Human resource (HR) key performance indicators (KPIs) are as important – if not more important – than workplace key performance indicators of labour and financial productivity. Despite a range of studies and extensive debate and discussion within the HR fraternity, it appears from my observation that they are paid too little attention by those in the executive team, other than HR.
This puzzles me. Imagine if employees were, as the spectre of future workplace technology suggests, a robot.
Why would a Chief Financial Officer not be interested in KPIs which demonstrate the effectiveness of our ability to manage the procurement and lifetime use of the robot? A resource that not only produces output, but assesses multiple inputs to make decisions, influences other decisions and can also be very destructive in a poor operating environment. Not only that, but the total costs include an extensive support network which contributes greatly to the fixed costs. The lifetime costs of the robot are also likely to be one of the biggest costs to the organisation over a thirty year period, and every time they have to replace the robot over the thirty years the costs escalate significantly.
So how should we go about designing HR KPIs that will help CFOs and CEOs care about them?
Critical Questions to Ask
To develop and select HR KPIs, there are twelve critical questions to ask:
1) Are we measuring a process?
Measuring the outcome of a process—rather than a discrete, not-to-be-repeated event—is a fundamental element of building a performance indicator. A process is a series of repeatable steps designed to produce a particular outcome. The reason to measure its performance is to enable corrective action to be taken if the process fails to meet its designated outcome.
2) Do we know the objective?
Knowing the objective of the process being measured is probably the most crucial foundation of an effective KPI. If you aren’t sure what ‘success’ looks like, how can you be certain what you should be measuring?
Take for example a process called ‘Mow Golf Course Greens’. What’s the objective of that process? Consider the following differing scenarios:
- Objective: keep grass healthy. KPI: number of times re-sowing of grass is required.
- Objective: maintain neat appearance of greens. KPI: number of complaints received about appearance of greens.
- Objective: keep ball speed consistent from green to green. KPI: variability in ball speed from green to green.
Understanding the objective—the core objective—of the process is absolutely imperative to good KPI design. We frequently come across the argument that KPIs shouldn’t be used because of such-and-such reasons, and the core of those arguments is usually a set of poorly designed KPIs. Let’s take an arbitrary public health system. What do you suppose the usual KPIs are there? They are probably around number of patients seen per hour, doctor-patient or nurse-patient ratios, that sort of thing.
What do you think the objective of the public health system should be? What KPIs would be appropriate to measure the attainment of that objective? Think about that for a while and ask yourself why private health insurance is so readily bought by many, despite the steep cost.
3) Do we speak the same language?
KPIs are by their nature used, reviewed and read by different groups of people. Because of this, it’s important to define all the critical terms in your KPIs so that they can be equally understood by everyone. And don’t think this is an easy task, either—when was the last time you tried to define what a ‘sale’ is? Or ‘revenue’? What about ‘customer satisfaction’, or ‘employee satisfaction’? How about ‘clean’? Or let’s get really difficult and try to define ‘manage’.
Having a common vocabulary between all the people who use or are affected by your KPIs is critical to success.
4) Can it be easily measured?
Some things can easily be measured. ‘Number of widgets produced per day’ should be easy to measure. ‘Number of widgets produced per day that meet minimum quality specifications’ is harder, but still easy enough to do.
When KPIs are hard to measure, you have two choices. One option is to sink resources into a project that enables measurement. This is the right thing to do if you believe the KPI in question is clearly the best—or possibly the only—way to measure the process you’re examining. The substance of such a project might vary widely, from setting up a new report to completely overhauling or replacing an entire IT system.
The second option is to simply abandon the KPI as written, and find an alternative or proxy. Sometimes that’s the right thing to do, as any system of KPIs needs to run smoothly and with minimal effort—or it simply won’t get done.
The other issue to consider here is the validity of data, which also brings in questions about the KPI’s stability over time. Because the entire point of measuring a KPI is to enable corrective action—in other words, to get better at whatever it is we’re doing—we will want to gather data over time so we can see the trends in our performance. Two potential problems can occur here:
We find ourselves using invalid data, because valid data is hard to get. Allocating fixed costs can be hard, for example, but if we use guesstimates and speculation rather than a system or formula (even if the system/formula is imperfect) then any KPI based on cost allocations is going to be hard to develop properly—and be taken seriously. The lesson here is that even if you have to invent something or use a guess to get your measurements, be consistent in its application and ensure that it applies equally to everyone who is measured by it.
We change our definitions or methodologies over time. Consider customer service. Let’s face it, customer service—expressed as a quantifiable number—is an artificial construct. What does ‘79% customer satisfaction’ really mean? It’s completely meaningless, and yet, if we standardise the way in which we collect, aggregate and report the data, and do it repeatedly over time, we can be secure in analysing trends. If, however, any of the ways in which we collect, aggregate or report our data happen to change, we can no longer compare current results with past results. This is why it’s important to maintain standardised procedures and methodologies for the collection of KPI data.
5) Is it easy to express and explain?
Incidentally, this is why having a ‘number’ KPI is often inferior to a ‘percentage’ KPI. ‘Number of deliveries returned due to incorrect address details’ could spike in months where large numbers of orders come through. ‘Percentage of deliveries returned due to incorrect address details’, though, is consistent regardless of the actual number of orders received.
6) Is it a leading indicator?
Let’s face it, building lagging indicators of performance is easy. ‘Volume of sales per month in $’ is a lagging indicator—it only tells me how much money I made from sales last month. I can’t go back and fix last month’s sales now—it’s already happened. Worse, if there’s a chronic problem with my volume of sales, that implies there’s something wrong with the sales process itself, and all the prospects that make up next month’s sales are already in the pipeline. By the time I find and solve the problem in the sales process, it might be months before I see any results.
Leading indicators are much more useful. They tell you that there might be a problem with a process before it becomes a serious issue for the business. In the case of a sales process, leading indicators might be ‘Conversion rate from contact to meeting’, or for businesses with an online sales model, ‘Number of unique visitors to our web store’.
This goes from the core of what it means to be a Key Performance Indicator—one of a handful that should be used to chart the fortunes of the business. It’s okay to have lagging indicators—sometimes we need them, in fact—but we should always be on the lookout for good leading indicators to use in preference to lagging ones.
7) Are all our KPIs aligned?
Imagine a retail store that has a KPI of ‘Number of stock-outs per month’, with the direction to keep stock-outs (times when they have no stock to sell) to a minimum. Their inventory management will be geared around ensuring available supply of stock, and consequently they will likely be pressuring their warehouse to keep significant volumes of stock for popular products.
Now imagine if the warehouse has a KPI of ‘Volume of stock on hand’, with the direction to maintain the leanest inventory volumes possible. The two KPIs are totally at odds with one another, and it’s highly likely that every time the warehouse gets a pat on the back for maintaining low stock levels, the retail store gets a reprimand for something going out of stock, and vice versa.
KPIs need to be aligned:
- with each other, to prevent situations like the one outlined above where competing priorities put different functions at loggerheads thanks to their KPIs;
- with the corporate goal or mission, to ensure everyone is pushing towards the same goal and different functions aren’t pulling in different directions (even if their KPIs aren’t directly in opposition); and
- to corporate culture. There is little point in building KPIs that will be meaningless or ignored thanks to cultural issues—a laid-back company with a policy of allowing their employees to select their own working hours shouldn’t choose KPIs that focus on employees’ presence in or absence from the office, for example.
8) Can our people affect the outcome?
If there’s a cardinal sin of KPI creation, this would have to be it.
A KPI, by its very nature, must be designed such that it enables corrective action. Otherwise, why bother having a KPI? Or any performance indicator?
Beyond that, the KPI has to enable corrective action by the individuals being measured. Measuring individual library staff on the number of books lost each month makes no sense—the library staff themselves have no way of preventing people from keeping or losing books that they have borrowed. Sure, the library itself as an entity could take corrective action by increasing the monetary value of fines for lost books, but that’s not a decision the librarians themselves can make.
9) Is there a context to the KPI?
A KPI needs to have a target. ‘Number of windows cleaned per hour’ is a good KPI, but what’s the magic number? Ten? Fifteen? Thirty? Does it differ depending on context? How many windows per hour are competitors getting through?
Any KPI should have a target, a target band, a threshold, or a benchmark associated with it that gives some direction as to the acceptable outcome of the process being measured. New staff members will be able to quickly understand whether their performance matches expectations, and it’s clear to managers where they need to improve.
10) Is there a review process in place?
Businesses change and so does what they need to do to succeed. Consequently, KPIs get old. When they’re first introduced, they might prompt a spike in performance as people take notice of the KPI and strive to improve to meet its expectations. But over time, KPIs become stale and need renewal. It’s important to review the impact KPIs are having on business performance, and, if necessary, remove old KPIs to replace them with new ones. It’s probably worth assessing a cohort of KPIs on a quarterly basis to ensure they are all functioning as intended.
11) Can I reward staff performance?
As we’ve already mentioned, it’s important for KPIs to enable corrective action. But just as important is being able to motivate people to perform. Linking KPIs—appropriately—to reward and remuneration programmes is a great way to drive productivity and performance across a business.
There are almost certainly pitfalls in this endeavour. There will always be individuals who seek to ‘game’ the system to maximise their own personal gain while minimising their effort. But just because designing something good is difficult doesn’t mean we shouldn’t do it. It just means we need to be diligent and work carefully through all the issues before we put a system in place.
12) Do I have too many KPIs?
Lastly, it’s possible—even common—to have too many KPIs. On average, the largest number of items the human brain can deal with simultaneously is seven. If any individual in your business is trying to meet more than seven KPIs over time, they are going to get confused, and likely their performance against those KPIs will be compromised. It’s our position that the fewer KPIs, the better—which means that sometimes you have to get really creative in designing KPIs that encompass all the elements of what we define as a successful outcome.
Steps to build a system of KPIs
To build a system of KPIs which can comfortably answer the twelve questions positively, there are five steps to creating KPIs.
1) Know what you’re measuring
Know your outcomes/objectives, and the goal of measurement.
2) Align your KPIs
Make sure your KPIs support each other, and that they are properly aligned to your business objectives
3) Provide support & training
Implementing KPIs is a big deal—it’s not something you should do without bringing in appropriate support mechanisms as necessary, which may include but should not be limited to training programmes, a communications plan, consultation, rewards & recognition programmes, and ongoing support. We find it useful to follow the Theory of Planned Behaviour, which in this context suggests that for a KPI implementation programme to be successful, employees must:
- Believe that the change is good for them; and
- Believe that the change will become the subjective norm; and
- Perceive that they have the capability, authority and direct access to data required to implement the change.
Think about that and ask yourself whether the people in your business can say that’s true of themselves.
4) Build in review mechanisms
Implementing your KPIs might initially bring you much success—but over time the KPIs will become outdated and require review and revision. It’s important to stay on top of your KPIs to ensure they are still relevant and still motivating your workforce.
5) Keep them under control
Whatever happens, don’t let your KPIs escape and run wild. As well as reviewing existing KPIs, be on the alert for new KPIs popping up—formal or informal. There are plenty of ways for informal KPIs to spring up when you least expect them—people who are fed up with the existing KPIs might seek to set up their own rather than try to change the system, or cultural influences might mean that KPIs that should be meaningful are rendered impotent.
It’s important to be vigilant and round up your KPIs—formal and informal—on a regular basis to see what is driving the behaviour of your employees.
KPIs in an HR context: Driving Organisational Performance
In our experience, there are four ‘prisms’ through which we can view the KPIs used in the HR function to measure human capital. In order of increasing complexity they are:
1) Human capital output
KPIs that measure the output of human capital are the simplest and most common. Measuring the quality and volume of work completed by individuals provides us with a basic level of information about the health of our business, and—when measured well and in alignment with the corporate goal—provides us with the simplest of levers to pull to improve business performance.
KPIs might include:
- Sales turnover per employee (or Full Time Equivalent: FTE)
- Widgets per man hour
- % error rate
- Salary rate / sales turnover
- Sales conversion rates
2) Human capital capability & health
When we move up to measuring the capability of our human capital, we’re talking about things like competency over time, absentee rates, or retention rates. These are the items that inform us about the health and capability of our human capital—things that don’t directly affect the quality or quantity of output, but that do provide the capacity for employees to do the work.
KPIs might include:
- % of employees competent in their role
- Average time (months) to competency
- % of employees with adequate occupational health & safety training
- Health & safety prevention costs per month
- Lost time injury frequency ratio
3) Culture & Attitudes
Figure 1 above is Johnson & Scholes’ cultural web—the most useful tool we have so far found in assessing corporate culture. And just as the concept of corporate culture is hard to pin down, so are the KPIs associated with it—employee satisfaction and levels of empowerment are a couple of examples.
The culture of a business dictates the environment within which its people operate, and in turn has an influence on both the capacity of the individual members and their output. Managing the culture of the business is therefore an important part of managing the performance of the business, and KPIs should be set up accordingly.
KPIs might include:
- % of total hours lost to absenteeism
- % employees believing they are aligned to the corporate vision or mission
- % employees perceiving that promotion is merit based
- % employee understanding of organisation objectives
- % employee perceiving they have adequate support to achieve organisation objectives
4) Employee lifecycle
Lastly, KPIs need to be managed over time—all employees go through a natural lifecycle (Figure 2) from the time they first apply for work to the time they retire or leave the organisation. Managing KPIs to continue motivating and challenging employees throughout their time with the business is key to building an effective set of KPIs that can be used to propel the business toward success regardless of the situation it finds itself in, or the makeup of its employee base.
KPIs might include:
- % new hires achieving 24 months service
- % new hires achieving satisfactory appraisal after first assessment
- % of key positions with adequate succession plan
- Employee satisfaction index with training
- Rate of life cycle of employees (total time served in the company of all staff/total staff recruited).