Forward-looking KPI systems: spotting blind spots

Profound changes in markets and the volatility that comes with them require organisations to manage adaptation processes constantly in order to remain competitive. To observe their environments, organisations establish observation systems. These generate information about what is happening outside the organisation and feed it into internal decision-making processes.

If an organisation gets into difficulty, this may be because the established observation and assessment systems and the associated key performance indicators are only inadequately geared towards early warning signals. This means signals of changes in the environments that are relevant to the organisation.

Anyone who examines organisations’ KPI systems finds that they shed very detailed light on the financial and process perspective and report back deviations between target and actual. As a rule, these deviations are also responded to very consistently.

However, these points of observation tend to observe and assess the results of decisions and operational actions from the past. They hardly manage to look ahead for signals that provide early information about profound changes in the relevant environments and to assess them.

In order to be able to undergo the necessary self-renewal process constantly, organisations need points of observation and assessment, i.e. KPI systems, that do not merely reflect the past. The aim is to look for impulses and provide the organisation with the information it needs for the foresighted self-renewal process, so that this information can feed into decision-making processes.

Organisations are complex, dynamic, operationally closed systems. Their survival depends on the performance they deliver providing a benefit to society. To maintain the attractiveness of this performance, organisations must closely observe their relevant environments, i.e. customers, suppliers, competitors and other stakeholders. Only in this way can they recognise tendencies towards change early on and initiate the adaptation processes needed to secure their own competitiveness in good time.

Taken together, an organisation’s environments are more complex than its own organisational complexity can reflect. To remain capable of acting, organisations must therefore constantly select their relevant environments and reduce the existing complexity. No organisation would be capable of acting if it had to respond to every event in its environment by adapting internal structures and processes.

These environments include customers, suppliers, competitors, banks, employees, the internet or the city in which the organisation is based. As a social system, the organisation faces the same question again and again in relation to them: change or stay the same?

The necessary selection leads organisations to largely decouple themselves from their environments and to fall back on themselves and their past in their development. As a result, there is a danger that over time they become blind to the demands of their environments.

A corporate crisis can therefore be explained by the fact that demands from the relevant environments have, over a long period, not led to the necessary changes in structures and routines within the organisation. The result: from the point of view of the relevant stakeholder groups, the performance delivered by the organisation has lost its attractiveness.

The basis of every kind of information gathering is observation and the distinctions and assessments associated with it. On the basis of such information, organisations produce their decisions.

It must be borne in mind that the patterns of observation and assessment established in everyday practice, and the decision-relevant information they make possible, are the result of the organisation’s previous history of survival and learning.

This contains a dangerous self-confirmation process. If certain points of observation and assessment have led to successful results in the past, this confirms the points used and encourages their continued use.

A further challenge is added. Organisations tend to reinterpret something unexpected as something expected, so that their own picture of the world can be confirmed. This is the core of organisational blindness: an organisation sees what it sees, and as a rule it does not see that it does not see what it does not see.

The decisive factor is that certain events and developments are processed into information relevant to action and decisions, and others are not. Because of the complexity and dynamics in the environments, there is therefore a danger that blind spots form in the established observation grids and that relevant changes are not picked up and processed early enough.

In the worst case, an organisation slides into an existential crisis as a result or even has to be liquidated.

Recognising an organisation’s blind spot is an important prerequisite for building a forward-looking KPI system. A shared understanding among management and important key players of how an organisation’s mechanisms work helps a great deal when it comes to discussing the phenomenon of the blind spot and looking at the established KPI systems from a meta-perspective.

It is helpful to recognise what the organisation is currently focusing on when observing its relevant environments and which areas it may be neglecting. Clarity is needed about the criteria an organisation uses to decide whether a particular result or process is rated as “good” or “less good”.

Transparency about the underlying assessment criteria is therefore an important prerequisite for the necessary reflection. It clarifies whether these criteria can still be considered appropriate in view of observable tendencies towards change in the outside world. Whether something is rated as “good” or “less good” therefore has more to do with the respective assessment criteria than with the facts themselves.

Niklas Luhmann posed the question: “How do we manage to prevent the unusual in our environment from being normalised immediately?”

Changing the underlying assessment criteria has a decisive influence on the construction of reality. This has a direct effect on organisational decisions.

For this reason, every organisation should review its established observation and assessment systems from a meta-perspective at regular intervals. The question to examine is whether the assessment criteria used generate the necessary early warning signals in light of the organisation’s current picture of the future. These signals are an indispensable prerequisite for the foresighted self-renewal process.

The first step towards a forward-looking KPI system is a KPI review. It is divided into three work blocks, each of which is worked through as a two-day workshop in a KPI team: the analysis of the established observation and assessment systems, work on trends and future challenges, and the development of the forward-looking KPI system.

Preparation for the first block includes reviewing the established controlling tools and KPI systems, providing a search grid for the composition of the team and creating the workshop design.

In the workshop, the established KPI systems are reflected on from a meta-perspective. What remains unspoken in everyday practice is made explicit: the organisation’s structural couplings, the established observation and assessment criteria and the specific blind spots. This also includes the options for decision and action that are available and those that are blocked or not seen.

The hypotheses and cause-and-effect relationships with which the organisation explains phenomena are also disclosed, as are the underlying paradigms that unconsciously influence these processes. The block ends with reflection on the process and a summary of the key insights and learning points.

The result of this block is a clear picture of the possibilities and limitations of the established observation and assessment systems. The two following blocks build on it.

The second block is devoted to trends and future challenges. Preparation includes reviewing current strategy papers, creating the workshop design and preparing data and information on influencing factors and trends as input for the process.

In the workshop, the key environmental factors influencing the company’s success are determined and developments and trends in the relevant environments are analysed. The current strategy and the organisation’s picture of the future are reflected on in light of the developments identified and updated if necessary. From this, the future strategic challenges are derived and the core strategic questions are made concrete. They form the result of this block.

The third block serves to develop the forward-looking KPI system. The workshop design and presentation and documentation materials are prepared.

In the workshop, the key dimensions of observation and decision-making for the company’s future success are defined. On this basis, the forward-looking KPIs are set and the paradigms underlying them are documented. The structural couplings through which the organisation will supply itself with “irritations” in future are also defined.

Finally, a routine for the regular review of the KPIs is developed, and the measures for introducing this regular KPI review are made concrete. The result is a forward-looking KPI system and a defined review routine.

A forward-looking KPI system is an important early warning system for an organisation and prevents it from constantly looking in the rear-view mirror. The reflection process makes it possible to regularly review the assumptions and constructions that exist in the organisation about its relevant environments. This allows a conscious decision as to whether they can be maintained or whether a correction is needed.

The regular review of established points of observation and assessment is therefore an important prerequisite for measuring and steering strategy implementation. At the same time, it serves to continuously review the strategic positioning and thus secures the organisation’s own competitiveness.