Most companies and organizations are good at writing strategies; only a few are good at implementing them.
I used to work in a company where the CEO liked to use modern terms just to say the company is modern, but he had no idea how it should be, and one of those terms was the KPI. Without asking for meetings he and the creative manager used to develop different KPIs and I am sure their method was wrong, as we never reached any of the targets they set in 9 months! Knowing how to create correct KPIs requires a bit of study and work.
What is a Key Performance Indicator?
“A KPI is something that can be counted and compared. It provides evidence of the success, or failure, of a strategic objective over a specified time.”Clive Keyte
So a KPI can be quantified into numerical characters, not just percentages, and these numbers should be used to compare with a benchmark. The reason for comparing is to give quality to the product. The results of quantifying and qualifying can be used as evidence used by all stakeholders in the same way. Another reason to use KPI is to contribute all the measures in a specific period to a certain goal.
Steps to Success of a KPI
Step 1: Create Objectives
As said before, KPIs require objectives. Write one or two objectives.
They should contribute to the organization’s results-oriented language to create a result for each objective. Activities and plans are a means of implementation to make improvements. The improvements are needed to be measured.
Step 2: Describe Results
When an objective is defined, ask “why we want to implement it?” and answer with words that can be perceived with physical parameters and do not have vague interpretations, like using the number of days needed.
If you are not satisfied with the objectives go back to step 1.
Step 3: Identify KPIs
The KPI needs to be clearly described.
Revise every single KPI that should be described fully and are physically perceived. Do not think about what you already measured, as that KPI might have been created in the past based on another formula.
Now define lead and lag KPIs.
Lead KPIs are input-oriented, a little hard to identify and measure and they predict the future performance of a business. They predict changes in the organization but not accurate. Lag KPI is output-oriented and easily measurable. They indicate the current state of the business.
A good lag indicator example is financial terms like gross margin, annual net income, and EBITDA. Lead indicators examples for the future growth of the organization are the percentages of growth in new markets and sales pipelines.
For one single objective, there can be different KPI descriptions, as there are a variety of indicators.
The KPI needs to be rated in terms of importance.
It is important to decide applicability, relative worth, and ease of identification of KPIs. A decision matrix can help out here.
“A decision matrix is a tool that helps business analysts and other stakeholders evaluate their options with greater clarity and objectivity. A decision matrix can: Reduce fatigue and subjectivity in decision making, and clarify and prioritize options.
“After deciding on the value of each KPI according to rates given, the low applicability rated KPIs or KPIs with more than one low rating will be discarded. Then a rational choice about the KPIs should be made and agreed upon by all parties.”
The KPI needs to be calculated and ownership assigned.
Before any calculation, all objectives and KPIs should be given to an individual with his own consent.
For every KPI the followings should be considered:
Description: A sentence to describe as accurately as possible what the KPI is for.
Label: The short description, used for presentational purposes, generally 1-5 words.
Owner: The individual who owns and will drive the objectives and KPI.
Updater: The individual who is responsible for gathering the required data and updating the KPI at the pre-defined times.
Calculation: A mathematical formula that describes how the data elements (tangible perceivable items) are combined to provide a number, percentage, or currency (sometimes a yes/no).
Frequency: How often the KPI is counted and recorded.
Scope: What should be included or discounted, often a cap or data range.
Metrics: The data and the sources of data used in the calculation, it is important to describe the metric items individually to avoid ambiguity.
Step 4: Define Thresholds
As defined by Oracle
“During KPI definition, you define threshold levels to cover all possible values for a KPI. Based on the threshold values defined, the status for tasks and resources are calculated for the KPI values that are based on a percentage.”
There are different ways to calculate the threshold values like using traffic light indicators.
Step 5: Measure
- Create a scorecard structure.
There is no need for it to be perfect but remember that later you might want to restrict access to some parts of the organization structure. Also, the performance management system should allow inputting all of the data in the description tables you created.
Think about those who are allowed to look at the system and what you let them see. If you want a cross-organizational view, a balanced scorecard approach can come in handy. And think if it should be strategic or departmental.
2. Upload or enter data on a regular basis.
There should be no more than 36 KPIs for a top-level HQ scorecard. Consider the frequency of updates as the time of reporting KPIs to management can decide for this matter. Also, decide on the update mechanism if metrics are included as a part of the system.
You will need 5 to 9 months of actual historical data or some data gathered to work with, to make the system meaningful.
Step 6: Interpret Results
After having a set of data you should create a set of dashboards and reports from the data and then interpret the results.
6 matters should be taken into account while making any dashboard:
Is the dashboard suited to the audience it is being built for?
Does the dashboard have an intuitive user interface and navigation?
When providing drill-down, does it provide enough additional information?
Have the right access permissions been set up?
Is the balance between current and historical data correct?
Visually, do the important items stand out?
Each sector of an organization wants to see the results usable for their own department so one dashboard is not sufficient to be presented to both financial management and operational management at the same time, for example, the financial manager wants numbers related to profit but the sales team wants ratios on performance.
After making the dashboards you should look at the performance data and interpret it but as a whole and over a reasonable duration and not based on individual performance.
While interpreting the results:
Do not rely on point analysis, business is too complex for that.
Check that the KPI is stable and predictable.
Always look at related KPIs.
Train yourself to look at patterns within KPIs and across multiple KPIs.
Be prepared for more questions rather than answers.
Drill down into source data for more information.
Look at long-term and short-term trends (not less than 6 months).
Talk to the owner of the KPI (using data, not emotion).
The key is to see the difference between normal variation and abnormal.
Look for ways to change and not control outcomes.
Step 7: Take Action
When the KPI and objectives are moving in the wrong way, they need to be monitored and managed over time to improve.
- Remedial activity: When a problem occurs an action will be taken which should be clear, associated with the KPI, should not be due to an anomaly, an individual should be assigned for it, and the action should be short-term activities.
- Strategic initiatives: These initiatives are complex and cause organizational changes.
- Generate a list of candidate initiatives. Write down the actions needed to fulfill the objectives and KPIs, if you have not done it yet.
- Develop the selection criteria. The criteria should be ideally three items with no real strategic significance which might be (i) the potential strategic gains related to the organizational vision. (ii) A judgment on the anticipated implementation, and operational cost. (iii) The time required to implement
- Select and prioritize the initiatives. From ideally 15 items, 5 to 7 initiatives should be prioritized according to organizational vision and strategy. Funding requirements should be considered while selecting.
- Describe the prioritized initiatives. The output of each strategic initiative should be documented and agreed upon by everyone. It should not be detailed but give the gist of requirements and the objectives to be impacted.
- Fund, implement and manage the initiatives. The team should look at ways of staging the highest priority initiative as it can be the most expensive one, to release funds for lower priority ones. After funding, initiatives should change to projects with a project manager assigned, to achieve business objectives. Completing an initiative does not mean improvement or success unless it is connected to an improvement objective.
KPIs are always different but there are KPIs that are general and can be found in any scorecard:
|Financial Measures||Customer||Internal Processes||Capacity|
– Net Profit
– Gross Profit
– Revenue Growth Rate
– Return on Investment
|– Customer Satisfaction Index|
– Net Promoter Score
– Customer Retention Rate
– Customer Profitability Score
– Customer Complaints
|– Time to Market|
– Rework Level
– Order Fulfillment
– Cycle Time
– First Contract Resolution
|– Employee Satisfaction Index|
– Revenue Per Employee
– Supply Chain Effectiveness
– Salary Competitiveness
– Energy Consumption
By developing significant KPIs, an organization can evaluate its success rate with simple, honest, and measurable indicators. If you would like to know how we provide Agile KPIs please contact us.
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