Danger of Leading Indicators

22 12 2009

UPDATED 12-23, 2009:  Boston.com story about home sales – seems like we have stories with divergent viewpoints.  Good example of how a single version of the truth depends upon the story teller…

CNN Opening Paragraph: NEW YORK (CNNMoney.com) — After surging 10% in October, sales of existing homes jumped again in November, growing 7.4% compared with October to an annualized rate of 6.54 million units, according to the National Association of Realtors. (full article)

Boston Globe Opening Paragraph: WASHINGTON—Sales of new homes plunged unexpectedly last month to the lowest level since April, a sign the housing market recovery will be rocky and heavily dependent on the generosity of Uncle Sam. (full article)

Read each…Ahh, the politics of spin, or is it the spin of politics of spin.

November saw a healthy jump in home sales.  The good news is that home sales and housing starts are usually very good leading indicators about the health of the economy.  Yet the bad news, in this case we have a potentially baked number.   The market is being artificially inflated with both lower interest rates and a government subsidy for first time home buyers.  What makes this worse is we have created a situation where we know less – we know a number improved, but we have no understanding if the economy is better.

CNN Story on November Home Sales

This is one of the fears about designing the right KPIs.  We want to find the perfect KPI, or create a list that tries to include everything.  What we need are a few KEY indicators to trigger the right conversations about what actions (business levers to pull) to take or not take.   We also need to discuss performance and action in a holistic manner and not get caught in panic mode because one indicator seems to be below expectation.  We also do not want to trigger an action to artificially improve a number.

For example…Days Sales Outstanding (DSO) can be used as a measure of customer satisfaction.  The interpretation is that people pay the bills of the people they like first.  If you are able to shrink the number, then you at least have an indication that customers are generally happier than they were last month.  If the Marketing VP were compensated on Customer Satisfaction and we used DSO, the VP might change the payment terms.  While we might see improvement in DSO, we are probably not seeing an improvement in Customer Satisfaction, which was the goal when we started.

As you are designing KPIs:

  • Start with your high level annual goals for the year
  • Build out a system to discuss the implications (don’t just look at the number)
  • Assign someone to write up the implications on a regular basis
  • Create a commonly understood definition of the KPI, and document it where it can be easily accessed
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Categories : Communication, Incentive Alignment, KPI, Performance Management, Strategy Management

Perceived Value

2 09 2009

As leaders and managers we are trained to think of employees in terms of financial value.  We give financial rewards based ideally on merit and performance.  Unfortunately, we don’t use often enough other types of rewards for motivation and morale.

I have two young children who do not yet demonstrate much grasp of financial matters.  We offered them an allowance in an attempt to motivate routine and good behavior. While we understand the value, neither kid  asked for their allowance in the last year since it was initiated.  Clearly, it is not a motivational tool for our children right now.

Both kids, however, love hockey. My youngest often lets me know she does not have as many hockey cards as her “brudder” and her brother often defaults to creating quiet games with those same cards.  It seems only natural to use the cards as a motivational device.  We will have to see how it plays out, but a couple of days in I can already see a marked difference.  What are the financial tradeoffs – the hockey card budget is about 50% of what I would spend on allowance.

  • When was the last time you created a “pat on the back” program?
  • Could you do something different to motivate project completion?
  • When was the last time you walked around the organization with $100 bills and randomly rewarded people doing the right thing?

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Categories : Change Management, Communication, Culture of Action, Incentive Alignment, Initiative Management