There are many companies where KPIs are treated as a “necessary evil,” one of the reasons is a poor implementation and translation of KPIs to employees. Today is a good time to revise your KPIs. Hopefully this article will help to make a shift of your business perception of KPIs from a “necessary evil” to a “must-have business tool.”
On the Internet there are a lot of “50+ KPIs for … ” lists, “X principles of winning KPIs,” “Y steps to measure something…” texts. The goal of this article is different. I want to come up with a sound approach for KPIs that will:
- Help managers to use KPIs for business management, not just for measurement;
- Ensure that line-level employees buy-into KPIs as a business tool.
Business context of KPIs
Many authors hastily start with KPI design principles, such as “SMART.” I’d prefer to start with a KPIs’ business context.
Bad KPIs are detached from this context and as a result are pointless. In the contrast, authors of winning KPIs start with an analysis of the business context, thus making their KPIs successful as a business tool.
The business context of any KPI is formed by:
- Business Objectives
- Action Plans
Let’s have a look at these connections and see how they might help us to convert a KPI from a measurement tool that employees disparage to a management tool that employees will buy into.
Alignment with business objectives
As the biggest challenge I would name an alignment of a KPI with a business objective. Companies like measuring something just because they can, or because it is a general business practice. As a result their KPIs are not helping a business, they are just consuming resources necessary to manage them and update their values.
- Each KPI should be aligned with a specific business objective.
This alignment should answer a “why” question for a KPI. Why does this KPI exist in this very company?
According to the practical usage, there are two functions that typically are associated with a KPI:
- Monitoring of the performance
- Measuring of the progress
A typical business tool that monitors business performance is a dashboard, while a scorecard is focused on measuring the progress. We were talking about the difference before.
In the case of monitoring an example of an alignment might look like this:
- KPI: “Number of deals closed today” -> Function: monitoring -> Business objective: Monitor a level of deals closed. Invest in additional marketing efforts if the number of deals closed is getting low.
In the case of progress measurement an example of alignment is:
- KPI: “Number of leads per month” -> Function: measuring the progress -> Business objective: Ensure the growth of the number of deals closed by 30% during the next 6 months.
We don’t have an answer for a “how” question that is supposed to be provided in an action plan. What we have by now is an objective and a KPI. A KPI plays a role of a progress tracking and/or performance monitoring tool for an objective.
As long as each KPI is aligned with a business objective we can conclude that the number of KPIs should correspond to the number of business objectives. I’m not saying that the rule is as simple as “the number of KPIs = the number of objectives,” but general practice is that huge lists of KPIs are useless as KPIs there are not associated with a specific business objective.
For the same reason it doesn’t make sense to inherit KPIs from some other company or just take it from a list. Your business is unique, your strategy is unique; it doesn’t make any sense taking KPIs of another company unless you want to copy their strategy.
Ideas of the articles summarized in a short YouTube video
An action plan should be aligned with a business objective and a KPI as well.
- In a case of monitoring of the business performance a business objective might be to ensure that its KPI is in the green zone and react appropriately when it goes in the red.
- When a business objective is focused on achieving something, a KPI will measure the progress towards the goal. An action plan in this case includes all the steps necessary to achieve a specified objective.
What if there is no specific action plan associated with a KPI? Well, if you measure it then there is supposed to be something, otherwise why do you measure it? When management fails to formulate an action plan for a specific business objective, and then I would recommend adding the steps necessary to research the problem into an action plan.
- For example: “Bounce Rate” is one of many KPIs that Google Analytic gives for a website. You already have it in your Google Analytics dashboard, but it doesn’t mean that you know what to do about it. It looks like this might be an indicator of the website’s quality, so an action plan in this case will actually be a research plan to find out how one can manage a bounce rate.
KPIs won’t execute your business strategy; your team will do this. Talking about a team, there are some typical problems:
- The KPI need to be properly translated to a team
- Team should buy into a usage of a specific KPI
If a team don’t think that KPI is relevant or is used appropriately then they won’t work with this KPI, or in a worst case scenario, they will start making everything possible (not necessary relevant to a strategy)to keep a KPI in a green zone, e.g. they will start gaming a KPI.
Basic tactics to prevent these problems are:
- Translate a KPI to your team by explaining to employees a “why” aspect, e.g. how a KPI is aligned with a specific business objective, how that business objective helps to execute a company’s strategy.
- Avoid using reward KPIs or linking any type of compensation to a KPI. Check out this article for details and best practices.
- Cultivate in your company a tolerant culture that will treat red-zone KPIs as opportunities. Check out the article by Sandy Richardson that explains the details.
- Assign a responsible employee for a specific KPI. The person should be responsible not just for filling in data each month, but for ensuring that an action plan is executed.
- Involve your team in KPI design.
A basic self-check question: does your KPI report raw data or valuable information? Obviously the difference is in the context. If KPI is aligned with a business objective then it will report information that will generate business insights and help with executing of an action plan.
KPIs Best Practices
We have talked about the business context of the KPI and hopefully now you start seeing KPIs from a different point of view. Not just a quantified representation of something, but a measurement tool that interconnects with its business environment. Now all of the standard KPI rules will sound a little bit different and, hopefully, will make more sense.
Focus on results, not on the process
KPI is aligned with a business objective, not with a business process. That’s why KPIs focused on results work better than KPIs focused on the process. KPIs focused on the results are harder to game; those KPIs don’t just give you a raw data, but information about the success level.
- Objective: “Close deals,” process: “Call prospects”
- Process oriented KPI: The number of calls made
- Result oriented KPI: The number of closed deals
In some cases it is difficult to come up with a good result-oriented KPI. In this case we can start with Critical Success Factors (CSF). For example, we were talking about employee engagement. For sure in that case an employee survey might give some idea about the current engagement level, but it will be very subjunctive. The better approach is focusing on critical success factors of employee engagement, which are more formalized and easier to measure.
Attributes of a KPI
In the “Team” paragraph we were talking about translating of a KPI to your team. Employees need to buy into a specific KPI, otherwise they won’t use it. Give your employee a clear picture about a KPI and they will be happy to use it. Make sure that the KPI that you suggest has these attributes:
- Name of KPI, preferably short and descriptive. If necessary add additional information about a KPI in a description.
- KPI is measurable. It is easy to measure it; there is a step-by-step instruction about how to do this, that unambiguously defines the way to measure its value. Do you use some quantified values? Do you conduct a survey? If you prefer surveys, read an article by Stacey Barr to learn why surveys are not real performance measures.
- Focused value. Avoid using aggregated values. Something like “financial success index” for a business unit or turnover rate in HR. Instead of measuring the aggregated value, find out what a part that actually matters for your business. Don’t measure turnover rate for all employees, try to minimize turnover rate of high performing talents.
- Alignment. It is aligned with a specific business objective and action plan.
- Responsible employee. As mentioned in “Team” section, there should be an employee responsible for this KPI.
- Update interval. How often does a KPI value need to be updated? How often a KPI’s attributes need to be revised?
- Data input. Define how the data is inputted in KPI. If a responsible employee is the one who will do that? Is the data updated automatically from a database or an Excel file?
- Target value and finish date. What you want to achieve is a specific target value, specify the estimated final date. This applies in case of progress tracking. In a case of performance monitoring the objective is to keep a KPI in a green zone and obviously no finish date value is used.
- Visualization. People believe in what they can see. Choose an appropriate means to visualize your KPI on a dashboard or on a strategy map.
There is an opinion that one doesn’t need an automation software for KPIs, because of all KPIs can be listed in an Excel spreadsheet that will work fine for any company. That’s makes sense if you have a list of KPIs that are not aligned with business objectives. You might argue that a business objective is just another column next to the KPI name. That’s makes sense too and will work for small projects.
The problem appears when it is necessary to create a strategy map where business objectives are linked by cause-and-effect connections and it is necessary to visualize important data about objectives and KPIs. When your project grows you will definitely need some sort of automation software. Check out how BSC Designer can help in term of KPIs.
A sound approach for better KPIs
Let me summarize all the ideas analyzed above. If you read articles in the same way like most busy business people do, then scan my arguments above to make sure you catch the main ideas. These ideas were also described in the details in this KPI system.
- Start KPI design with a business context, not with a KPI. Define what your business objective is.
- Do you have an action plan? What are you going to do to achieve a specified business objective?
- Define a KPI; it can be a KPI for monitoring of the performance or for the tracking of the progress. Choose a KPI according to your business context; don’t copy a KPI from others.
- Translate your KPI to a team. Explain the context, avoid reward KPIs. Involve your team in KPI design.
- Choose a proper KPI automation and visualization tool.