KPIs - Key Performance Indicators
How to effectively measure and use metrics that matter.
KPIs are important for 2 reasons:
- They are a scorecard for company health- you only need a handful of KPIs to monitor your company's vital signs. Only measure what you want to move so you can put energy where you want to effect change.
- They can be a Dashboard for specific business problems or opportunities - you can track what's happened in the past and the results you want to achieve with Lagging (Results) Indicators. Then, you can also measure Leading Indicators to ensure you are on track to achieve the results you want. Leading Indicators give you an execution advantage over your competition.
Below you will find 5 tips to help you evaluate your current KPIs, create the right KPIs, and use them to drive results in your business.
Start With The Right Question.
The right question to start with is "What business results are we trying to impact?" or "What problems are we trying to solve?"
Follow these 4 steps to create KPIs that really matter:
- Select a business result or problem that needs to be improved.
- Determine what levers in your business influence the outcome and find a way to measure those levers.
- Set Red-Yellow-Green success criteria for each. (Watch this 5 minute video to learn how)
- Determine specific actions required to achieve the Green success criteria and get to work.
Start with just one result or problem you want to work on, and set up KPIs that measure your progress on the activities that influence the result.
Less Is More.
The purpose of having KPIs is to drive action that affects results. Many times we find that companies track, measure and report on a boatload of KPIs every week, but there are only a handful that ever cause anyone on the team to take action. This is a big waste of time for the executives responsible for collecting and reporting the data, and can easily cause a team to overlook the few that really do matter.
Remember that the secret to success is not in the KPI itself. The secret to success lies in the actions you take to impact the KPI. Don't measure everything that moves. Measure what you want to move. Focus on actions, get value, achieve success, and maintain momentum. Once you move into the phase of maintaining momentum, you're ready to tackle another area and develop a few more KPIs. You can keep the original KPIs on your dashboard for a period of time to ensure they stay on track, but eventually you may be able to remove them. Less is more!
If you start by developing and focusing on a couple of KPIs each quarter, before you know it, you will have a good, healthy dashboard with 10-12 KPIs that are action-oriented, driving positive results for your business.
Use Leading Indicators To Drive Results.
KPIs come in two flavors: Results Indicators and Leading Indicators.
Results indicators report what you have achieved. These are the usual suspects such as sales closed, products shipped or net profit. Use results indicators to establish targets for effective annual and quarterly plans. Begin with the end in mind by setting targets, and developing a plan to hit the targets.
Leading indicators, on the other hand, are predictive in nature. These measure how you are doing on the activities and levers that will move your outcome in a positive or negative way. Identifying and tracking leading indicators with frequency will help guide your day to day operations and decision making, and can give you a glimpse into the future, allowing you to make adjustments mid-stream that will positively impact your results.
Starting at your result indicator will not get you there. Instead, push on your leading indicators to drive towards your results.
To find your leading indicators, ask yourself "What results are we trying to achieve?" Once you understand what you need to achieve, start peeling back the layers of the onion by asking more questions to determine what actually causes that result. You may need to go several layers deep to get to the most important leading indicator. Once you have discovered your most important leading indicator, track it frequently (weekly or daily).
Each KPI should be assigned an owner, have a clear success definition of what success looks like and be visible for all to see. In order not to be blindsided by the final result, it is important for the KPI to be tracked and discussed weekly if possible. This will give you an opportunity to recognize a potential problem, make adjustments and avoid disaster. It's a lot easier to prevent fires than fight them.
You should discuss, debate and agree as a team on what success looks like and what failure looks like. Red-Yellow-Green the success criteria for each KPI.
- Green is your goal. You will create your plan for the purpose of achieving your Green goal.
- Red is an unacceptable result. It is the definition of failure.
- Yellow is the warning zone between Green and Red. Here you still have time to make adjustments before it's too late.
- SuperGreen is the stretch goal and should signify a time to celebrate.
You will also want to think about actions you will take if at some point your results start falling into Yellow or Red. If you have KPIs that consistently fall into Yellow or Red, and there's no action or sense of urgency from the team, then it's likely you are measuring something that isn't important after all, or you have set the wrong success criteria. Remember, KPIs should drive action.
Watch Patrick Thean, CEO of Rhythm Systems, explain how to set SMART Red-Yellow-Green Success Criteria.
Maintain A Healthy Balance.
Finally, you want to make sure your KPIs indicate you are maintaining a good balance between People and Process. It is very easy to become so narrowly focused on solving one problem that you create new problems in other places. For example, if an efficiency measure in one area of your business has fallen behind, you may want to develop
On the People side, make sure you have 1-2 KPIs to monitor the health of your relationships with:
On the Process side, make sure you have 1-2 KPIs to monitor productivity in:
- Operations (how you make/buy/deliver)
- Record keeping (how you monitor your finances)
Taking the time to make sure you've identified the right KPIs, that you're using Leading Indicators to track your progress, that you have clearly identified what success looks like, and that you're taking a healthy, balanced approach to running your business can be one of the most important exercises you and your executive team can do together. Invest the time, commit to the process, assign ownership and improve your company's results.