KPIs – be careful what you wish for

It’s that time of the year when we look back on 2012 and start thinking about our targets for 2013. Management are very keen on giving everyone Key Performance Indicators which are often used to determine pay and bonuses.

KPIs drive behaviours so be careful what you wish for. Several years ago there was a story in the papers about the train operators in the UK. The train operators were set targets on punctuality and if a certain percentage of trains had been late the UK regulators would impose financial penalties on the operating companies. It was alleged at the time that when management thought that trains would be delayed they simply cancelled the service altogether. Cancelled services did not form part of the KPI and the train operators kept within the target set.

KPIs in the demurrage world can also change behaviours and here are my ideas on this.

Aged Claims. You may have a target to reduce the age profile of the claims you have outstanding on your books. This is a good target as I believe there are still too many claims sitting around the industry and we are complacent about that. How often have you heard people say “it wasn’t old, we have only had the claim three months”. If you want to reduce the old claims you can easily set a target but that could lead to paying claims at a higher level than you would like, or recovering less that you are entitled to just to get a quick solution, the papers off your desk and meeting the target.

Cash Flow. Some companies ensure that they do not settle claims until they have been paid themselves. This may be valid where this is a clear contractual connection which happens in some trading chains. Is this fair for the Owner of a vessel that has been delayed waiting for his cash until the receiver and the supplier have paid the charterer under the oil contracts? I don’t think so and how does that affect your reputation in chartering market? If cash flow on demurrage is that critical in your company perhaps trading oil is not the game for you? If you are just waiting for the comfort of the cash before paying the Owner why not adopt the Code of Practice for Handling Shipping and Contract Claims as found at www.asdem.co.uk in the downloads section.

Savings against claimed values – this is a favourite measure taking the difference between the amounts originally claimed against that finally paid out. The danger is pushing this too far. Say in 2012 you have saved x% of the claimed value, your manager is going to stretch you next year and ask for a target of x+2%. How will you meet that target? Well you could get better at your job. Would this bring on another 2% saving or are you at the top of your game already? If you are the only way to go is to start inventing deductions and hope that your claimants give up and concede the point just to get settlement. Does this improve your credibility or your company’s reputation?

Of course if your charterers are fixing ships from the quality Owners that aim to get their claims right first time you may struggle to save any money at all.

I don’t think many demurrage analysts need to be incentivised to reduce claims in this way, after all, isn’t this the fun of the game? Don’t we all love showing off how much we have saved through our good investigation, our knowledge of the contracts and our negotiation skills?

What do you think of KPIs? What’s your favourite? Have you seen examples of unintended consequences? Please add your comment here.