We like to measure things. In business we are very familiar with the phrase “You can’t manage what you can’t measure”. Interestingly this phase is often wrongly attributed to W. E. Demming, ironically, what he actually said was “It is wrong to suppose that if you can’t measure it, you can’t manage it – a costly myth” (The New Economics 1994). His view was that there were, and are, multiple ways to manage and organisation or business. In this he is of course correct. Nevertheless, one of the tools we have in our management armoury is the Key Performance Indicator (KPI).
The problem that often arises when using KPIs is they proliferate over time and become un-manageable. They become a victim of their own success. When we first start to use KPIs they provide us with a top-level view of the business, they really are ‘Key’ to the business. Over time, because the KPIs have provided good management information, we add a few more and then even more. Don’t forget, we like to measure things. Before we know it, our executive reports contain large numbers of ‘operational’ performance indicators. These are of course very important measures, but they are operational measures and not business measures. So how can you take control of your KPIs and provide a meaningful view of the business?
Here are three simple tests you can apply:
1. Is the KPI related to a formally stated business objective that contributes to the business strategy? The only reason a KPI should be in place is that it measures the success of the business strategy, that is the future growth of the business. Operations can look after operational measures.
2. Does the KPI have an owner? This is connected to having an objective. For a KPI to have meaning it needs to show improvement over time. For change to occur someone has to be responsible for the change. This has to be a person; it should not be an organisation or department.
3. Does the KPI have defined thresholds? In other words, is there a target associated with the KPI and are there upper and lower limits that are considered to be good performance and bad performance respectively?
It has to be noted that the third test can only be rigorously applied to a KPI that; a) is not deviating wildly month on month and 2) has been in place long enough to have a reasonable history. Clearly there will be times when new KPIs will be added/required that measure something new and the first priority is to simple stabilise performance.
By applying these tests, many of the KPIs that have infiltrated over time can be weeded out and given back to (usually) operational areas of disposed of completely. One of the overall questions that should be asked of every KPI is:
“By taking this measurement are we enabling the management team to effectively manage and make the required changes to align the business to its strategy?”
If the answer is ‘no’ or ‘we don’t know’ or ‘but the measurement is useful in other ways’ then it is not a KPI and should be removed or put somewhere else.
For more information on how to develop meaningful KPIs, download our whitepaper