If you work in an organisation of any size, odds are you’re swimming in metrics that are measured, tracked, and reported on every month, every quarter and every year. Often, those bits of numeric information are called KPIs (or Key Performance Indicators).
But most of your “KPIs” are not KPIs at all. They’re just a number. A number that someone somewhere some day decided they wanted to know. So it was put into a board report, and has been faithfully reported on every month since, long after anyone stopped understanding what it meant or why it was tracked in the first place.
What Are KPIs?
I know it might sound too obvious, but KPIs are “key” – that is, they’re important, which many of the numbers fighting for your attention in the monthly board report are most certainly not.
They are also about “performance”. Things you do, things you make happen, activities that take place in your business.
And they are “indicators”. In the same way as you use the indicators on your car before you turn, not after, KPIs should primarily be concerned about predicting future performance, not reporting on past performance.
In most organisations, true KPIs are rare. Reporting systems tend to be based on a mix of:
- Financial results – numbers like your annual profit, sales made last week, or return on capital employed. These are numbers you need to know, but they are not KPIs.
- Non-financial measures – employee satisfaction, NPS scores, ESG measures and the like. They are supposed to lead the business in the right direction for the future but, however important they might be, they aren’t KPIs either.
The Problem With Traditional Performance Measures
Running a business using only the standard financial and non-financial measures presents three main problems.
- Firstly, by the time you know what those numbers are, it’s too late to do anything about them. You can’t go back 12 months and start over if you don’t like them. They are outcome measures – recording the outcome, or end result, of how well a basket of strategies and tactics worked together over a period of time. But they do little or nothing to help you manage the business along the way.
- Secondly, you don’t know what to fix when things go wrong…or even if it’s “wrong”. If employee satisfaction is down, but profits are up, is that “wrong” or “not wrong”? Depends on where you work, but achieving short-term profits while storing up long-term problems is remarkably common in organisations of all kinds. Even if you want to fix that employee satisfaction result, what is the clear and unambiguous lever you can pull to make everything OK again?
- Finally, there is no clarity about who is responsible for what when using traditional financial and non-financial measures. Mostly because there can’t be – in one way or another, nearly everyone in any organisation bears some responsibility for a reduction in profits, but no one person working on their own can put profits back on track again. If profits are down, is that because marketing identified the wrong target market, sales messed up the conversion, production didn’t produce to quality, or logistics didn’t deliver on time…or some combination of the above…?
Because traditional measures don’t help much in figuring out what went wrong, and what needs to be better, your organisation needs a good KPI system with proper KPIs, not just random numbers on a reporting spreadsheet.
7 Criteria for Good KPIs
David Parmenter, author of the book “Key Performance Indicators”, proposes seven criteria for good KPIs which I quite like:
- They should be non-financial.
- They should have a disproportionate impact on the overall results of the business.
- Measured frequently (24/7, daily or weekly at the most – the more often, the better, generally).
- Can be acted upon by the CEO and senior executives – after all, since these activities have a disproportionate impact on company results, why they wouldn’t want to be all over them?
- They should clearly indicate what action needs to be taken should any measure go off-course.
- Responsibility should be clearly identified with a specific team.
- They encourage appropriate action – that is, they have been tested and drilled in real life so that everyone knows what needs to happen to get results back on track. They should help avoid knee-jerk, short-term decisions to fix today’s crisis, but at the expense of creating an even bigger crisis in the future.
That all sounds fair enough, doesn’t it? But be honest, how many of the “monthly KPIs” in your organisation fit that basic criteria? Likely, not many.
Most of the reporting I’ve seen in organisations of any size doesn’t meet even one of those criteria, never mind all seven of them.
Ironically, the position is often worse in organisations with well-developed reporting systems, where you can hardly step through the door without stumbling over Balanced Scorecards, ESG reporting, Triple Bottom Line methodologies, and many other management fads.
That’s not to argue against the underlying spirit behind those approaches. It’s just to say that, when it comes to organisational performance, you can’t really run a business using only that style of reporting because too many people are involved, the responsibilities for each element are opaque, and the actions required are unclear.
Most organisations need to track fewer, rather than more, metrics.
How to Build an Effective KPI System
The starting point is to be clear which measures out of the hundreds you’re probably tracking at the moment have a disproportionate impact on the overall results of the organisation and take a more systematic approach to measuring them. As a rule, your tracking needs to go deeper, not wider.
And once you get there, use the definitions above to set proper KPIs. Don’t track some random numbers that are easy to find in a particular function and just hope for the best.
When I’m doing this sort of exercise, I always like to tie KPIs back to activities, because that’s the level at which you can meaningfully influence an organisation’s results.
An example might help.
Your organisation probably has a sales target. A financial number that it needs to achieve in terms of income in order to cover your overheads and make a profit.
Well, that’s better than having no idea at all, but it’s not very helpful. If you get to the end of the week, month, quarter or year and “hit your KPIs”, champagne corks start popping. Miss that same target and some people might get fired and everyone’s bonuses are scaled back.
But I’ve worked in many organisations where it’s largely a matter of luck whether any particular target can be hit in any defined timeframe. That can depend heavily on matters entirely outside the control of your sales team, such as whether or not a government permit is granted on time, whether your customer overspent their budget on something else so they have to scale back what they were going to buy from you, or your customer’s CFO just implemented a purchasing freeze to protect their year-end target cash balances.
And anyway, is there really a meaningful difference between a sale on 31 March, just before the end of one financial year, or on 1 April, at the start of the following financial year? From an organisational view no, not particularly. Yet from a salesperson’s point of view, it can be the difference between being fired and keeping their job.
But whether or not you fire your salesperson it’s hard to tell from traditional metrics if that was the right course of action.
Getting Closer to the Root Cause
In the era of complex CRM systems, some organisations track it back a bit. They review salespeople’s performance based on the number of leads generated, or how many potential customers have made it through each key level of a selling process – have we been invited to make a bid, are we in the “final three” and so on.
While better, even that isn’t perfect. If the quality of leads from the marketing department is poor, no amount of selling skills from your sales team will make that into a viable deal flow. While we have a slightly better idea as to what the problem is in this model, we’re no closer to knowing what to do about it. So even a blizzard of CRM-generated statistics are not usually the basis for good KPIs.
This is where stripping things back to “things people do”, or activities as I call them, helps make both the responsibility for action and actions themselves unambiguous.
Let’s imagine leads are generated via outbound telephone calls to key decision-makers, who are taken through some sort of qualification process, and then a meeting is arranged for a member of the sales team to do a sales presentation to the prospect.
Straight away, we have two different activities we can focus on.
For the lead generation team, are they making a sufficient number of calls each week to clear the required number of prospects through qualification and arranging a sales presentation meeting frequently enough for the sales team to stand a reasonable chance of hitting their targets?
These are all yes/no questions and, assuming we know that a lead today would ordinarily be a sale (say) three months from today, we also get a good early indication of trouble ahead in enough time to do something about it.
For the sales team, they need to make a certain number of sales presentations each week in this model, and they need to convert a pre-determined percentage of prospects at a pre-determined price range to generate the sales required to hit the organisation’s sales target for the year.
All of these are activities that only one person, or one team, does.
They’re non-financial in nature. And they can be measured in more or less real time.
Achieving them will have a disproportionate impact on the organisation’s success, so they should attract the attention of the CEO and the rest of the C-Suite.
Responsibility for each element is clear – marketing does the lead gen calls, sales people do the conversion – and the action required is clear if the measure isn’t working. You know what part of the system you need to fix if salespeople make enough sales presentations, and convert prospects at the required percentage rate, but can’t get a unit price high enough to hit their annual sales target.
If only one member of the sales team misses their target, they probably just need a bit of training or mentoring to get them back on track. If the whole team misses target, individually and collectively, you’ve probably messed up your pricing model, or an aggressive competitor has entered the market and you need to think again. Either way you’re clear about where your problem is and which part of the process you’re trying to fix.
When your performance measures look like that, you’re much more likely to have actionable KPIs…true KPIs…that keep your organisation on track, and also help predict the future with a reasonable level of certainty, because you’ve designed your KPIs based on a range of trackable activities, each with clear outcomes and responsibilities.
The Bottom Line
The bottom line is that creating KPIs in this systematic way, focusing on root cause activities instead of outcome measures like sales and profits, builds a stronger business. You have a clear forward view of what your business results are going to be weeks or months into the future. And you can focus your efforts where they really matter, because you know what the key levers are to generate a disproportionate return on the time and effort spent on them in your business.
Without a systematic set of KPIs, you’re firing in the dark. With properly-structured, activity-based KPIs in place, you’re on the front foot, you can spot trouble coming a long way off, and you can focus your time where it gets the best results.