Many of us will be familiar with the term KPI, Key Performance Indicator. With an ever increasing amount of data that can be ingested by a business and used to assess or predict performance. KPIs are starting to get a very longtail. Each new technology or tool, generates its own set of metrics, and corresponding KPIs. Selected correctly, KPIs can help steer the focus of performance investigations, and serve to implement initiatives, to maintain or grow performance.
What is a KPI?
KPI is an abbreviation of Key Performance Indicator. A Key Performance Indicator is a performance measure used to track the success of a business at achieving a goal. If the business goal is to increase sales vs prior year by +10%. The measurement KPI would be cumulative sales vs. prior year.
KPIs are a measure of performance that can be monitored as frequently as daily or as infrequently as quarterly. The important thing about a KPIs is its ability to demonstrate the progress towards the goal.
Why are KPIs Important?
KPIs are important for assessing the progress towards a goal. KPIs can help identify when performance is exceeding expectations, or when things aren’t going to plan.
KPIs are important for decision making. KPIs help to delegate responsibility and accountability, enabling those who have the greatest influence to take action when performance steers off course.
How to decide which KPIs to monitor?
From my experience deciding which KPIs to monitor is perhaps one of the most complicated parts of the yearly planning process. Complicated not for difficulty, but for clarity of focus. And this is primarily because different stakeholders will have differing opinions of what KPIs are the most important or valuable.
Challenges in getting agreement on KPIs surfaces the conundrum that not all KPIs are made equal. For example, a business may want to grow sales and profit margin. However, if sales exceed targets ate the detriment of profit margin. That sales driving activity will be seen as less valuable, vs sales driving activity that has a positive impact on margin.
With that in mind, how exactly does one decide which KPIs to monitor?
1. Start with the end goal in mind
Starting with the end goal in mind, will establish the broad overarching KPI(s). For example, a sales target of £10million or a subscriber target of 10million subscribers.
The end goal will establish a baseline the KPI will be compared to. The baseline will likely be the current position of the targeted metric (sales or subscribers). However, in some cases it may be more relevant to establish a baseline from industry standards.
Taking the £10million sales as an example. The baseline to compare to would be the sales variance between the annualised sales of the prior year (£8million) and the target of £10million. For this example the baseline is a sales growth of +25% vs prior year.
The tracked metric in this example would be cumulative sales. And the KPI would be the cumulative sales variance to the prior year. If cumulative sales drops below the baseline, +25%, then there is a problem. If it stays at or above +25% then performance is on track to achieving the overall goal.
2. Identify building blocks
One of the benefits of KPIs is how they can be used to steer the focus of performance investigations. This is done by attributing KPIs to the building blocks that will help to achieve the high level goal – in this example £10million sales.
KPIs associated with these building blocks, ensures the day to day activity is supporting the high level goal. These lower level KPIs will making spotting any potential risks before they become a bigger issue easier. And will give clear jumping off points for deep dive performance investigations.
Each building block identified will need a baseline for the KPI to be compared to, and an associated metric to monitor how performance is tracking to target.
3. Maintain a level of flexibility
Not all KPIs are made equal, and everyone will have an opinion of what “good” looks like. And which KPIs are and aren’t worth monitoring. The amount of data any business can ingest also adds to the conversation of what is and is not a valuable KPI.
Planning a year’s performance based on a carefully selected number of KPIs can be extremely satisfy. That is until something – or someone – disrupts the “business as usual”. In those instances KPIs are the first thing to be questioned. As what was being tracked may no longer be the most relevant to assess the success of performance towards a goal. So it is important to maintain a level of flexibility with KPIs.
KPIs by their very nature will be reviewed regularly, whether that be weekly, monthly or quarterly. And it’s important to assess how relevant they are at tracking performance based on internal and external changes.
Personally I like a structured approach to KPIs. Whether that be high level, broad, goals. Or lower level, action-oriented goals. It gives a clear focus of what is and is not important, and also makes it possible to identify when KPIs need to be adapt to the changing environment.
The benefit of a KPI is highlighting how well or how badly something is performing to target. To be able to do this well, there needs to be an established baseline for comparison. And to do it really really well, there needs to be action-oriented KPIs that can support the overall goal. The action-oriented KPIs are essential for being able to quickly influence performance and adapt to changes.
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