their efforts and some advertising on their patients’ average length of stay. The criterion was established as a means of measuring the effectiveness of the care received at a specific institution. In theory, the shorter the average person was hospitalized, the quicker that person was regaining his or her health, and this would be evidence of the hospital’s high level of care and medical expertise.
Unfortunately, once insurers and others started using this criterion for reimbursement purposes and to cut costs, medical providers were pushed to get people out of the hospital quickly, sometimes without proper regard for the patient’s state of health. This is another example of a KPI being used the wrong way.
As time progressed, a new criterion known as the readmission rate became part of the KPIs for most health care providers. Naturally, when we are hospitalized, most of us want to get back home as soon as we can. But we’d prefer to be healthy when we do so, rather than sick enough that we’re likely to return to the hospital for another stay.
KPIs can help management determine if overall goals and standards are being met or not. But by focusing on price or raw input cost, the need to track and measure the desired outcome is often missed.
In a previous column, we discussed labor input costs in respect to profitability per employee; and as that column mentioned, lower or higher wages do not necessarily lead to improved profits for a business or organization. Instead, productivity leads to profitability.
Key performance indicators can be a great tool and are very valuable to any organization. But it’s important to make sure your organization measures the right things the right way.
CEO, Dacotah Paper Co.