In this video tutorial, accounting professor Kay Stice explains that you get what you measure in a business. Using the example of an oil drilling completion, he explores what motivates employees and how that is critical in what is achieved.
- Before we go any further with Key Performance Indicators and the Balance Scorecard, we need to note an important concept related to performance measurement and human behavior. Here's the principle, simply stated. You get what you measure, that's it. If you start measuring something then people will naturally focus on that thing. Here's a nice illustration. In the old Soviet Union, oil drilling teams were placed in competition one with another to motivate hard work. The competition rules were set up so that the teams received recognition and compensation based on the number of meters drilled.
Interestingly, the award-winning team recognized in the newspaper Pravda, drilled meter after meter, but never struck oil. It seems that the clever members of this team realized that the first 100 meters of drilling do not require as much effort and expense as the second, third and fourth hundred meters. The deeper the oil well, the longer it takes to drill one incremental meter. So, the winning team drilled an impressive number of dry holes, none of which were deeper than 100 meters.
They just moved around their area, drilling the easy 100 meters, then extracting their drilling equipment, moving a short distance away, drilling another easy 100 meters and so on. The drilling teams were being evaluated on number of meters drilled, so they focused on meters. They didn't care about oil or about drilling as deeply as the geologist's had said they should. Now, let's consider what would have been a better basis for evaluating the performance of the drilling teams. I've used this exercise in classes with business executives many times and here's some of their suggestions.
First, reward only successful wells. Now, this is a natural suggestion. However, this could also lead to problems because the finding of oil has a random element and also depends on the skill of the geologist who have told the drilling teams where to drill. A performance evaluation system that is random or that relies on the skills of others can lead to frustration by those being evaluated. Another suggestion, give extra credit for deeper wells, another possibility. Drilled meters in the second hundred meters should count more than meters drilled in the first hundred meters and even more for meters drilled in the third hundred meters and so on.
The deeper the well, the more the chance of finding oil and thus the more credit given more each incremental meter. Well, here you also have to be careful. If you give too much credit for very deep wells, you will create an incentive for the drilling teams to just drill deep holes, without caring whether they have gotten past the zone where oil is expected to be found. Now, by the way, I could stop here and tell you about the time that my brother Jim and I went two miles down in a goldmine in South Africa, that's a story for another day. So, here's another possibility.
Here's a content rule suggestion that I heard just last week when I was teaching some business executives in Moscow. A person in the course, whose experience in the oil exploration business, said that the proper way to motivate the workers was to give them credit for meters drilled only after they had reached the depth indicated by the geologist's as being the most likely location of oil for that spot. Until reaching that minimum depth, the drilling team should get no credit. Now, this isn't a course on how to motivate oil drillers, but the general point is that the implications of the Performance Measurement System have to be very carefully considered.
If you measure and reward meters drilled, you'll get meters. In this case, that meant lots of useless 100 meter deep holes. If you want your people to focus on something else, then you need to measure something else. Performance measurement and performance evaluation are extremely powerful tools to motivate employee behavior. Remember, you get what you measure, so be careful what you measure. We will keep this in mind as we discuss Key Performance Indicators and the Balance Scorecard.
In this course, accounting professors Jim and Kay Stice explain what KPIs your business should consider in a balanced scorecard, from financial goals to employee and customer satisfaction. They describe how to craft a clear mission statement that complements your KPIs, and how to tie performance to incentives. Plus, get a look at KPIs in action, as Jim and Kay break down a case study examining a trucking company's balanced scorecard.
- The importance of KPIs and measuring performance
- Financial goals and measure
- Customer needs and satisfaction
- Employee growth
- Creating an effective mission statement
- Linking measurements and rewards
- Examining a KPI case study