KPI’s or key performance indicators measure your progress towards success. KPI's are a crucial strategy execution component. Unfortunately, too many managers get carried away when they hear the word KPI. Dashboards, traffic lights, …. the more visuals, the better. However, using KPI’s the wrong way can harm your company. So what's the right way to work with KPI's? Here are 6 ways to challenge your current KPI’s of check the quality for new ones. You can check out the KPI video here.
1. KPI’s: relevance is key
“What’s the value of measuring speed if you are driving in the wrong direction?” KPI's should be deduced from strategic goals and measure success. Focus your measurement on the outcomes, not the means.
Here’s a real life example: Once, in a Balanced Scorecard workshop, a Supply Chain Manager told Carlos Guevara, a friend of mine, that one of her key objectives for the next year was to implement a new procurement system. She had even set out the measures and targets – in 15 months the system should ‘go live’. He asked, “Why do you need a new procurement system?”. After a few seconds pause, she replied: “You are right, that’s not my objective, that’s my initiative. My objective would be to improve the efficiency of procurement”.
In this example, the real advantage, the outcome, is better procurement. And that outcome deserves a measure and one or more targets.
You don’t want to hear from the accounting department six months down the line as to whether your strategy is on track or not. You need real-time and leading (read: predicting) KPI’s that will give you early warning signs as to if and how you need to change course. And as each strategy is unique, there is no fixed set of KPI’s that will work in every situation.
So it’s important that you get into the habit of building and monitoring your own relevant KPI dashboard.
Don’t copy/paste KPI’s because others are using them. Create your own dashboard.
QPR comments : It is important that software supports flexible creation of dashboards. With QPR your dashboard or strategy map look exactly how you need – you can add any pictures, tables, as many KPI’s as necessary, traffic lights, and it doesn’t require any programming skills.
2. KPI's: easy to understand
“If you have too many rear view mirrors, it will be very difficult to see the road ahead”
Ratios – correlating two variables such as cost per unit or CAPEX per employee – can look like a good idea at the start, but when the variables are so complex that you can’t explain them easily, they are useless. KPI's should be easy to use and understand.
3. KPI's: recurrence is crucial
Avoid KPI's that can only be measured once a year. Great KPI’s are backed up by reliable data, can be reported frequently and are easy for target setting. That also means ‘yes/no’ KPI’s.
Your KPI’s should be able to show development over time (e.g. ups / downs over a longer period of time).
QPR comments: With QPR system you can easily set up different periods for KPI collecting and monitoring from one day to a year, including your own customized periods, for example a week starting on Sunday or Monday or some other customized periods.
4. Aim for consistent KPI’s
Ideally, your KPI’s should be consistent across organizational units. The same measurement done by two different people should give the same result across the organization.
How? Make a KPI definition card to clarify the purpose of each KPI, the source of its data elements, the calculation method, frequency of update, data owner or owners and evaluation limits.
5. Mix leading and lagging KPI’s
A lagging indicator is a KPI that looks at the past. It trails behind reality and offers an accurate, but historical view of the facts, such as turnover. A leading indicator is a KPI that tries to predict the future. It shows trends before lagging indicators show the actual result, for example, customer satisfaction before customer loyalty. Your dashboard should be a mix of both so you can predict where you are going and take corrective action if needed. Having only lagging indicators limits your corrective ability.
(and having a dashboard with only lagging KPI's gives you a false sense of control.)
6. Aim for efficiency
If it takes you a month to collect data or you need to redesign completely your ERP system, you are probably better if selecting a different KPI.