Do your KPIs prevent value creation?
“Given the incentives, most managers achieve their KIPs, but this often requires cutting corners. For example, they might under-invest in brands or training to trim short-term costs, or they might play revenue recognition games to artificially boost sales growth. ”
Competition in the B2B world has never been fiercer. With more companies fighting over every contract, the sales teams are now laser-focused on the next sale and holding on to each customer, whatever it takes. How organisations measure their employees, and what behaviours they reward add to the laser-focus on short-term gains.
Short-term focus is easy to achieve and there are very sexy dashboards that have been developed. They look good, but do not create an environment for long-term vision and growth. Sadly it forces focus on the urgent, the short-term and not on creating a different future!
Increasing Sales
Whether deliberately or accidentally, most organisations are designed around this short-term focus. The timescale for many organisations is one month - reporting on sales, margins and profits each month. Processes, people and rewards are all designed around this timescale to create and reinforce the best results for each month. Our earlier blog Time for a change: consequences for SAM explains in more detail the risks of short-term focus on the sustainable success of a company.
Cutting Costs
Focusing on short-term targets means reducing costs from suppliers as much as increasing sales from customers. Squeezing the extra margin from both sources to ensure that targets are met, and financial rewards are received. Having targets and KPIs that are short-term could be costing your organisation money, rather than yielding rich rewards. Thinking more long-term and taking into account the total costs of any purchase can produce much better results for your bottom line, even if you don't hit your target for this financial year or month. The importance of thinking long-term is explored in the blog Are your KPIs costing your money?
Rewarding Behaviour
If you measure and reward your staff based on KPIs with short-term targets, then you will prevent sustainable value creation and a sustainable future for your organisation. With staff driven to hit their targets - even if value is wrecked in the process, the long-term future of the company will be in jeopardy. The blog KPI's Should Never Be Tied to Compensation by Kevin Kaiser and S. David Young from INSEAD clarifies the mismatch between long-term value creation and short-term business targets.
The problem seems to be that long-term goals and building business relationships, that promote sustainable value creation and sustainable business practices, takes time. While in theory, everyone agrees with the ideas of long-term value creation, if they are rewarded for short-term results there will always be a mismatch.
Measuring Strategic Relationships
Additionally, executives are nervous about losing track of individual performance if they need to wait over 12 months to see any results to company profits. If your financial rewards are measured in years rather than months, how can you be sure that you are on track? This blog How do you know if your strategic relationships are getting stronger? details a way to monitor a move to more strategic relationships.
Secure your place in the long-term B2B battleground. Build barriers to your competitors and ensure sustainable value creation for the future by measuring and rewarding the behaviours that make this possible.