How Many KPIs Should My Contract Have? – Part 1

A colleague of mine sent me the following cartoon that made me laugh.  The very talented cartoonist Tom Fishburne sketches tongue-in-cheek how people tend to view key performance indicators (KPIs).

Figure 1 – “KPI Overload” by Tom Fishburne at http://www.marketoonist.com

As a Performance Based Contracting (PBC) practitioner I cannot remember the number of times I have experienced this exact circumstance.  So why am I bringing it up? For over 15 years people constantly ask me how many KPIs should my contract have?  Unfortunately, there is no single number or magical formula that will make our lives easier. But, more importantly, I think it’s the wrong question.

To be honest, the first question should be what are KPIs and why do we use them?  The Key Performance Indicators Manual: a Practical Guide for the Best Practice Development, Implementation and Use of KPIs by AusIndustry (part of the Australian Department of Industry, Science, Energy and Resources) defines KPIs as:

Key Performance Indicators represent a set of measures focusing on the aspects of organisational performance that are most crucial for the current and future success of the organisation.

KPIs are therefore focused either on the critical aspects of organisational performance that require improvement, or on the aspects that must be kept within a specified level to ensure the continued success of the organisation.

But shouldn’t more KPIs be better?  For example, having more KPIs means the buyer gets additional performance information, including the associated performance drivers and risks, leading to better oversight, control and assurance of seller performance.  However, more KPIs is not without costs, including the increased cost of collecting, analysing, reporting and storing information.  Interestingly, more KPIs can also lead to confusion and loss of control with the buyer distracted from critical performance issues with numerous indicators, some masking true performance.  Alternatively, having too many performance measures may result in the buyer interfering (micro-managing) the seller’s delivery of performance potentially resulting in more disputes and damaging the business relationship.  A summary of these benefits and costs is illustrated in Figure 2.

Figure 2 – Benefits vs. Costs of Using More Performance Measures

Given this, perhaps the next question might be, how do we go about balancing the benefits of using performance measures versus the costs of using them?  We will look at that in the next part of the article.

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1 Response to How Many KPIs Should My Contract Have? – Part 1

  1. Pingback: How Many KPIs Should My Contract Have? – Part 2 | Performance Based Contracting (PBC) Blog

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