Can we go too hard in measuring our service providers? Performance measurement of service providers is a very fraught subject and challenges companies to find their ‘Goldilocks’ zone where performance measures fall neatly between too much measurement and not enough measurement.
We can all imagine the flaws with too little measurement; what the team at Vested* call the ailment of ‘driving blind’. In this situation the customer has insufficient insight into how the service provider is performing and perhaps the service provider is a little unclear as well! Research from the Aberdeen Group has highlighted one of the biggest issues for firms that outsource as the challenge of identifying whether projected savings actually hit the bottom line. In particular, if they don’t, where is the shortfall occurring?
So, too few measures is clearly bad, having lots of performance measures is better…. right? Well, like fast food, too much of something can be bad as well. Again, Vested has described an ailment that covers this – ‘Measurement Minutia’. In this case, firms try to measure everything and end up with spread-sheets with hundreds of performance measures. Not only is the effort and time to put all these measurements together of questionable value, but they are unlikely to be usable in running the business.
Often firms making this mistake use the ICE model to develop KPIs:
I = identify what is easy to measure
C = collect, measure and report everything that is easy to get to
E = end up confused as to what is really going on!
It is well established that around 5 to 7 KPIs is the optimal amount for an individual to deal with. Once the number increases above this, measures tend to organise themselves into first tier, second tier and so on. How often do second tier measures get reviewed? That’s right – rarely! Vested has an ailment that describes this situation which they describe as the “saddest ailment of all” – the ‘Power of Not Doing’, not using performance measures, even when established, circles the firm right back to driving blind and the failure to deliver results.
Having absorbed the lessons of too few or too many KPIs and come up with the optimal number, nothing else could go wrong…. could it? Unfortunately there is still one aspect that can trap unsuspecting players. KPIs that are arbitrarily imposed have a destructive effect on supply chain relationships. They tend to say to the other party “we don’t trust you” and often lead to minimalist behaviour; that is, just enough effort to meet the KPI benchmark but no more. Unsurprisingly Vested has identified an ailment to describe this situation – ‘sandbagging’, which needs little explanation.
Interestingly research indicates that where firms arrive at their performance measures collaboratively, this acts to strengthen the relationship and drives improved performance and compliance with the KPIs. It has also been found that service providers that are tightly controlled and measured exhibit an extreme reluctance to be flexible and adjust to circumstances if it will show a poor result on the KPIs they are being held to. This is even the case if the customer requests the flexibility!
So, have you identified your ‘Goldilocks Zone’ for the number of KPIs you put in place to measure your service providers and do you develop these KPIs collaboratively with your service providers?
*Vested 10 Ailments – for more information on the 10 Ailments visit www.vestedway.com/penny-wise-and-pound-foolish/.
If you would like help in developing the right number of KPIs in the right way, or want to find out more about Vested then contact us at firstname.lastname@example.org or call +61 (0)419 581 705.