It is far too easy to measure things. As business people, we often follow the mantra, “If you can’t measure it, you can’t manage it.’ And although the statement is logically true, one of the unfortunate by-products is that we measure too much. The tools and systems we have available today allow us to easily automate measurement. And the cost of computer storage is so small, we are happy to capture gigabytes of data. And in some cases, this is absolutely the right thing to do. In the world of ‘big-data’ the analysis or more accurately, the cross-analysis of massively large amounts of data can provide invaluable results. However, it is the insight that we are really interested in, not the data itself.
Key Performance Indicators, usually referred to as KPIs are what we should be looking at. It is here where we often confuse ourselves. All measures are not KPIs. The clue is in the title. Key. A key performance indicator is not an operational measure or a piece of data.
The key (excuse the pun) quality of a key performance indicator is it is directly related to an objective or a goal. If it is not related to an objective or a goal, then it is simply a measure. It may be an important measure, but it is not a key performance indicator.
Let’s look at a familiar example to explain this definition. A very common KPI is Customer Satisfaction. What makes it a key performance indicator?
First and foremost, it is directly related to the objective to Improve Customer Satisfaction. It is unlikely you would be measuring customer satisfaction if the desired outcome was not to improve the relationship between your organisation and your customers.
Second, customer satisfaction is an index. Not all KPIs have to be indices, but in reality, most are. It is made up a set of other measures that are aggregated to create a percentage. For example, customer satisfaction might be made up of a survey result, a point of sale result, the number of lost customers over the number of retained customers and several other factors.
Third, customer satisfaction will be gauged by and acceptable or target value, usually between 80%-100% and an unacceptable value, maybe 75%. By applying a traditional red, amber, green, colour scheme to these thresholds, you can very quickly see where you stand.
How do we select KPIs?
The glib answer is, don’t start by selecting KPIs. If the first quality of a KPI is it must be related to an objective or goal, then start with the objective or goal. By doing this, two very important things will happen. 1. You will start looking at your business or organisation from the correct perspective, that is, what do I want to achieve? Rather than, what do I need to measure? and 2. You will begin to measure the things that matter. As an outcome, you will measure far fewer things but have a far better view as to how your business or organisation is progressing.
How should I start?
Creating a set of business or organisational objectives is not for the faint-hearted. If you have not done it before, you might be surprised at the outcome. The starting point, of course, is to look at what the organisation is trying to achieve in terms of an overall vision. Actually, this part is usually pretty simple. You will almost certainly have a vision in place already, or something that can be tweaked and used. The next stage is a bit more daunting. To really get to grips with selecting KPIs you need to put in place a strategic process. Selecting the right strategic process is often a contentious activity. Everyone will have a view. But do not be fooled into thinking that you can invent a process yourself. One of the best strategic processes is the Intrafocus Seven-Step Strategic Planning process (SSP) based on the Balanced Scorecard methodology.
What are the seven steps?
The seven-step methodology is based on the tried and tested balanced scorecard methodology and starts by looking at the foundational area.
Step 1 Foundation: in the foundation, you will look at you Vision, Purpose and Core Values. Thus, setting the stage for the rest of the strategy
Step 2. Assessment: You will need to look both internally at anything you have already created and then externally at the market and the environment. Often, we include SWOT, Value Proposition and Gap Analysis here. An analysis will generate three Strategic Priorities.
Step 3. Strategic Objectives: This is the centre of the strategy. Strategic Objectives break the vision down into workable components.
Step 4. Measures and Targets: It is only now that we start to consider KPIs. As you can see, several days and sometimes weeks’ worth of effort has to be made before KPIs are even considered!
Step 5. Projects: It is interesting to note that projects are left to the fifth stage. This is intentional. Too often we will be project led when actually we need to be objective led.
Step 6. Communication: With the strategy written and the KPIs defined, a good communication plan needs to be put in place
Step 7. Automation: And finally, the strategy has to be implemented, the process has to be embedded into your normal business processes and data collected from various sources to update your measures. This cannot be done with spreadsheets or presentations. A system needs to be put into place.
Creating a set of KPIs is not something that can be done overnight. Neither can it be done by looking at an existing set of measures and trying to apply them to your business. KPIs have to be relevant and meaningful. The whole process has to be automated and managed. A KPI software system like Spider Impact should be deployed to ensure your success.