Choosing the Perfect KPIs
Choosing the Perfect KPIs doesn’t have to be a puzzle.
When setting up a dashboard, or internal report, people often forget to think about the name itself ‘Key Performance Indicators’ when they are choosing the KPIs – instead picking activities that are easy to measure, rather than performance indicators that will enable good decision making.
This article is about being able to pick useful KPIs to go on an organisation’s Dashboard, however these principles will apply equally well to individual KPIs and Departmental KPIs.
Follow these six steps, and you’ll have clear reports and be making better decisions in no time!
What is a Key Performance Indicator (KPI)?
This 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 variationsA 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.
Purpose-driven organizations, like charities, associations, and other non-profit entities, need KPIs as much as any profit driven business.
Because KPIs offer a broad overview of the progress and activities, profit doesn’t need to be the driver.
KPIs are high-level indicators, distinct from the daily management data, scorecards, or specific performance indicators, ratios, or variance analyses used by individual managers to fine-tune systems and processes.
KPIs focus on overall performance, not the granular level of day-to-day tweaks. If there’s a deviation from expectations, it should prompt further investigation before making any management changes.
Searching for the best KPIs?
These 6 steps will help you get it right…
Step 1. Work out the audience and their objectives
KPIs should be regularly reviewed and shared.
They provide a summary of important areas and activities, serving as a tool to monitor, not manage, those areas on a daily basis.
Did I mention summary? It’s worth repeating.
The audience for KPIs is typically a level above the activities being measured, so your KPIs need to be tiered accordingly. It’s crucial to consider the different levels of management and tailor the level of detail to match the pyramid structure of decision-making.
As you move up the management chain, the level of detail in KPIs should decrease to prevent information overload and promote accountability at lower levels. The higher you go, the more of an overview is needed. What’s a critical KPI for one manager might be irrelevant or overly detailed for someone higher up.
Each audience has different objectives, so take the time to clarify what outcomes are essential for their success before applying the relevant KPIs. Understanding these critical outcomes is key to selecting the right indicators for each level.
Step 3. Definitely “Sweat the Detail”
Each KPI is an “indicator of progress or achievement of work.” So to know if you are making good progress you need to have clear objectives about WHERE, HOW, and WHY you should be progressing
To make informed decisions, as outlined in Step 2, you must first establish clear ground rules for what is expected, and this means taking the time to set detailed objectives.
Being crystal clear about which tasks and goals are key is essential. Your objectives must be valid to ensure your KPIs are meaningful. This is why it’s so important to sweat the detail when defining your KPI objectives.
As a side note – the best objectives—the ones that are met and celebrated—share six key elements. To help you capture these, use the S.M.A.R.T guidelines that each objective should be:
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- Specific – Precise Wording
- Measurable – One Clear Measure
- Achievable – can the team get this done
- Realistic Target
- Timebound
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If the objective is well defined then Tracking it is where your KPI, from a data perspective, comes into play
Step 5. 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:
Don’t forget that a mixture of types of KPIs helps ensure both qualitative and quantitative measures are selected.
Step 2. Be Clear about the Message
When selecting the right KPIs for your reports, focus on two essential aspects: Key and Indicator.
For the Key part—limit your report to just 6 to 8 KPIs. More than 8 creates too much detail, distracting from the main points, so always keep the context in mind (more on that later).
For the Indicator part—well-designed KPIs should lead to one of two outcomes: either ‘do nothing’ or ‘investigate.’ A KPI’s role is to communicate one of three things:
- Things are looking bad
- Things are looking good
- Things are on track
To be effective, KPIs should enable quick decisions and prompt action in each scenario:
- Things are looking bad: Decision = Investigate; Action = Ask for more information
- Things are looking good: Decision = Investigate; Action = Ask for more information
- Things are on track: Decision = No investigation needed; Action = None required
If a KPI provides more detailed information than this, it’s too granular and no longer a true Key Performance Indicator. Instead of indicating performance, it’s explaining how or why the result happened.
Always consider the audience and their objectives when determining what messages your KPIs should deliver. And if a report doesn’t lead to actionable decisions, get rid of it!
Step 4. Balance it out
Consider the context in which the KPI is used—it’s crucial to ensure that the chosen KPI contributes to a balanced view in the report. This helps prevent opportunistic behavior that can arise from a skewed or narrow focus.
Step 6. Give it a Test
Once you’ve selected and fine-tuned your KPIs, it’s time to test them! The first thing I check is ease of use. From experience, here are three rules of thumb for effective KPIs:
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- A rate or ratio is better than an absolute or cumulative number.
- The KPI should be comparable across different time periods, locations, or segments.
- Keep the metric name under 5 words, and ensure the calculation can be described in less than 10 words.
for more information on measuring your business see this post: Measuring your Business Made Simple
Also, give your KPIs a trial run before fully implementing them. Collect data and generate reports for a few months to see if everyone on the team understands them, and to assess whether the targets are realistic or overly ambitious.
Jumping straight into using KPIs, especially for things like bonus allocation, without testing them can lead to serious business issues. Be sure to understand how they might be “gamed,” affect morale, or cause unintended outcomes.
KPIs should be reviewed every year or so – to make sure you continue choosing the Perfect KPIs
KPI Reviews ensure their purpose remains relevant, the appropriate data is being collected and informed decision can be made.
For more information about choosing the perfect KPIs see this excellent post by Salesforce – The Complete Guide to NonProfit KPIs
