“Dare to be…. don’t pay lip-service to measurement – create KPI’s that work”
I come across a lot of businesses that intellectually appreciate the need to have measures of performance yet in reality only pay lip service to implementing a formal measurement system. In many instances measures are limited to basic financial measures or they produce data for data’s sake with no link to action or process/continuous improvement.
Many companies lack a clear, systematic approach to producing KPI’s (Key Performance Indicators) and this frequently limits their ability to achieve their business goals, to manage performance, improve employee engagement and make effective decisions.
I think that one of the reasons that many SME’s struggle to implement an effective measurement process is because of confusion. A lot is written about business measures: “metrics”; CSF (critical success factors); dashboards; balanced scorecards; OKRs (Objectives and Key Results); Key Result Indicators (KRIs); Key Performance Targets( KPT’s) – way too many TLA’s (Three Letter Acronyms!!) for my liking!
To keep things simple and to provide a laymen’s interpretation of KPI’s, I think that it’s easier to consider two types of measure that are important and should be measured. These will directly help any business define and measure progress toward their organisational goals.
- Result Indicators – these are financial and non-financial measures that give an overview of past performance and communicate how well the management have done in achieving annual objectives and strategic targets (turnover, financial ratios, stock levels, margins, new customers, average sales value, hits on the web site etc.)
But because you can’t “manage” results it is also important to measure activity and performance, hence the need to measure KPI’s:
- Key Performance Indicators (KPI’s) – these are what managers should be focussed upon in their daily working lives. Actions in these areas determine the success in achieving the results/goals that most businesses are ultimately focussed upon.
Note: Beware of measuring for measuring sake. Measurement should be used to drive action toward achieving improved performance. Where possible associate SMART (Specific, Measurable, Achievable, Realistic, Timed) actions to each measure.
KPIs are metrics that link organisational vision with individual action as per Figure 1 below, with vision at the top and actions at the bottom, in the middle you find the KPIs that have been derived from the strategy, objectives, and critical success factors of the organisation.
Step 1: How to identify what KPI’s are right for your business:
To help you identify KPI’s for your business, start by asking yourself the following questions:
- What are the key functional areas in your business (production, marketing, sales, product development, operations, customer service, finance etc.)
- What result or outcome are we looking to achieve in each functional area?
You may need to ask yourself “Why?” several times to really get to the nub of what is important. Then, to identify your KPIs, I recommend spending time exploring and debating the following 2 questions.
- What “activities” or “actions” drive this outcome?
- What “effectiveness” measures let us know how well these activities are being performed?
Activity and effectiveness measures are things you have the ability to manage and improve. These 2 areas are where your KPIs are to be found.
Each functional area of your business will have a small handful of KPIs that drive the outcomes you seek. I recommend that clients measure 5 or fewer KPIs per functional area.
From this, your organization as a whole should be able to identify a small subset of KPIs that you deem to be the CSF’s “critical success factors” – the key drivers of your overall business
Ideally I recommend you refine this list of critical success factors to 5 or fewer “Organization-wide KPIs”, and keep these scores visible to everyone in your company and discuss them every week in your team meetings.
An example: A CSF requirement could be to win new business or new customers in a certain sector. The key actions may be sales prospecting or web site leads. The effectiveness measures (KPI’s) could be the number of visits to prospects and/or quotations and/or quotation conversion rates.
Step 2; Define the parameters:
Once you’ve identified the KPI measures, you need to define the parameters of performance (SMART measures) which can be reported upon and typically be colour coded to represent a visual interpretation of outcomes: “red” (bad, below target, a real problem), “amber” (watch closely, actions to recover likely to succeed), and “green” (good, on or above target)
I would strongly recommend that you involve the functional members of your departments to help you select the right KPI measures, and to get them to agree on the parameters. This will help ensure that you get “buy-in” and acceptance of what represents good and bad performance.
I would also recommend that you consider identifying a “stretch target” and including this on the graphical displays (see below).
Step 3 Source of data for measures:
After you’ve determined what the measure actually is, you need to determine the source. Do you already have the data or is it new. Are you going to have to gather it, or do you already have it somewhere, or do you need to create a new report/spreadsheet/use a pivot table? A source might be your CRM system, your accounts system, your project plan.
Some data may be able to be accessed instantly and be available “live” (e.g orders). Some might take longer e.g daily weekly or monthly. If it’s only an annual metric, such as customer satisfaction, think about how you might get a monthly indicator to track your progress in between the years.
Every business will be different. Some data may be easy to collate but if it’s more difficult don’t put off finding a way to get the information. Engage with your staff and develop a plan of action that will get you the information that you need within an agreed timeframe.
If you have defined something as “KEY” then find a way to measure it.
Step 4 Displaying the KPi’s:
Once you’ve got the data or raw numbers you have to choose how best to present the figures. As a “picture paints a thousand words”, graphical interpretations of the data are most common (rather than just raw data).
There are lots of charts that you can use (bar, line, pie, spider, etc.) or you can use the more creative options – speedometers, petrol tanks etc. There are no rules about what is best, just choose something that represents the data most effectively
See the image below to give an example of a KPI “dashboard” (a management tool that is used to track KPIs. Dashboards simplify a number of KPI’s to provide users with at a glance awareness of current performance.)
Consider posting KPIs everywhere: in each department, in the canteen, on the walls of meeting rooms, on the company intranet, even on the company web site for some of them. Show what the target for each KPI is and show the progress toward that target for each of them. People will be motivated to reach those KPI targets. Make sure that everyone in your organisation is focused on meeting or exceeding their KPI’s. and make sure that you celebrate successes.
Suggested Departmental KPI’s to be considered
- Gross Profit
- Days cash in hand
- Daily order intake
- Average order value
- Debtor days
- Creditor days
- Liquidity ratio
- Turnover per rep
- No of calls made
- Number of proposals
- Conversion % rate
- Key account meetings held
- Customer visits by type of call
- Sales by contact method e.g web, telesales, direct mail, sales cold calling…)
- Gross margin by rep
- Cost per lead
- Number of enquiries generated
- Web site traffic
- Market share
- Net promoter score
- Cost per lead type
- Response rates to different promotional activities
- Google analytics report KPI’s
Customer Service KPI’s
- Response time
- Customer complaints
- First time call resolution
- Credit notes issue
- Performance to SLA
- Average handling time
- Training days
- Employee engagement
- Sickness days
- OTIF deliveries (on Time In Full)
- Compliance breeches
- Lost time
- Picking time
- Productivity rates
- Stock turn
- Damaged goods
- Delivery times
- Return rates
- Stock accuracy