Choosing Effective KPIs isn’t easy

KEY PERFORMANCE INDICATORS – exist to direct decisions and actions;
effective KPIs motivate profitable, and successful, business decisions.

It seems most people forget to think about the name itself ‘Key performance Indicators’ when they are Choosing Effective KPIs – just picking stuff that is easy to measure. This article is about being able to pick useful KPIs to go on a Dashboard.  However these principles will apply equally well to individual KPIs as to departmental KPIs.

Use these 6 steps, to get the best out of your Business

What is a KPI?

A Key Performance Indicator is a measure of how well a fundamental part of the business is tracking towards its goals.

* Key = something that secures or controls access, important, essential, fundamental
* Performance = the execution or accomplishment of work
* Indicator = a measure, and record of variations
A KPIs’ specific purpose is to communicate a relevant summary of the current business situation to a particular person, or group; giving an indication of how a certain part of the enterprise is delivering its strategic commitments. Because it is an ‘Indicator’ it doesn’t of itself have to be all encompassing, or provide all the information about the business are, or reveal all about detailed execution. The purpose of a KPI is to highlight if, and when more investigation is needed; it doesn’t provide enough information to drive specific business decisions.

KPIs are high level, so are different from day-to-day management data, scorecards, etc – ie they are NOT everyday ‘Performance Indicators’, Ratios, or Variance Analyses which are produced for a specific manager so they can analyse, manipulate and make tweaks to systems and processes.  KPIs provide an OVERVIEW of the business, triggering further inquiry if necessary.

For choosing effective KPIs follow these 6 simple steps:

A. Work out the audience and their objectives

KPIs are to be reviewed and shared – they are a Summary used as a way of keeping an eye on important areas and activities, but not used to run those areas and activities on a daily basis…Did I say “summary”?, it is worth repeating… The audience of KPIs is most likely up one level from the activities being reported on – so when producing your KPIs you need to ‘tier’ them. Thinking about the various levels of management, and who is reading the report is vital – then rethink your business information levels of detail to match the tiered pyramid structure of management.

management pyramid image
Detail should be decreased as you move up that structure to avoid information overload and engender responsibility at the lower levels.
Remember: One manager’s critical Key Performance Indicator will be unimportant, including to too much detail, for another manager higher up the organisational tree.
Each audience will have different objectives to achieve, and these need to be teased out and clarified before the relevant KPIs can be applied. Spend some time understanding exactly what are the outcomes that are critical to your audience’s success.

B. Be Clear about the Message

When choosing your KPIs for reports two messages are vital Key and Indicator.
Addressing the Key part – any KPI you choose should be one of only 6 to 8 KPIs on any report – more than 8 begins to create a level of detail that undermines the primary relevance of the indicators, so always consider context (more on that later).
Addressing the Indicator part – well designed KPIs only deliver a message that will instigate one of two decisions; either ‘do nothing’ or ‘investigate’!
Recognise a KPI’s job is to tell you one of these three things:

  1. Things are looking bad
  2. Things are looking good
  3. Things are OK

For a KPI to be useful they also need to enable easy decisions and instigate action in each of these scenarios.

  1. Things are looking bad: Decision = need to investigate, Action = ask for more information
  2. Things are looking good: Decision = need to investigate, Action = ask for more information
  3. Things are on Track: Decision = no need to investigate, Action = none required

If your indicator is revealing more information than that is probably too low level, therefore not a KEY Performance indicator; it is not acting as an “Indicator” of performance but providing information about how and why the outcome happened.
So, taking into account the audience and understand what objectives they are trying to achieve will help you work out what messages your indicators need to be providing.
By the way, if the information on any report you have is not enabling decisions DITCH IT! – see Create useful reports – not more data…!!!

C. Definitely “Sweat the Detail”

Your KPI is an “indicator of execution or accomplishment of work”. To be able to make the decisions needed in B. above, the ground-rules of what is expected needs to be set. Being super, extra, specifically, clear about what work and what goals are Key is critical. The objectives need to be valid, so the the KPIs being reported can be valid, and this is where lots of attention to the detail of the construction of your KPI objectives is vital. The best objectives, and by that I mean ones that are achieved and celebrated, all have 6 elements in common; to help you capture each of these elements we have designed a set of 6 questions:

  1. Good Wording
  2. One Clear Measure
  3. Realistic Target
  4. Time Frame
  5. Tracking – this is the spot where your KPI, from a data point of view, comes into play

For more detail on this aspect of selection see: 6 Questions to ensure you word your KPIs effectively.

D. Balance it out

Think of the context the KPI is used in – overall it is important to ensure the chosen KPI is part of a balanced view being reported – thus avoiding opportunistic behaviour, driven by a skewed perspective.

  1. Input KPIs – measure the quantity and sometimes quality of the RESOURCES PROVIDED for the objective. eg Number of FTEs available per project or Number of Training Hours per Employee per Year
  2. Process KPIs – measure the quantity and sometimes quality of the ACTIVITIES REQUIRED to provide certain expected outputs. eg Number of On Time Deliveries per month or Percentage machine utilisation at capacity per week
  3. Output KPIs – measure the quantity and sometimes quality of the GOODS/SERVICES CREATED by the use of the inputs. eg Number of Miles of Road Built per month, Number of Saleable Widgets completed daily
  4. Impact KPIs – measure the quantity and sometimes quality of the RESULTS ACHIEVED through the provision of the goods and services eg Number of Customer referrals per month, or Number of goods returned due to faults per week
E. Use a variety of KPI types

Again, context is relevant – apart from KPI focus above, it is important to have range of KPI from following types:

  1. Target KPIs – Most often these have a target / budget associated with them and action will happen if we fall above or below this budget figure. For example, if we have a “department costs” and we also have a budget figure every month then should we exceed this figure then it’s likely to raise some actions or discussion.
  2. Directional KPIs – With many KPIs the number is much less important than the direction of travel. For example, “Number of days lost to staff sickness” [per month]. Here the exact number of days is not that useful as we can’t control this, however if the trend is rising we can investigate and take action accordingly.

Don’t forget that a mixture of types of KPIs helps ensure both qualitative and quantitative measures are selected.

F. Give it a Test

Once you think you are done, and have selected and fine-tuned your KPIs, give it a test! I have found there are three rules of thumb for what makes great measures:

1. A rate or ratio is better than an absolute or cumulative value.
2. It is comparative to other time periods, sites, or segments.
3. Make sure the metric name is less than 5 words and the calculation is easily described in under 10 words

For more detail on these three rules see this post on Rules of Thumb for effective KPIs
Also give all of your KPIs a trial run – making sure there is some lead-up time to check if everyone understands it as a team, if the outcomes are easily delivered or super stretch targets…. It can lead to disaster if you simply design, then implement, a KPI as a way to allocate bonuses without fully understanding if and how it can be “gamed” or how it will affect morale, or any other unforeseen outcomes.