Defining KPIs to drive the Culture you Want

In our previous article, we explored four key ingredients for enabling decentralized decision-making: Values and Principles, Strategic Context, Skills and Experience. Today, we'll dive deeper into Values and Principles, exploring how they can be effectively aligned with KPIs to drive organizational culture.

Values and principles are not very controversial as a topic; a lot of companies have published their values and principles publicly. You’ll often find posters espousing the values up on the walls around the office. The only problem is that companies don’t follow through on them.

The way people behave is often at odds with the supposed values of the company and the culture the company wants to create. This is because there is a disconnect between what the company says it cares about and the behaviours that are actually rewarded.

The good news is that it is easy to change because people respond really well to incentives.

Let’s look at three distinct groups involved in product development and how we can alter their KPIs to align more with the culture that we want to create: individual contributors, functional managers and teams.

Individual Contributors

Many companies place a disproportionate focus on functional ability when evaluating individual contributors. This means that you get a conflict of interest between the individuals who want to demonstrate ever increasing technical complexity and the business needs which are often best served by simple solutions.

A more holistic approach requires balancing ability with effort and attitude, both of which have a deeper impact on team culture and long-term success.

Amazon does this really well by defining and measuring their employees on 16 leadership principles, which focus on the way they expect people to behave. This approach, coupled with more traditional role-specific KPIs, helps them to fight against the tendency for large organisations to slow down and to create the day-one culture that they are famous for.

Functional Managers

The people with the most experience and knowledge are promoted to management positions and then we ask them to do admin work like assigning people to projects, tracking progress, firefighting issues and reporting on status. According to McKinsey middle managers are spending 49% of their time on admin and individual contributor work. This is a waste of their expertise and a missed opportunity for the company to leverage their skills and experience.

Functional managers should be focusing more of their effort on hiring and developing talent and supporting the product strategy instead.

But managers are just responding to their KPIs which often include:

• Utilisation Rate: The percentage of time that people in their functions are assigned to CapEx projects
  This leads people to focus on the admin tasks of assigning people to projects and tracking progress.

• Predictability: The adherence to estimates provided by their function.
  This leads people to focus on very detailed handovers, excessive estimate padding and a resistance to change, even when relevant new information is uncovered.

By adopting a product model, we can remove the admin overhead from functional managers. Since people are assigned to long-lived teams there is no allocation overhead and utilisation rate is no longer relevant. Also teams define how they work as a whole, rather than separate functions, so there is no separation between predictability at a functional level.

Having relieved functional managers of the low leverage tasks we can give them more time to focus on what will really move the needle for the company. Examples of new KPIs could include:

People Management KPIs

• Cultural alignment: Survey testing alignment of teams with company’s values

• Skills Improvement Index: Increase in proficiency in key skill areas

• Turnover rate: Percentage of voluntary and involuntary turnover

• Internal Promotion Rate: Percentage of positions filled through internal promotion

Strategy

• Strategic Alignment Ratio: Percentage of initiatives that align directly with business strategy

• Goal Achievement Rate: Percentage of strategic objectives achieved per quarter.

Teams

Long-lived teams remove a lot of the admin overhead from functional managers. But the shift from project teams to long lived teams also requires a change in the KPIs used to measure team performance.

There are four core metric types:

• Effort (e.g. hours worked)

• Outputs (e.g. features build on-time and on-budget)

• Outcomes (e.g. customer behavioural changes)

• Impact (e.g. revenue and cost changes)

The business really cares about the overall impact of the work being done, but changes in these core metrics are often too slow to influence product development.

Traditional projects use output based KPIs as teams do not have control over the scope of the projects they are building. But most features fail to deliver the expected business impact.

When we shift to a product model, teams can become accountable for outcomes since they get to choose the features to develop. This is very easy to say but hard to get right in practice because identifying product outcomes that will influence the desired impacts is difficult. When a team starts delivering the metrics should be watched closely and adjusted as necessary until they prove the correlation with the business impact.

Conclusion

In conclusion, aligning KPIs with your desired culture is crucial for organizational success. This starts with defining your values and principles so that you can align the KPIs that will drive that culture you want. For a generative culture, this will lead to behavioural based KPIs for individuals, people management and strategy KPIs for functional managers and outcome based KPIs for teams.