Don’t Chase the Needle: How to React to KPI Changes
"Don't chase the needle. If you do, you'll probably die."
Before having kids, I flew a fair amount. Early on in my flight training, an instructor gave me that advice. It's meant to warn against changing your heading every time the compass needle moves. That’s because usually the needle movement is just random turbulence. Thermals and gusts will buffet the aircraft and move the nose temporarily. if you're constantly adjusting, you'll never take your eyes off the compass. And if you don’t stay alert to what’s happening on the other side of the windows, well …
But how do you know when it's random turbulence? I mean, sometimes, you do get blown off course, right? The trick is to have your eye on a landmark on the horizon (limiting the metaphor here to visual flight rules). Does the nose of the aircraft keep coming back to that radio tower in the distance? Then you’re on course. If the compass heading deviates for a moment, don’t worry about it too much. Allow for some time to pass and see if that radio tower swings back to the center of your view. Without being explicit about it, the flight instructors are basically asking us to apply a moving average.
I think about this advice a lot while reviewing KPIs. Is it time to make an adjustment? Or is this just turbulence? And of course, a moving average is a powerful tool for getting at the answer. Sales are down from yesterday? Let’s not immediately react. Is the 30-day moving average on target? If so, give the radio tower some time to swing back into view.
But give it how much time? Yes, now we’re into the second order challenge. For many KPIs, certainly at larger, public companies, the answer is one quarter, or about 90 days. At public companies this is driven by the need to report earnings quarterly. But even independent of that requirement, 90 days is often a good time scale at which to assess the trajectory of change.
If you ever get some flight training, you’ll notice that the instructor’s admonishment not to chase the needle happens less and less as you approach the runway. And this igives us insight into the third order challenge with how to react to KPIs. For certain KPIs there’s a target number at a point in time—one billion in sales in Q1, for example. As you get close to your goal tolerance for not being on target needs to narrow; the moving average window needs to shrink.
So what to do if the KPI is off target? Don’t panic. The trick is to have your eye on a landmark on the horizon. But once you're on final approach, you need to push back harder on any deviation from heading.
