Tuesday 17 November 2009

Could KPIs derail innovation?

Key Performance Indicators (KPIs) are one of the management tools used in ensuring organisations achieve their strategic goals and objectives. It provides a broad idea of how far an organisation has performed relative to a set of criteria that is chosen to reflect its performance.

While profits and economic returns to shareholders are the ultimate aims for commercial organisations, KPIs have been used as complementary measures which guide management to achieve commercial objectives in the way that would ensure sustainability of business while providing desired returns to shareholders. This is necessary when financial measures per se may not be adequate as a gauge of performance, especially for organisations which care about the social and environmental impact of the way they conduct their business activities.

Given organisations in the public sector are established with the aim of supporting nation building and providing services to the people, monetary measures alone are definitely not adequate in measuring performance. In the past, the amount of spending was about the single measure used to indicate their efforts. This has been proven to be faulty as spending money need not necessarily result in the desired outcomes. The annual findings of the Auditor-General suggest that the people’s money had not been prudently and wisely spent by ministries and agencies.

To reflect the seriousness of the present administration in attending to issues which concern the people, certain Key Result Areas (KRAs) had been introduced. What is the difference between KPIs and KRAs? Simply put, a KRA is the destination while KPI measures whether an organisation is moving towards the destination.

For example, if we are travelling from Johor Bahru to Kuala Lumpur, passing through Air Keroh and Seremban indicates that you are on the right track. Paying toll at Sungai Besi tells us that we are about to enter Kuala Lumpur. Here, passing Air Keroh and Seremban could be the KPI for direction while paying toll at Sungai Besi without being booked by the police could be the KRA.

While the above example looks simple, it also indicates the limitation of the tool. For example, arriving in Kuala Lumpur without being caught by a speed trap does not necessarily indicate we have been driving according to speed limit! Furthermore, if there is not enough fuel in the car, this is only realised when the car stalls after passing Seremban, thus hindering us from reaching Kuala Lumpur as well.

Each government agency was set up with specific objectives and mandates. In pursuing the objectives and exercising the mandate, the organisation has to deal with changing circumstances and expectations of its stakeholders. Therefore, each agency should have the ability to reset strategy and its operational approach in responding to the changing circumstances in order to be effective and efficient.

If the organisation is assessed on a set of KPIs which is rigid, and worse be imposed without due consideration of the changing circumstances, the whole concept of KPIs may not work. Here, ability to respond to change and realignment of KPIs may be required while the ultimate desired outcome may not necessarily be compromised. The question here is how far agencies are empowered to deviate from pre-determined indicators when it is necessary to do so?
If they are so empowered, would the leadership of these organisations exercise this power for the benefit of the people while putting themselves in a situation where they may need to challenge “higher authorities” to justify the re-alignment?

In moving up the value chain and transforming ourselves into an innovative society, the performance of our higher education institutions is absolutely critical. Our ultimate desire is for these institutions to facilitate young and bright Malaysians to develop their intellectual capabilities so that they could lead this country in competing with the best in an open environment where merit and performance are the order of the day. Do they have enough flexibility to focus on what is really necessary to achieve this ultimate outcome?

In the quest of maintaining quality, the institutions of higher learning have to comply with certain performance indicators that are generic and applied across the board. If they fall under the category of research universities, another set of indicators needs to be observed, particularly on the number of researches cited in established journals.

Annually, where they stand in the ranking made by external parties would be used as part of the assessment of their performance. To ensure consistent performance, universities now require ISO certification. How would all of these initiatives be linked to the production of graduates who have the knowledge, skills and values to be our saviours in the future?

The risk of using KPIs blindly is the tendency of grabbing what is easily quantifiable and used by others while ignoring the reality of the institutions and the dynamics that are faced by the management of universities. What works for others may not necessarily work for us.

If would really be unfortunate if before a university even starts to think about strategy, KPIs have been assigned for them to meet. Wouldn’t this result in killing innovation?

This article was also published at the Edge Malaysia website:

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