ACADEMIC EYE: Do You Fall in the Indicator Trap?

KPIs are useful but they do have shortcomings: should we place more faith in human thought?

The KPI trap?

The KPI trap?

By Jan Ketil Arnulf at BI Norwegian Business School and the Associate Dean of the BI-Fudan MBA program

“Do you avoid the dangers of indicator-driven management?” read an e-mail I received recently. The sender, a reputed management institute, warned against the dangers of using performance indicators or so-called “key performance indicators” (KPIs). I could only conclude that the author would just replace the old indices with new ones (their own).

We live an abundance of information. KPIs or indicators are simplifications that claim to reveal if managers are on the right track before results are actually obtained. They are too often treated as an oracle’s voice from a magical source.

This is just like the old superstition when certain events (black cat crossing the road) were interpreted as signs of an upcoming event (accident). Many would argue that indicators are expressions of actual causal relationships and are in this sense “scientific.” Such claims often do not withstand closer scrutiny.

Performance indicators are vulnerable to three well-known misinterpretations

  1. Reliability: The measurements are too influenced by chance, as some feel about oral exams.
  2. Validity: Can we draw conclusions based on the performance indicators? Will satisfied customers always be more profitable?
  3. Habitual thinking: Is the indicator the best expression of what we measure, or should we think again? Indicators that are both reliable and valid will only make you better at yesterday’s solutions. The purpose of the performance indicators is to put control in front of thinking.

Post-it notes began as a production error. Disturbingly, many leaders were bad at school. The discovery of America was a disappointing miss of India. I have seen leaders destroy businesses by misguided faith in customer retention indices. I have seen people perish when they think the grades from school are descriptive of them. However, throwing around the proper abbreviations is still good for the career.

Stay clear of the indicator trap. Thinking is difficult and confrontational, but a useful servant to human beings. My guess is that this will last a while.

Prof. Jan Ketil Arnulf

Prof. Jan Ketil Arnulf

Jan Ketil Arnulf is Associate Professor at BI Norwegian Business School and the Associate Dean of the BI-Fudan MBA program. He studied at the University of Oslo, Norway and the Freie Universität Berlin, Germany. His research on management teams has earned an award, and he is at the editorial board of the scientific journal “The Leadership Quarterly”.

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