Key performance indicators (KPIs) can be one of the most important tools used in an organisation and one of the most effective ways to manage a company's drive to achieve its mission.
While the concept of KPIs is not a new or complex one, businesses are awash with poorly conceived and implemented indicators that don’t lead to performance improvement and in many cases, lead to undesired behaviours and results.
Most businesses have attempted to implement KPIs in one form or another, but few manage to implement them effectively. Most fall into the same three traps:
- Measure everything: the quantity of KPIs selected becomes unmanageable
- Generic KPI selection: the KPIs selected are not specific to the critical success factors
- Indicators turn into targets: the KPIs selected become targets and not indicators
Getting the right balance in the number of KPIs is often one of the most difficult decisions. Procrastination in selecting what to, and what not to measure leads to measuring everything, because the more information the better, right? The sheer volume of work generated by attempting to measure every aspect of the business will not only quickly consume valuable organisational resources in the actual measuring, it will also restrict resource from implementing any actions to effect improvements. Most businesses should be able to select one to three KPIs per function that provide a strong indication of performance.
Generic KPI selection
KPIs should provide an indication of how the business is performing in relation to the critical business success factors. Many companies simply select generic, popular measures because they’ve seen them used elsewhere. Every business is different and the specific risks to success need to be identified for each individual business. KPIs should be developed and cascaded down from the business vision and objectives:
- Organisational vision – to be known for our superior customer service and satisfaction
- Organisational objective – to reduce the number of dissatisfied customers by 25%
- Organisational KPI – the average response and resolution time for customer complaints.
It is also important to find the right balance between leading and lagging KPIs. Leading indicators focus on the likelihood of achieving goals and what might occur in the future, serving as a predictor or a warning sign, whereas lagging indicators focus on results at the end of a time period, normally summarising historical performance. While both types of metric are critical for any organisation to track, the more successful companies study more leading metrics to allow them to make changes to improve scenarios before lagging indicators come into effect.
Indicators turn into targets
Once a KPI becomes a target, it will not take long for decisions to be taken to specifically drive better KPI performance to the detriment of areas which are not monitored. KPIs are much like spotlights, highlighting an area of the business performance that provides a good indication of the overall performance. It is therefore inevitable that outside the glare of the spotlight there will be aspects of the business that do not receive the same focus and attention at the highest level.
By making KPIs incentivised targets for managers, decisions will be made to sacrifice anything outside the glare of the spotlight to make sure the targets are hit. This may ultimately lead to a longer-term decline of performance within the organisation as a whole.
Selecting effective KPIs
The entire objective behind setting KPIs and monitoring performance is to provide context and information against which informed decision making can take place, ensuring that the business vision and objectives will be achieved. Well-defined KPIs should not only be able to help you gauge the temperature, the humidity and the direction of the wind, they should work together to provide a complete picture and help predict whether a storm is brewing so that the necessary actions can be taken. Here are our three tips for developing effective KPIs:
1 – understand the context
- What is the company vision?
- What are the organisation’s objectives and what actions need to be taken to achieve them?
- What are the critical success factors that directly affect the ability to deliver the objectives?
2 – define the KPIs
- Which critical success factors pose the highest risk of failure?
- How many metrics are manageable?
- How frequently should each measure be reported?
- Do we have the facility to measure to the required accuracy / frequency?
- What is an appropriate benchmark? What does good look like?
3 – manage, monitor and report the KPIs
- Who is responsible for measuring and reporting?
- What negative effect could the KPI have? Could any areas be adversely compromised to drive up the measurement?
- For example: the design of a tool for producing cast iron products results in an element of waste from leakage. Setting a KPI to reduce the waste may result in excessively increased costs for improved tooling design that are not offset by the saving in material.
- What counterproductive incentives would be set up if this metric was used and how could these be managed?
- For example: setting a KPI to reduce the number of accidents may incentivise the lack of reporting of accidents.
Our consultants have experience implementing effective KPIs at all levels of differently sized organisations, ensuring effective monitoring and planning towards the company vision. Contact us today to see how we can support you in achieving your strategic objectives.