Question 1: Am I 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.
Question 2: Do I know what the objective is?
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:
a. Objective: keep grass healthy. KPI: number of times re-sowing of grass is required.
b. Objective: maintain neat appearance of greens. KPI: number of complaints received about appearance of greens.
c. 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.
Question 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.
Question 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 need 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. 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.
Question 5: Is it easy to express and explain?
KPIs should be easy to explain, or they simply won’t gain any traction—everyone is busy and if they have to look up a series of definitions to work out what a KPI means, they simply won’t do it. A simple KPI like ‘Percentage of deliveries returned due to faulty address details’ will always trump one using complex calculations—because if an employee is going to be measured by a KPI, they will want to have faith in it and how it’s calculated. Creating a Byzantine set of KPIs that are only truly understood by the executive is not a good way to gain employee buy-in.
Question 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’.
Question 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.
Question 8: Can our people affect the outcome?
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.
Question 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.
Question 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.
Question 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.
Question 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.