The Boston Consulting Group (BCG) was asked recently to add to the public discussions on the key performance indicators (KPIs) that the prime minister has introduced for his ministers.

KPIs are financial and non-financial measures or metrics used to help an organisation, and in this case, a country, define and evaluate how successful it is, especially in terms of making progress towards its most important goals. One view of KPIs is that they can be a useful tool for measuring and managing performance, but for this to work, the performance environment must be completely controlled and static on three levels: values, structure, and system.

We agree that there are certain conditions required for KPIs to be effective instruments to drive change and results. We would even add that KPIs are a blunt instrument to engender high performance. That said, a blunt instrument is better than none at all. The Malaysian government (and Malaysia, in general) will be better off with the key KPIs in place.

The right question is not about whether Malaysia should have a KPI system, but rather how to make this blunt instrument as sharp as possible. For this to happen, Malaysia will need to objectively measure the right key indicators and reward those who accomplish real results.

KPIs fail largely because of the inability to make this simple statement materialise. There are three major points of failure:

1Failure to identify the key indicators. By their very definition, KPIs focus on key indicators, not all indicators.  Many critics of KPIs have pointed to their non-comprehensive set of measures as a failure. In the US, there is much talk of how Wall Street’s focus on short-term financial performance, rather than a longer-term sustainable goal catering to a broader set of stakeholders, is a primary cause of the financial crisis we suffer today.  Therefore, the starting point for defining a KPI is to understand what is really key, and ask, “What is really important to the different stakeholders?”

In the Malaysian public sector context, given the various competing agendas of the stakeholders, this becomes even more pertinent. KPIs need to be defined in a way that ensures the KPIs of one agency do not conflict with another. Apart from ensuring that agendas do not conflict, what needs to get done will need to cascade throughout the administration. Key activities need to be aligned towards the same outcomes (that is, the KPIs).

2 Tracking and reporting on process and activity rather than results. For KPIs, you need to know what metrics to measure and to measure with objectivity. Hypothetically, a stakeholder could report with flourish how many more policemen are now placed on the beat, and conveniently not mention that the crime rate has not fallen. The government, therefore, will need to make sure they define the right outcome metric.

Second, once you are measuring the right “outcome, not process” metric, it is important that KPIs are quantifiable, and verifiable. Indeed, methodologies, such as BCG’s Workonomics, exist to help quantify difficult-to-measure activities such as the benefits of leadership development, engagement, service, and satisfaction. Many KPI systems also fail because the metrics, however apt, are not independently measurable, and are left to the owner to arbitrarily (and with personal vested interest) to define one’s own results, hence success.

A mnemonically useful BCG framework to test the robustness of KPI metrics is SMART, as illustrated in the diagram.

3Lack of reward. Ultimately, the effectiveness of any KPI system depends on ensuring timely and sizable rewards. Getting results will require very hard work from the KPI owner, both in terms of formulating a plan as well as executing to plan to realise results. It stands to reason that success when achieved needs to be recognised and rewarded, and equally important, failure needs to be acknowledged and accountability assigned. 

Malaysia needs to start somewhere, and this is a good beginning. The prime minister is open-minded enough to adopt private sector practices to upgrade performance and enforce accountability. Malaysia now has an opportunity to get it right, and we should give the government a chance. When this system works, we will all be better off.

Vincent Chin ([email protected]) is a BCG partner and managing director and head of BCG’s Malaysia office.

This article appeared in Manager@Work, the monthly management pullout of The Edge Malaysia, Issue 769, Aug 24-30,2009.