KPI, or key performance indicator, has long been a familiar abbreviation, and some form of KPI system now exists in almost every company. But, like any tool used to achieve a goal, it must be applied correctly. Used badly, a mechanism intended to increase sales can destroy employee motivation and lead the company to losses.
I recommend using between two and four KPIs at a time and reviewing them monthly according to the problem the business needs to solve. Every KPI should be derived from a genuine problem area. Before introducing one, management should conduct a thorough analysis of the existing sales system.
There are many examples of KPIs that made performance worse because they measured the wrong behaviour.
Consider a company that introduced a minimum amount of time that each salesperson had to spend speaking with customers every day. At first, the sales team increased its calling activity and revenue improved. Some managers were praised during team meetings. Over time, however, the metric stopped contributing to plan attainment.
A review showed that employees were meeting the target by having long, informal conversations with customers about matters unrelated to the sale. The required talk time was being achieved, but the extra conversation naturally did not produce more business.
The company responded by introducing call quality control. It retained a target for total talk time but added a minimum number of productive calls. Call quality also became part of the system, with selected calls reviewed at defined stages of an opportunity. A further KPI measured conversion from lead to contract.
The combination of these indicators, together with call reviews and feedback from the quality-control team, changed the situation fundamentally. Sales volume doubled.
Other apparently simple KPIs can also improve sales. One example is requiring every active opportunity in the CRM to have a scheduled next action, or, conversely, measuring the number of active opportunities without one. Any serious sales organisation should use a CRM appropriate to its field and capable of assigning actions within an opportunity.
This indicator encourages salespeople to schedule the required follow-up at every relevant stage. It reduces the chance that a customer or expected payment will simply be forgotten. Monitoring overdue actions also helps prevent opportunities from being neglected.
Targets should be demanding but achievable. An employee should not look at a KPI and give up because it is plainly impossible. Each indicator should also have a clear financial weight in the compensation model, creating additional motivation for both salespeople and the head of sales.
It is equally important to recognise that KPIs can be useful for one department and demotivating for another. They may fit a sales or production function, but rigidly tying a creative team to numerical performance indicators can be a mistake.
An excessively strict KPI regime can also discourage initiative. Employees begin to ask why they should suggest anything new when management only rewards strict compliance with the formal indicators.
Excessive formalisation kills initiative.
Expert comment
Ilya Mishin, management consultant
Some heads of sales become so absorbed in creating policies, rules and controls that they lose sight of whether the new requirements are useful. Salespeople rarely welcome additional bureaucracy, and excessive formalisation can quickly undermine motivation.
When employees face too many procedures and KPIs, they stop understanding what management actually wants from them. Eventually, they cease following the rules altogether. It is impossible to track an endless list of indicators, so employees may not even attempt to do so. They no longer understand how their pay is calculated, how they can influence it or why payday still brings disappointment regardless of their effort.
Unrealistically high targets have a similar effect. Salespeople see no credible path to the required result, their motivation declines and performance deteriorates. They may begin to resist instructions because they believe they are being treated unfairly. If they conclude that achieving all the indicators is impossible, they do not merely work at half capacity; they begin seriously considering another employer.
The manager then faces a new problem: rising staff turnover. It must be addressed quickly because sales can fall sharply when the team no longer has enough people.
Before implementing a KPI system, management should therefore model its likely effect on performance. Even when the indicators appear achievable and few enough to remain clear, the consequences of the new system should be monitored closely during the initial period.
