#332: Getting Started with KPIs to Measure Anything with Bernie Smith

#332: Getting Started with KPIs to Measure Anything with Bernie Smith

Our Guest Mentor: 

BERNIE SMITH is a KPI author, consultant, trainer, and the owner of Made to Measure KPIs and has worked with many major organisations including HSBC, Airbus, UBS, Barclays, Credit Suisse, Lloyds and many more organisations. present their management information in the clearest possible way to support good decision making.  

Bernie is based out of Sheffield, England. 

Key Quotes from the Episode: 

[On one of the biggest challenges with KPIs] One of the biggest problems is that there isn’t a roadmap.” [05:25] 

[On the importance of having an overall set of principles for KPIs] it’s like building a house where five tradesmen, all go off and start doing their own thing without talking to each other. They’ll do a great professional job within their little sphere, but you wouldn’t necessarily want to live in the house that they’re going to build.” [05:39] 

[On the importance of indirect observations in measuring anything] If you take the native Canadians, they measure temperature directly, but they would refer to temperature in terms of a number of dogs, night, dog night or three dog night. And that’s how many dogs you had to kill up with to stay warm. [15:22] 

[On the illusion of exactness] whether you’re an engineer or an accountant, there’s a big premium put on exactness, but as you get further into your career, you realize a lot of that exactness is actually a bit of an illusion.” [22:08] 

[On the dangers of financial rewards & pressure] If you’re standing too close to that barbecue, you’re not wearing flame retardant clothing, you’re going to find out and the bigger the reward the more risky it is. So I regard financial rewards and management pressure as accelerants, they tend to flush out problems that are there anyway but it makes them more visible.” [24:30] 

[On practical advice when it comes to KPIs] So when it comes to KPIs don’t be intimidated by the size of the task. Doing one thing that you weren’t doing in terms of measurement is much better than thinking about a perfect system that you never implement. So get started. Keep it simple.” [35:10] 

Key Points from the Episode: 

  • One of the biggest problems with KPIs particularly for well-meaning accountants and finance professionals. 
  • Why there are only a handful of true KPIs and how to stop the KPI vine weeds from growing so we can find the gold bars.  
  • Why it is possible to pretty much measure anything particularly when it comes to uncertainty reduction.  
  • Target setting & incentives, a critique of SMART objectives & a simple control to prevent gaming of the system.  

Stamped Show Notes 

[02:56] Bernie shares his slightly unconventional career journey from mechanical engineering on finite element analysis to taking the horrible sticky subject of KPIs and trying to make it simpler, more human, more structured, and easier to understand. 

[05:20] Bernie details one of the biggest problems with KPIs particularly for well-meaning accountants and finance professionals. 

[06:10] Bernie deconstructs how we can get started with KPIs and why it helps to first picture a visit to the local DIY Home Depot. 

[11:24] On why there are only a handful of true KPIs and how to stop the KPI vine weeds from growing so we can find the gold bars. 

[15:22] The importance of indirect observations & proxy measures in measuring anything. 

[21:18] Bernie shares why it is possible to pretty much measure anything particularly when it comes to uncertainty reduction. 

[23:25] We discuss the growing prevalence of intangibles. 

[24:10] We delve into Bernie’s work around target setting and incentives which is a natural evolution of KPIs, and he critiques SMART objectives & shares examples of where targets were gamed. 

[30:08] A simple tip to better control gaming of the system. 

[31:42] Bernie shares his best bit of advice he’s ever received. 

[34:03] Bernie recommends a website, books, as well as free templates to help get up to speed to KPIs. 

[35:13] Wrap-up and parting thoughts to finance audience. 

Resources Mentioned: 

Made to Measure KPI website with free templates & guides: https://madetomeasurekpis.com/ 

Bernie’s Author Page (KPI checklists by sector) 

Getting Started with KPIs: Step-by-Step KPI Guide for Ambitious Businesses – March 22, 2018 by Bernie Smith 

Connect with today’s guest: 

LinkedIn:  https://www.linkedin.com/in/berniesmith/ 

Website:  https://madetomeasurekpis.com/ 

Complete transcript: 

#332: Getting Started with KPIs to Measure Anything with Bernie Smith 

Andrew: [00:00:00] Hi everyone. And welcome to this week, strength in the numbers, and I’m really honored today to share with you this week’s guest mentor, Bernie Smith. 

[00:00:39]because not only did I have a great conversation with Bernie this week, but he really helps us tackle 

[00:00:46]something that as finance professionals. We could probably do a bit better particularly when it comes to the world of KPIs or these key performance indicators, target setting and incentives. So where Bernie and I start as we actually delve into why this is quite a big challenge for accountants and finance professionals. Particularly as a lot of us are looking for exactness when the whole point of measurement is to do with uncertainty reduction. And then we take it a bit further using these ideas of KPI trees to understand why there’s only really a handful of true KPIs and how we can remove the rest of the KPI vine weeds so we can get at the golden nuggets, the gold bars that will help us drive a bigger impact in our work and our organizations. 

[00:01:35]And then probably for the last third of our conversation. We really delve into target setting and incentives, a critique of smart objectives. As some of us might have come across and also a very simple control we can all do and implement to prevent gaming of target and incentive systems. 

[00:01:54]It’s a really interesting area, especially if you’re dealing with sales or operations team, trying to drive. Towards particular outcomes. Bernie gives us a bit of a roadmap on how to progress our journey along those. 

[00:02:05]So look, if you did enjoy this week’s episode, please let us know. You can also recommend the episode to your friends and colleagues were on all the major platforms. You can subscribe at iTunes, Stitcher, SoundCloud, YouTube, Spotify, Amazon music. 

[00:02:19]And if you do want to connect with Bernie, follow up on some of the key resources mentioned. As well as detailed timestamp show notes and transcripts, you can find out more at sitnshow.com 

[00:02:31]so I guess that’s enough for me for now. So without further ado, over to Bernie on the show. So Bernie, welcome to the show. 

[00:02:42]Bernie: [00:02:42] Thanks for having me along, Andrew. 

[00:02:44]Andrew: [00:02:44] It’s our pleasure, Bernie and I really enjoyed our chat again, previous to the show. And I so excited about sharing your insights with our audience before we do, though, would you mind maybe giving them a quick introduction to your background, please? 

[00:02:56] Bernie: [00:02:56] Yeah, absolutely so slightly unconventional. I’m a professional engineer by training. I started life studying mechanical engineering and something really obscure called finite element analysis. This is stress modeling using computers. I started my working life building large steam turbines with power generation company, fascinating stuff, but not for me. 

[00:03:15]I wanted to make a bit more. In the world. So I joined a specialist consulting firm that did lean six Sigma. It’s really called lean six Sigma. And I traveled the world. I worked with global Manufacturing for helping fix their process problems. I spent a really interesting, but Taryn, stressful, 10 years traveling the world, fixing manufacturing processes. 

[00:03:37] So I worked on kidney dialysis machines in Germany polyethylene cracking in Finland. Paper-making in the us all kinds of interesting stuff, but not family-friendly. That 10 years into that, I decided I got a skillset. But I don’t want to rock up to manufacturing sites at six in the morning anymore. 

[00:03:52]I joined a company that did the same sort of thing, but for banks it was in the early days of lean six Sigma and people were just starting to realize that this stuff applied to banks as well. So did that for about 10 years. Decided I wanted to set up my own and I looked for something that everyone found difficult and disliked, and that was KPIs. 

[00:04:11] Nobody enjoys them and you can see people visibly flinch when you mentioned them. So I thought, hang on, there’s a person sized business here taking this horrible sticky subject and trying to make it simpler, more human, more structured, and easier to understand. So I took my kind of engineering minors, I thought, how can we make it so that. Anyone can find the right KPIs by following a series of logical steps. And that’s what brings me to where I am now, I set up made to measure KPIs about 10 years ago, and I’ve been writing books, running courses, and doing consulting, work on KPIs and reporting and dashboard design ever since. 

[00:04:47] Andrew: [00:04:47] Yeah. You’ve got a phenomenal, as you say, stamina, to just keep enhancing our understanding of KPIs. Bernie, I just started is incredible. The number of courses and books you’ve managed composite and re what’s relatively well it’s decades. A good period of time. But there’s just so much of a body of work there. 

[00:05:04] And it’s interesting. I was wondering, as you were saying that about the KPIs and it’s a sticky subject for a lot of people and a lot of organizations struggle with it, I can’t help, but feel also as accountants or as professionals, maybe we’ve messed it up a bit, made it a bit more difficult than we needed to. 

[00:05:20] Bernie: [00:05:20] Well believes that everyone does the best they can in the situation they’re in. I think one of the biggest problems is that there isn’t a roadmap. So I see time and time again, smart people doing intelligence. Based on the information they go, but what there isn’t is an overarching set of principles, which were all, so it’s like building a house where five tradesmen, all go off and start doing their own thing without talking to each other. 

[00:05:45] They’ll do a great professional job within their little sphere, but you wouldn’t necessarily want to live in the house that they’re going to build. And this is exactly what happens with KPIs and the bigger the organization, the worse that problem is. It’s a weird subject, but, I don’t think there’s anything. 

[00:05:57]There’s no such thing as a boring subject. The more you look at it, the better you get your head around it. The more interesting it gets. So that sounds, but I’m certainly not done with it yet. 

[00:06:07] Andrew: [00:06:07] Yeah it’s a borrow from a phrase or one of your books. How do we get started with KPIs? 

[00:06:12] Bernie: [00:06:12] Okay. So the number one thing. So w run training, I do a little thought experiment. I challenged people. I said, imagine that your local DIY Superstore has been opened just for you. So in, in the UK, it’s BNQ in America, home Depot, and then I challenged them to. Visualize, and then retrieve the single most useful tool in the stool. 

[00:06:34] And I get them to mentally go through this exercise and retrieve the tool. And then we talk through what they’ve retrieved and all the answers are really sensible and sound. And they’re all based on a series of assumptions, but the problem is not with the answers it’s with the question, going and buying a DIY tool when you don’t know what the job is insanity. 

[00:06:51] So it’s just the same KPIs. So the F. That is figuring out what it is you want to achieve as an organization. And people get quite intimidated by strategy, but it’s not that hard. You do need to be clear on it though, because every KPI you choose or you don’t choose needs to flow from what it is we’re trying to do. 

[00:07:11]Now the next step is to break it down into more bite sized chunks. So I use examples. Being healthy. If something we’ll all think about quite a lot of the time, being healthy though in not directly measurable, it’s something we need to break down. So with your objectives, you need to break it down. 

[00:07:27] So if we’re interested in growth as a small business, then we’re marketing. Maybe one of the things that we want to break down. So you say, okay, what does web marketing break down into? It breaks down into having people visit our website. It breaks out into having a website that’s accessible and functional. 

[00:07:42]It breaks down into. Having engagement. So they actually do something when they’re there ideally leaving their email address. And then once they’ve left their email address, then we need to think about, or we market to them. So how often we email them, whether they engage with those emails and stuff. 

[00:07:59] And when you break things down like that, it’s a lot less scary. So it’s just about taking a systematic approach, bang on a high level, what are we trying to do? How does it break down? And then how do we measure those things that we’ve broken down now? In reality, most businesses actually take three layers of outcomes to break off on the top. 

[00:08:17] You’ve got profit growth, innovation, next level down. You might have, we market successfully using our website and emails, and then you break that down into smaller outcomes. And by the time you got to that third level then you’re at the point where you can figure out KPIs quite easily. They normally just drop out and we use a visual technique for doing this called KPI trees, which is something I. 

[00:08:38] Put together about 12 years ago. And that was popping up all over the web. 

[00:08:42] Andrew: [00:08:42] Okay. It’s like a fight, as we say, we’ve had some concepts, like business partnering has been around since 1963, and now we’re all talking about it, it’s 

[00:08:49] Bernie: [00:08:49] Yeah. They’re all thirsty. Yeah. 

[00:08:52] Andrew: [00:08:52] interesting. I was saying like KPI trees though. It’s such a great idea, but why now? 

[00:08:55]Bernie: [00:08:55] It was, I’ll be honest. They didn’t come out of the blue. So I looked at things like Kaplan and Norton strategy maps, and some of the other techniques for breaking it down. And it’s really an evolution. So it’s a clear set of rules and some methodology to make it easier, but it didn’t just pop out of thin air. 

[00:09:11] It also borrows quite heavily from something in the toilet to production system called P M analysis, which is. Almost completely unknown. No, almost no one in the lean six Sigma world knows about it. 

[00:09:22] Andrew: [00:09:22] yeah, exactly. I did lean six Sigma as well. I can’t remember coming across it. So it was 

[00:09:26] Bernie: [00:09:26] So it’s a work of genius and it’s something I use for problem solving for a decade. I’ve had, I still use it. And the idea of PM analysis is it’s phenomenon method. And the idea is you break down. And outcome into the driving principles, the things that control it. So I used it in a manufacturing concept on things like paper breaks, what does the sheet of paper break on a machine? 

[00:09:46]It’s because the stress on that paper exits the strength. So you split it into two and then you break it down and break it down. And people often confuse it with an issue go up, but he’s quite different. It’s about the phenomenon is not about the problems and really it’s just applying that methodology, but in a business context. 

[00:10:02] So yeah. You’re breaking down the principles layer by layer until you get to the lowest layer. Now there’s a few tweaks, or we do it with KPIs because the top three layers are about outcomes. And then the bottom line is the things you measure to tell you those outcomes. But you know that’s where it’s come from and many new ideas under the sun. 

[00:10:21] So this is a mashup 

[00:10:24] Andrew: [00:10:24] Get your your honesty around that Bernie because I do find that people package a lot of these things off that have been around for a long time and make them sound like brand new in the must have, and we all must do it. I’m just delighted. People are taking this messaging on board. 

[00:10:37] What might scare some people though is when we hear KPI’s you think, Oh my God, the dreaded KPI report there’s. Hundreds of them, but I think the way you’re speaking you’re property saying, yes, there’s important outcomes delivered, but there’s probably only a handful of real true KPIs.  

[00:10:52] Bernie: [00:10:52] Absolutely. So th there’s actually a two step process we go through. So what I’ve just described is the first part. So this is when I say two steps. This is the middle two steps of the method. The roots orientated KPI system or the rocks method. But there’s two steps in the middle, which are about choosing our KPIs. 

[00:11:06] Now, the reason it’s two steps is that our. Two types of people in the world. There’s the dream who want to measure everything. And they tend to be senior executives because they don’t have to do it. So they want to make sure this and that and whatever. And then there’s the pragmatists. These are the people who go sharp intake of breath. 

[00:11:23]We can’t do that with that. Sorry. That’s not possible with our current, our workflow system. They’re the ones who bring us back to earth and know the cost in terms of time, effort, and pain of measuring everything. Now you cannot keep both of those types of people on board with a single step. 

[00:11:40] So what we do is we split into two. So the KPI tree part is for the dreamers. Now it always produce too many KPIs, typically about four to five. Times more KPIs than you’ll use in the last instance, what we do to keep the pragmatist happy is we use something called a shortlisting matrix. Now this is on creation, but it doesn’t look very impressive. 

[00:12:01]It’s a grid plot where you have, how important is something on the vertical axis on a scale of one to 10? And how easy is it to measure on the horizontal axis? On a scale of one to 10 now, Something that’s important and easy to measure. Great. That just goes on the dashboard. Typically things that are hard to measure, not important. 

[00:12:20] I need to make the starting grid. It’s the other two quadrants that are really interesting. So something that is. Easy to measure, but not important. You think how do those exist? I’ll tell you why they exist is because anyone who has installed a system wants to prove how much value they’ve delivered. 

[00:12:35] They switch on every default report management gets buried in 500 feet of sat report or JD Edwards report. And no one has the courage to turn it off.  

[00:12:44] Andrew: [00:12:44] Oh  

[00:12:44] Bernie: [00:12:44] you’re nodding a lot. You clearly 

[00:12:46] Andrew: [00:12:46] God, I don’t. You got the car shoe that is when you come into a new role and said does anyone actually read these? And you just stopped sending them out. That’s the only you couldn’t do that. You just wouldn’t have the courage and a day job that you’ve been doing, sending this report for agents to stop. 

[00:12:59] It’s like part of your identity. It also, yeah, it takes tremendous courage. I completely  

[00:13:03] Bernie: [00:13:03] and this stuff is the vine weed that shakes the living daylight up human beings. So I work with one brand comms organization where they had daily operations meeting and the call center. Agent level with the supervisor and the supervisor report had 108 daily KPIs, or you just go, this is total insanity. 

[00:13:26] Andrew: [00:13:26] Okay. I read somewhere like a human beings. We can only like ingest seven or eight different channels of information and that’s not even ingesting them. So 

[00:13:33]Bernie: [00:13:33] Yeah, your short-term memory holds between three and seven items. So if it’s more than that, you forgotten the first thing by the time you get to the thing. So after insanity, so the shortlisting matrix gives us permission to ditch some of that craft. What’s really interesting. And the bit that always gets overlooked, unless you use a formal method like this is the hard to measure or apparently impossible to measure. 

[00:13:56] But important stuff. Now these are the gold bars that really can transform a business. And they normally just get swept aside cause people look at them and they go we can’t measure that. And they just forget that it’s gone. And these are the things that if all your competitors are saying the same thing, if you can figure out how to measure that, then you’re laughing. 

[00:14:16]You could become a Google or an expert. 

[00:14:19] Andrew: [00:14:19] So I’ve got my own thoughts of this one, Bernie, but why do you think people are not rushing to measure these gold bars? Because I agree with you. I’d like, and I I look at things like gravity, right? It’s a rather important thing. It keeps us grounded in this planet, but it’s intangible. It’s very difficult to see, but you can measure it with a sheet of paper and a pencil and also maybe a smartphone, it’s not that hard to measure it. 

[00:14:42]And use some basic algorithms to compute its true value. I don’t know if it’d be worthwhile for a lot of us, but it’s something important, but in organizations I have my own thoughts on it, but why, what are some of the roadblocks of people measuring these important, hard to measure things? 

[00:14:57]Bernie: [00:14:57] We’ve there’s a lot of things on there. So you, the gravity wants an interesting example. It’s something where we can see the effect, but we can’t actually directly observe it. So what you’re talking about. When you have a sheet of paper, a pencil and smartphone, and I’m really interested in the details of that, but I’m presuming it involves dropping something against the calibrated scale. 

[00:15:15] Andrew: [00:15:15] It involves a karate chop. 

[00:15:19] Bernie: [00:15:19] Okay, cool. 

[00:15:20]Andrew: [00:15:20] Yeah, we’d have to discuss that off area. Definitely. 

[00:15:22]Bernie: [00:15:22] With that, you’re having to observe the impact of that thing rather than thing directly. Bizarrely and slightly Karen pitifully, because we live in, it’s a digital era. We are used to stuff being presented to us as a pile of numbers, a CSV file or a spreadsheet or whatever. We’ve actually become quite unimaginative when it comes to measuring things indirectly. 

[00:15:45]If you take the native Canadians, they measure temperature directly, but they would refer to temperature in terms of a number of dogs, night, dog night or three dog night. And that’s how many dogs you had to kill up with to stay warm. So they had what I call a proxy measure. 

[00:16:03] It was something that was observable that wasn’t telling you the term directly, but it gives you some idea of what’s going on. And those are amongst the most powerful proxy KPIs that you can come up 

[00:16:16]Andrew: [00:16:16] see where you see, this is the thing I think with I’m not gonna brush paint all accountants with the same brush here, but. There’s a, there are a lot of us, and I know why I was like this already in my career. You have to be very exact right. We used to run trial balances and I was the type who had to make sure it balanced back to zero. 

[00:16:33] Even if it was a few cent or pennies out, I’d be there. It’s no, this has to balance it. The algorithm says, yeah, everything should balance and whatever. I’m not booking anything to a suspense account, I’m writing it off. But so there’s this sense of exactness, but that’s, I suppose I grew into the corporate world and came a decision maker by self. 

[00:16:50]I thought that the best way driving return was and where I could add value as a finance professional is uncertainty reduction. Because if you think about the value creation before a form to the net present value, the best way to drive a better return is reduce risk. Off the decision. And if something, it gives you a proxy to make a better decision, it takes some of the risk out of it. 

[00:17:12] And it’s probably one of the most valuable things we can do in our organizations. It’s just yes, it’s great to be exact, but sometimes the most important things, the best, or the only thing we have to hand is a proxy measure. And we do that with, to reduce risk and we get those gold bars. Subar from their terminology burning a bit faster. 

[00:17:29] That’s the way I view it.  

[00:17:30] Bernie: [00:17:30] Complete. I completely agree. So I can give you one practical example where it’s not exact, but it’s fantastically valuable. So I work with a pension provider in Scotland and interesting challenge, which was If you’re a pension provider, basically you want to sell pensions and you want to keep those customers until they die. 

[00:17:49]That’s the fundamental sort of business model in terms of sales. And these guys had an uptick in people transferring the pensions to other organizations now I was party to one of the meetings where were passing lists and there was a real sense of gloom and doom. People were transferring the pension out and they had a figure showing the amount they’re being transferred out and being a pension from that’s a big number. 

[00:18:10] It had gone up, no one knew why and everyone was really despondent. And it was like, why don’t. Look at people’s intent to leave. And there was just a snort of disdain around the table. People just dismissed it as impossible. And in fact that the most senior people were the worst for this. 

[00:18:26]But a few people in the meeting decided not to take that as a kind of deterrent. I like they did a bit of digging and they found something really random. Interesting. There is something that almost everyone does. Before they turn for their pension. It’s an early warning indicator. And that thing is getting a valuation. 

[00:18:46] Now this was pre-internet self-service for this organization. So in that case, people would call in for evaluation. So we’d gone from, in the damage a month later in a meeting through to. And action that tells us that someone is very lightly thinking about transferring the pension. Now not everyone who rings up for evaluation is intending to transfer, but almost everyone who transfers does ring up from valuation. 

[00:19:13] Now what’s interesting. They had just automated that process. It just comes self service. And that’s what explained the uptick. So this is not a purely KPI example. You need deep process understand, but they gone from counting the damage retrospectively through to having a critical process touch point where if you put your best customer retention people on there, certainly Mr. 

[00:19:36] Smith, I’d be happy to give you that valuation just out of interest. Can I check your with your pension happy with the service you’re getting, they managed to intervene. And dramatically mitigate that problem. So that’s just one example of it being quite precise that is not precise data, but it’s enough information to tell you, okay, move upstream, headed off at the past and dramatically change the course of events. 

[00:20:02]So not easy to find, not easy to deal with, but incredibly valuable to the organization. 

[00:20:07] Andrew: [00:20:07] Yeah, but it’s just, it’s when you break it down like that, Bernie it’s so obvious. And I don’t know, it’s not obvious and decides it’s directly measurable. It’s an indirect measure, but it’s obvious thinking, it’s just  

[00:20:17] Bernie: [00:20:17] I learned this from my industrial problem solving when you’d explain why this was doing what it was doing after the event. It’s easy. The trick is finding comes easy once you’ve solved it. And it’s the same with KPIs, but the key point is that there is, I believe there’s nothing that’s not measurable. 

[00:20:35]I’ve done quite a lot of research and thinking around this, and there’s a toolkit of techniques that you can. You can deploy proxy measures is one of the most powerful because often you’ve got the proxy information already. You’ll find that, if through your data, be it structured or unstructured, you’ll very often find those indicators. 

[00:20:56] And that’s one of the few times I would advocate this slightly fashionable data science things, trolling for relationships, looking. Yeah. Using linear regression to identify correlates between certain datas that’s where it gets very useful for identifying proxy measures. But even if you don’t have proxy measures, there’s other tools you can use. 

[00:21:16] We probably haven’t got time to go into them, but things like Fermi decomposition, which is a technique use while you, or you’ve heard of it, Enrico, Fermi. I really clever estimation technique where you stack your estimates. You get an order of magnitude on something where you had no idea before. Sorry. 

[00:21:36] Andrew: [00:21:36] It’s very powerful at reducing uncertainty. I think if we appreciate it, we’re not going to get exactness, but directionally, it’s going to help us make a better decision. That’s what we’re paying for. 

[00:21:46] Bernie: [00:21:46] Yes, imperfect information is almost always better than no information at all. And typically the things that we’re using techniques on are big, important things. So if we can get an approximately right answer is not a clue, I would take the approximately right. Answer all the time. But as you say, it’s well outside of people’s. 

[00:22:05] That signs, and particularly when you’re starting out in a career, whether you’re an engineer or an accountant, there’s a big premium put on exactness, but as you get further into your career, you realize a lot of that exactness is actually a bit of an illusion. So in accounting, but 

[00:22:20] Andrew: [00:22:20] Knocked everyone’s foundations out from underneath or no, Bernie 

[00:22:23] Bernie: [00:22:23] I’m sorry about that. 

[00:22:25] Andrew: [00:22:25] careers. Illusion, not exactness. Yeah, but I fell in love with that exactness and that’s why I was probably slow to embrace. I suppose I, I maybe it was the mathematic side of it. Just the elegance of it all. Particularly double entry accounting. 

[00:22:39] That I sorta fell in love with it, but actually I do think in hindsight that it’s one of the best things that ever happened is learning things like this from BD composition, understanding the importance. I actually, even if you look at accounts nowadays of businesses as ocean Tomo updated their survey, and that’s the one where they look at the assets and the value of a company and they understood that they. 

[00:23:03] Currently, I think it’s around 87% of the SNP 500 balance sheet is made off of intangible assets stuff that is based on you can’t kick it. You can’t physically see yes. Move it. Whereas 35 years ago it was completely the other way around. It was mostly tangible assets. That, and again, I think it’s just getting used to that new environment we’re in. 

[00:23:26] Where, the best business models out there don’t necessarily need physical assets. They could be good ideas or are generating the value. So it’s just interesting things have changed anything if we don’t open our minds a bit to, to, to these ways of measurements and, try and base exact as we can, particularly where we have proxy measures but, appreciate that to make better decisions. 

[00:23:46] We need to move outside our comfort zone. 

[00:23:49] Bernie: [00:23:49] The really interesting observation. I’ve not thought about it. It’s like the difference between veiling fall and Facebook. If you look in Facebook in terms of tangible assets, it’s, it’s a pile of servers at best. But there’s something else going on there as well. Yeah, no really interesting observation. 

[00:24:04]Yeah, exciting times. 

[00:24:06] Andrew: [00:24:06] but I, yeah, talking to me exciting times though, right? I am. And again, I love to squeeze it in with you. Bernie is what you’re working on at the moment, which is around targets and incentives. And I love this topic because I work a lot with it. But sales organizations. I find it fascinating, and it’s, some of us are very much driven. 

[00:24:22] So we say maybe coin operated, and all those aren’t so much, but I love that interplay between finance and sales and it plays to my early days in Austrian economics, where I just love this whole idea of human action and how it’s get people to take the most constructive courses. 

[00:24:36]So yeah. How did you get into this targets and incentives? 

[00:24:39]Bernie: [00:24:39] It’s a natural offspring of KPIs. And in fact, what I find fascinating is. How little guidance there is out there. So step five of my method is define your KPIs. And then there’s a whole load of reasons why it’s important to define your KPIs. And part of that is setting targets and, measuring progress against targets. 

[00:24:57] But the entire world seems to be stuck at the smart. Objective stage now smart. Okay. But it doesn’t work. You can have something with specific achievable and targeted. But you could still end up with a Volkswagen. The emission, you can still end up with a Wells Fargo or a PPI mis-selling scandal because humans are complicated and organizations are complicated. 

[00:25:21] And a lot of the targets we use are stupid. We target one thing. For example product sales in bronze network, and we completely disregard things like conduct risk, treating the customer fairly the operational risk involved and the fact that people will gain targets like nobody’s business, worse than monopoly. 

[00:25:40]I work with a certain brand name, high street bank where staff were selling the products to themselves. And to their friends and family and saying, cancel it. As soon as the month’s up, you’ve got a cooling down period. I will hit my sales target. I saw people selling products to people they knew could not use those products. 

[00:25:58] So people who were self-employed pre-existing conditions and I saw people well, there’s other things I can’t even talk about. And you realize that people. If you set targets, some people will be motivated intrinsically by just by the joy of going after a target. And that’s great and that’s generally quite healthy, but as soon as you start involving substantial incentives or substantial penalties, I liken it to pouring petrol on the barbecue. 

[00:26:29] Any problems that you’ve got. If you’re standing too close to that barbecue, you’re not wearing flame retardant clothing, you’re going to find out and the bigger the reward the more risky it is. So I regard  financial rewards and management pressure as accelerants, they tend to flush out problems that are there anyway but it makes them more visible. 

[00:26:50]There’s definitely two camps here targets on their own, generally drive intrinsic motivation, natural competitiveness. And that’s generally pretty healthy. As soon as you bring incentives, rewards, or punishments in then it gets a lot more serious and one example I use is from one of the. 

[00:27:06]Which racing  competitions there’s something called, I think it’s the GT race series where the idea is that, these are cars that you can buy that families can have. And you can watch some races on TV and then you can go out and buy one. You start digging into it and you find well, Toyota decided to go into that space. 

[00:27:22] So it’s available for purchase. They make two, one for racing and one for museum. So that checks that box. One of the other regulations was you can fit a suitcase of a specified size into the car. Obviously they want, for Mondays or whatever we can put luggage in and yeah. The family car. 

[00:27:41] So Toyota didn’t want to do this and didn’t have the space. So they looked at the rules really closely and discovered. There was nothing about the petrol tank being full when you have the suitcase in the car. So they measured the fuel tank. And so we’ll theoretically put a suitcase in the fuel tank when it’s empty. 

[00:27:57] And that was within the rules. Cause no one had thought you try and stick suitcase in the fuel tank. Now. The reason I’m mentioning this is it’s such high stakes. That as soon as you put that kind of pressure on a rule system, on a reward system, people will find amazing complex ways of working around the rules and looking for loopholes. 

[00:28:17]I’ve spent the last few months, reverse engineering, lots and lots of horror stories. So in the book I’ve got 13 different case studies, interesting figure as well. And I’ve been picking through what’s gone wrong. And what you find is there are. Themes and issues that crop up repeatedly, and I’ve built a diagnostic model based on those issues that you can use to test and reverse engineer your targets and incentives, but it’s been fascinating and horrifying at the same 

[00:28:42] Andrew: [00:28:42] yeah cause we’ve spoke of previous, they get about some of those stories and they’re just, it is fascinating. I have to say. And I haven’t read the book now, myself, Bernie, but I’m definitely going to have to delve in. I know I can’t wait. I can’t wait. 

[00:28:54] But the thing is is I see a lot of it in my day work about particular sales. I think it’s because. Like dating with a lot of very creative people and they will quickly point where a control system or a comp plan is not been put in place up to me, optimally. And you learn so much about your business and how to do things in the right way and also how to work with them to get the best out. 

[00:29:14] Cause you don’t want to be I have too many rules either, cause too many rules are too complex, makes it difficult to change and understand where the errors are. But I do feel it’s worn air. We definitely don’t have enough in the way of diagnostic tools to correct them. I suppose we use a lot of rule of thumbs that are at our team and our finance organization to have gotten by. 

[00:29:33] But like I know they’re going to fight sales and another lock circuit. They’re going to find loopholes. I get ahead of it and I do find big data has been very helpful in that regard, in terms of modeling behavior, particularly Monte-Carlo analysis and projecting it forward. But that, but that’s all, there’s no book that says, Cohen do that. 

[00:29:49] We figured that out by trying trial and error, that was a very good way of controlling it. But but I suppose, yes, I can’t wait to understand more aboard this area because it’s an era where we don’t have enough. Understanding at the moment. And again, come back to reduce that risk again. 

[00:30:04] Great opportunity for us as finance professionals. Add value. 

[00:30:08] Bernie: [00:30:08] Interesting here, hearing you talking about sales and bar is one of my big case studies is on a fictitious software sales company, because they’re just great environments testing waste you also another really interesting point, which is if you ask people, they will point out the problems and I’ve built that into my method. 

[00:30:23] I call it black hat. You’ve got white hat testing, which is how it should work and then black hat testing, which is how it is actually going to work. 

[00:30:30] Andrew: [00:30:30] it’s amazing. It’s just so great at recovery. I think it’s a bit of pride and people saying, Oh yeah, I found out that loophole. Yeah. And that’s how you solve it. They just asked them, how would you solve it? And they tell you 

[00:30:40]Bernie: [00:30:40] It’s not complicated. And honestly, most people cool. Don’t enjoy gaming the system. There are a few psychopaths out there, most people want to do the right to get rewarded for it and actually resent and get frustrated by being forced to do stupid. In order to hit the target. 

[00:30:56] So most people are actually quite consciously up for helping build a sensible system. Cause I think most people got inbuilt sense of fairness and get frustrated when a stupid is imposed on them. 

[00:31:07]Andrew: [00:31:07] having dealt with thousands of salespeople, probably. I would. I completely agree with you. There’s very, I would say on a handful of thousands that, that, that. Our rogue elements, everyone else I think is aligned to doing the right thing. And again, another good reason why I think their hearts are generally in the right place, but but yeah, it’s important to have a robust environment around them. 

[00:31:25]Not the stupid things going on, but they’ll tell you. And again, that’s another reasons why we just need to get out from behind your desk to engage with people. No, look. Bernie you’ve been giving us fantastic advice and appreciate very respect for your time. So we’ll look to wrap up shortly, but I suppose in terms of yourself, what’s been the best bit of advice you’ve ever received. 

[00:31:42] Bernie: [00:31:42] Ah, that’s an interesting one. It’s probably not the most quote worthy, but it was actually a Dickens quote from David Copperfield and the quote goes fine. I wrote it down on the wall guy, annual income, 20 annual expenditure, 19, 19, and six result. Happiness. Income 20 pounds, annual expenditure, 20 pounds out and six results. 

[00:32:10] Now, not the most quotable quote, but he’s quite fundamental. Yeah. There is a, he spent slightly less than you earn, you’re going to have a happy life and if you spend slightly more, you’re going to have a miserable, but. I didn’t really grasp it until I was quite a bit older. The key thing is that freedom, if you have a low cost, modest lifestyle, whatever your income level, you can do, what you want. 

[00:32:32] You you become much more up for risk because it’s less risky. If you build a life that requires you to peddle hard all the time to keep it going, you’re going to. Firstly be stressed, but secondly, you’re not going to take the leaps that you might want to, you’re going to feel. Hemmed in because you haven’t got leeway to take a risk for things to go wrong, maybe to lose income. 

[00:32:58] So that was something that someone told me when I was in my early teens and on one level, I got it at the time, but it’s only, now I’m hitting midlife. So I’m really fully unmanned. Yeah know. Would, if you stay below that bar, if you stay below that threshold, then you know, life’s a lot more fun. 

[00:33:15] Andrew: [00:33:15] it’s. Yeah I think like I get that, I think some of our listeners will get it as well because the pennies dropped for us, Bernie, but yeah, some of our audience that, that might be a bit younger, starting out a bit. I, again, really take this advice on board. Once you start building those differentials in, in, in your favor. 

[00:33:32] And you got the power of compound interest and that builds up quick 

[00:33:36] Bernie: [00:33:36] Yeah, I know. I know it’s not a new observation, but it’s one that just keeps on coming home. 

[00:33:41] Andrew: [00:33:41] it’s funny. It’s funny. I’m say I trained as a finance professional Bernie and it was already, in my thirties, I figured that out, it’s I, a bit embarrassing, but yet, it, wasn’t a quick learn on that one. 

[00:33:51] Bernie: [00:33:51] A capitalist society that basically tries to push us as much as it can overall it. And yeah. Learning to stand your ground and actually choose your own boundaries is a crucial lesson in life. Really? Isn’t it. 

[00:34:03]Andrew: [00:34:03] No it’s great advice. Look, if our audience want to check out some resources around KPIs and also, when you got the book ready around the targets and incentives where can they go to get more information? 

[00:34:14] Bernie: [00:34:14] okay. At three things, firstly had to meet to measure kpis.com. So it’s the same as this banner here, but with the.com on the end loads of free materials that, and if you sign up for anything now there’s free templates and downloads. If you sign up. For free you’ll be on my mailing list. 

[00:34:28] So I’ll let you know when the book is launched. If you want a bit more on KPI trees and the rocks method, then KPI check it’s available in paperback, hardback Kindle and audible. So just talking KPI, it’s normally top of the ranks and. If you want to connect on LinkedIn. I love when people connect tight in Bernie Smith KPI and you sh I should on the top of the search rankings, hopefully 

[00:34:55] Andrew: [00:34:55] actually our doors. I do have another guest mentor recommend you for the show and it was turned out to be a fantastic recommendation. Bernie had really, Oh, I can’t say thank you so much for sharing so many great insights, but before we let you go, I always ask this question. Would you have any, maybe any other parting thoughts for our audience? 

[00:35:13] Bernie: [00:35:13] Oh, gosh. Oh, that’s a really interesting one. Sorry about that. Parting thoughts. Okay. So when it comes to KPIs Don’t be intimidated by the size of the task.  Doing one thing that you weren’t doing in terms of measurement is much better than thinking about a perfect system that you never implement. 

[00:35:34] So get started. Keep it simple. 

[00:35:37] Andrew: [00:35:37] Love it. That’s a great way to finish this show on Bernie. Thank you so much for coming on strength to the numbers today. 

[00:35:43] Bernie: [00:35:43] An absolute pleasure. Thanks for having me along. 

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