In the previous episode we mentioned the existence of universal KPIs applicable to any employee of a company who takes part in the value creation process.
We shall tell you about the KPIs here.
Firstly, let us remember the Balanced Scorecard term and note the word ‘balanced’. One that is very important but regularly forgotten by FISP creators. This sin deserves putting on the Deadly sins list, by the way.
What does the importance of balance stem from and what is it like in practice?
In an overwhelming majority of cases, the work of an organization’s employee cannot be exhaustively described by just one indicator.
For example: if we pay a shop assistant for the sales volume only, profit will certainly suffer.
Even if the prices are fixed ones and the salesman can grant no discounts at his discretion, let’s remember that in any trade business there are locomotive goods – those that generate turnover (albeit at a minimal margin) and attract customers, and accessory items, low-priced but highly profitable, which earn most of your profit.
This dualism is quite universal.
Thus, many people know that shop chains sell a considerable number of washing machine and mobile phone models below cost — but generate their margin on the installation service and the film-and-case stuff, respectively.
But few know that a symbol of the ghoul America, McDonalds’, also sells its cheeseburgers and McNuggets at a loss. Those global backstage agents earn their billions on French fries and Coke. Remember what they push in their fixed meals?
So in our salesman’s example, the sales volume is quite a correct indicator, but it is insufficient alone.
The Sales Volume KPIs should be COUNTERBALANCED with another one, e.g. profit rate. The salesman should be motivated to sell not only the expensive locomotive items but also cheap but profit-generating associated goods.
There arises a natural question: why not bluntly motivate our salesman for gross sales profit? Perhaps it might be a good solution in a limited number of cases, but not amid the competitive market’s realities… Remember that ‘locomotive goods’ are sold at a minimal mark-up if not at a loss? Then you can easily imagine the mental convulsions that seize an average salesman as he realizes that if he sells a specific TV set his salary will get SMALLER. Still, there are solutions for such cases, too – although technically complicated ones; perhaps we’ll tell you about them in the episodes to follow.
Considerable experience in FISP design has led us to conclude that:
(a) for any position that creates added value (that is, a NON-sponger; read here about the sponger detection technology) there is a pair of mutually balancing countable KPIs of which one describes the amount of
work done by the person and the other, its quality;
(b) using this pair of KPIs as a basis for this position’s motivation formula is necessary and sufficient for obtaining the best result.
For ease of further use, we’ll term this statement the Volume-and-Quality Axiom (V&QA).
Note the word, ‘basis’ in Para. (b): the motivation formula may well include other indicators, but:
- they must be additive: a bonus/malus to be added or subtracted, RATHER THEN multiplicative on the volume and quality group;
- their contribution to the employee’s final income should be considerably smaller than that of the V&Q base pair. To put it simply, no more than a quarter.
It is quite apparent that our example with the salesman being motivated on the basis of his sales volume and the counterbalancing profit rate KPI is a particular case of the V&QA: the sales volume represents the amount of work done by the salesman, and the profit rate, the work’s quality.
The ingenious is always simple.
The V&QA is simple, and the V&QA works perfectly well.
As the practice shows, most practical difficulties concern the correct determination of what a quality indicator is for the position in question (volume KPIs usually cause no questions).
Nevertheless, such quality indicators do always exist. The question is whether your CIS can collect and
process them.
A restaurant waiter who lives on tips only (or a share of these) is an infrequent example of motivation well described by a single indicator. In this respect, a waiter is similar to a private businessman.
However™, if we look at the tips ‘indicator’ a bit more attentively, we’ll see that it includes
- a measure of both volume (the rule of 5–10% of the bill) –
- and quality: ‘If you’ve liked our service, please note that our bill includes no service charge’. A ’pay if you like’ principle.