Great companies live in a world where they must measure Key Performance Indicators that have been determined to lead to strong business outcomes and success in their industry. The measurements must be accurately defined and measured to be of any value to the company and its management team. Whether the company is publicly traded or run as a private entity, stockholders or stakeholders want to be informed as the company matures and progresses. A good way to communicate the company’s progress toward results is by showing measurement and improvement against Key Performance Indicators. It is important for management to be able to articulate why the KPIs that they have chosen to measure and monitor are relevant and how they ensure their progress against achieving specific strategic company goals.
Focus – It is often best to measure three to five (as opposed to more) key indicators that have proven to predict your success with some accuracy. Such indicators might be the number of new customers per year, the percentage of employee turnover, strong financial ratios, sales revenue growth, or other similar metrics. If you plan to measure 15-20 KPIs, you will likely lose the power of incredible focus on those most powerful 3-5 that correlate to your success. Don’t overcomplicate this, pick five strong metrics and get started!
Context Relevance – You must be able to explain why you’ve selected the chosen three to five KPIs that you monitor. Likewise, you must to be able to explain why THOSE measurements are relevant to being able to predict your organization’s success in a given month, quarter, or year. Good KPIs are very strong proxies for overall company success. Remember always, just because something can be measured does not make it a great focus KPI! The key is to select only those metrics that have a very high correlation to your success during that period of time measured.
Attributes – For a KPI to be effective and valuable, it needs to be able to be accurately measured on a consistent basis over time. KPIs need to be based on quantifiable, specific units of measurement that allow trend analysis to be performed over similar periods of time. Success is defined in terms of improving results toward achieving strategic targets. As a result, selecting the best KPIs to monitor implies a deep understanding of only those relevant results that are important to the advancement of the organization. If you measure your KPIs on a regular cadence, they will be more helpful. Of course, you must determine with cadence makes the most sense! If you wish to drive improved results in the short term, KPIs that are measured and analyzed annually or quarterly will be of little help in that effort. Some KPIs can best be managed effectively monthly, while others are effectively measured weekly, daily, by shift, or hourly. Select a cadence that allows you to analyze the data and make course corrections that drive results in a positive direction at an appropriate pace.
Consider Needs – As you make decisions about what to measure and what to report on, avoid the temptation just to measure and report on what is easy. Let the needs of the business and the needs of your reporting users dictate what you gather, how you structure the data, and how you will present it in reports. Reports that are inaccurate or which present the information in ways that make it difficult to use are not valuable and quickly discarded. While it may be difficult or expensive to develop a system to measure and report your KPIs, you will generally find it well worth the effort and the investment. With effort and time, the ability to measure and present data will improve and will lead to managers making better decisions with better information.
Accuracy – Invest in making certain that all stakeholders in the Key Performance value chain understand their role in collecting data, setting targets, formulating reports, and using the data from the reports. You want to enable the Managers to make timely and appropriate decisions that maximize value. Above all, the data gathered needs to be accurate which may involve some manual scrubbing and adjustments from time to time. While manual adjustments may be occasionally needed, they should be avoided as often as practicable. Well-designed systems run automatically most of the time, and manual corrections should be the exception, rather than the rule.
Top-Down Priority – In any high-performance organization, the importance of identifying and measuring KPIs must be understood, prioritized and focused on appropriately. A visible commitment to supporting KPI measurement must start with the CEO and every member of the executive team. This priority must flow consistently to all management and leadership in the company. Show your commitment from the top down and people will appreciate the urgency and manage performance by adhering to the handful of most important KPIs.
Keep It Positive – Recognize that well thought-out KPIs support and encourage positive and proportionate decisions and actions. KPIs that have not been rigorously conceived will almost certainly lead to poor decisions, dysfunctional behavior or inadequate action plans in your company. Be very careful about what you choose to measure and be aware that any performance metric can have an unintended and unforeseen negative consequence that requires extra care. For example: A well-intentioned pizza delivery business implemented penalties for delivery drivers to ensure that pizzas were delivered quickly to hungry customers. The unintended result was that drivers began to run stop signs and drive through red lights to avoid late delivery penalties. The drivers were invented to avoid penalties but dysfunctionally adapted with behavior that led to traffic accidents and injuries to pedestrians and drivers along the delivery route. The moral of the story: Be careful what you measure and how you react to that data to avoid making a bad situation worse!
Running your company effectively can be enhanced by picking your KPIs carefully and by making them the core of your Performance Management strategy. In my experience, the best companies always have KPIs, and they have been selected wisely and the company is using them to drive consistent positive results. Great decisions are made quickly with accurate data that helps Management to see the future in the context of the present and the past. Turbo-charge your company with a fresh approach to your KPIs!