Key performance indicators (KPIs) would seem, on the surface, one of the most straightforward topics to grasp.
However the process of defining a meaningful set of KPIs is a lot harder than it might seem and one of the reasons companies are always on the lookout for pre-existing content they can apply to their business.
Why Do We Need Performance Information?
The obvious answer is that it tells us whether or not we’re meeting our objectives. When we’re dealing with scorecards as oppose to dashboards (a topic in its own right), this is probably sufficient. But performance information can also tell us whether improvements are necessary (see Getting More value from Your Operations), how quickly we’re achieving our goals, and whether the rate of improvement is increasing or decreasing? Measures also help us align teams and keep us focused both on what needs to get done and the necessary course corrections to achieve our goals.
Top-level measures are fairly easy to come up with; for example, revenue, profitability, and customer and employee satisfaction. As we drill into business processes in more detail, the number of performance measures starts to increase quite quickly. So, one immediate challenge is knowing what ones require our focus.
Managing Performance Is a Balancing Act
- We need to be effective – focus on what matters most. There’s little sense doing well things that have little impact.
- We strive to be efficient – use least amount of resources. Being more efficient frees up resources so we can do more. So, a portion of our measures should indicate the less expensive, quickest, lowest, highest way, etc. of meeting our objectives.
- We also need to ensure being more efficient doesn’t mean we cut quality – so we need to achieve cost reductions in ways that don’t negatively impact safety, compliance, or stakeholder satisfaction. Ideally, the product and services we deliver should exceed expectations.
Measurement by Itself Won’t Improve Performance
Certainly from an employee performance/compensation standpoint, knowing what you’re measured on helps focus attention. We need focus on outcome KPIs rather than output. For example, in sales, performance is ultimately about deals closed and deal size. Pipeline and sales activity are important, but they aren’t the outcome on which our pay is based. So, as a best practice, we should have more outcome indicators and fewer input and output KPIs.
Prioritization is also key, as some outcomes are needed sooner than others. This can be clearly seen in long-term plans where gaining market share is more important, initially, than revenue and profitability, which come later in growing businesses.
Too Many Metrics Makes It Hard to Determine Performance
More isn’t always better when it comes to performance management. A very common beginner’s mistake is establishing too many KPIs (and objectives), making it very hard for employees to focus on the most critical activities. Plus, you mostly end up with a conflicting set of metrics where it’s almost impossible to tell if you’ve improved or are delivering anything worthwhile.
In Malcolm Gladwell’s book, Blink, he describes a situation at Cook County Hospital where they were struggling with too many metrics. The issue was that anyone with heart issues regardless of the problem had to be treated, and it bogged down their emergency services. They wanted to determine the critical few metrics that would allow them to focus only on individuals with heart issues that were of an emergency nature and treat less serious cases in other departments. The issue was that most people are trained to think more information is better.
Defining Key Performance Indicators Involves More Management than You Think
Organizations get themselves in trouble by not allocating enough time to defining KPIs. What kinds of problems arise?
- It’s hard to get the right cross-functional team together – KPIs need to help many stakeholders, yet you want to also limit the total number you track.
- Stakeholders argue, so it becomes hard to obtain agreement.
- You might pick the perfect KPI only to find you don’t have sufficient data available to measure it.
- Other problems are psychological: fear and anxiety arise around achieving the KPIs. There’s risk in doing or measuring something that’s never been done before.
- Lastly, compensation is likely to rear its head – how will I be rewarded for doing this?
How Much Work Is Involved with Tracking the KPIs
When determining your KPIs, you need to consider how much work is involved maintaining them. With limited resources, make sure that keeping your KPIs up to date isn’t more work than the projects they’re designed to measure.
Consider what’s involved in collecting the actuals each period (can this be automated) and how frequently they need updating. Difficultly in producing reports is one of the major reasons companies turn to purpose-built applications; so if using these tools adds too much additional work, than the investment in them may not be worth it.
Lastly, do your KPIs adequately measure your objectives? Returning to my soccer analogy from an earlier post, if the goal is to make the team fitter, then we need to focus on training that ensures the players can both go full speed for short bursts and last the full duration of the game jogging continuously for 60 minutes will make them fit but not in the way we want.
So, defining key performance indicators isn’t straightforward after all. There are lots of considerations, and you need to budget time accordingly.