When developing a business strategy, don’t turn to Key Performance Indicators (KPIs) too quickly. For many businesses, this is the part that they are keenest to start working on. After all, everything about KPIs signifies progress, activity, and delivery.
In fact, many businesses assume that they already have a strong set of KPIs in place simply because they have operational and department level measures. These can be targets used for sales bonuses, quality measures imposed by partners, customers or regulators. Or other figures which are used to make progress comparisons against previous year figures, such as quarterly sales revenue.
After all, if our quarterly sales revenue is higher than last year’s, then we must be succeeding as a business… right?
Well, that depends. The fact is, ‘true’ KPIs pass a number of tests to actually be a Key Performance Indicator.
What is a KPI?
A Key Performance Indicator is:
“A quantifiable measure that an organisation uses to gauge the performance of an objective over a specified time.”
The keys here are that it is quantitative, linked to a strategic business objective and time-bound.
Put a set of business measures in front of you and test whether they are actual KPIs by asking:
- Does the measure relate to a strategic objective?
- Can it be counted? (e.g. is it a quantitative measure?)
- Can it be compared? (Say, to an industry benchmark or previous quarter performance results?)
- Does it have a target (often, a Red, Amber or Green status on a report, set by pre-agreed threshold figures.)
- Does it relate to the business itself – or a department?
If the answer to these is yes, then the figure is likely to be a KPI. If not, it is likely to be an operational measure. Note too that if your measure relates to an individual employee, then it also will not be a KPI. It is more likely a personal employee objective.
Examples of a ‘true’ KPI
A true strategic KPI focuses on the progress of the business – as a whole – towards strategic goals. It measures the core business activities that will take it closer towards achieving strategic goals; those that improve the business, build it, enhance what it does, reduce risk, maximise efficiencies and so forth.
Examples of these might be growing revenue, cutting waste and improving customer satisfaction. Sometimes a KPI even aggregates an index of several different measures to show progress towards an organisational goal. Many businesses use accepted business ratios and key measures when they are defining KPIs. But, as ever, only when they are appropriate for measuring the relevant organisational objective.
This contrasts to operational KPIs which tend to look at process efficiency, such as reducing H&S incidents, maximising quality outputs, minimising operational downtime and so forth.
Taking KPIs forward
As we said in our first refresher article on KPIs, the first step in setting Key Performance Indicators is to know where your business is going! Understand your strategic foundations and have clear objectives in place before you start looking at your KPIs. Without this, you simply have a dashboard of random (or operational) measures; no matter how fancy the dashboard is, or how impressive the numbers are!
Being SMART
Once you do have your vision, purpose, core values and strategic objectives in place, you can begin to craft KPIs by using the SMART methodology. (Specific, Measurable, Achievable, Realistic and Timebound)
Using technology
Most businesses will also use KPI software automation to make the KPI gathering, analysis and reporting far easier, with software packages that make the entire process simple and trouble-free.
Engaging your people
Bring in a variety of key people across your business to help you with this process; recognising that many of your experts may be in more junior frontline roles, for example, if they work regularly with clients and customers and have a valuable insight into what really matters for your objectives. The more you can engage your workforce by harnessing their input and involvement, the more motivated they will be to achieve those objectives. Especially if you link any performance-related pay elements!
Be ready too to communicate your objectives clearly as well as your KPIs, to help boost that ongoing engagement, morale and passion across the business. This approach to regular, two-way communication helps to build your employer brand, as well as taking you closer towards strategic success.
Getting the help you need
It can be challenging to get to grips with KPIs at first, especially if your business is new to using them, or if you have always worked in a certain way. In these instances, it can help to get support and guidance from an external strategy consultancy or bring a facilitator in to run a strategy workshop.
A strategy workshop can provide the tools to really kick-start a formal KPI programme and develop a set of meaningful KPIs that will help monitor your business or organisation effectively. Don’t get bogged down with KPIs too quickly. Make sure you have the right strategic structures in place before you turn to measurement.
