In this latest article series, we are going to take an in-depth look at the ins and outs of Key Performance Indicators, commonly abbreviated to KPIs. We’ll begin with a KPI overview and explore their context within organisations, before moving on to a series of specific interest areas that will build up a strong understanding of their features and benefits.
Setting the context for KPIs
In our recent articles, we have focused on the broad topic of business strategy. Having understood the high-level, long-term and overarching nature of strategic development, we now turn our attention to the ‘ground level’ of the organisation and seek to understand how we can measure business activity to demonstrate success and achievement of strategic goals.
So what exactly is a KPI?
A Key Performance Indicator is best understood as a performance measure that organisations use to track their progress. By nature, they tend to be used at a business level, rather than at an individual level, in order to measure progress towards strategic level goals and objectives. For operational goals which need to be repeated, KPIs can also provide an ongoing monitoring and benchmarking system.
What is the value of KPIs?
It is vital to know that KPIs have no intrinsic value in their own right. In fact, their value is only realised when they are linked with a strategic organisational objective or goal. This goal – and the linked KPI – can be specific to a department or function, or to the organisation as a whole. For this reason, the choice of KPIs needs to be consistent, so that the set can be used effectively by the delivering department to manage reporting and decision-making. KPIs must also demonstrate their contribution to the broader organisational objectives and be intrinsically linked to these strategic goals. Without this link, they simply become local business metrics.
How are KPIs managed?
Most organisations will use a proven and standardised methodology for KPI management, particularly the Balanced Scorecard. This gives a robust and highly usable framework which delivers benefits across the entire organisation. You can find out about this methodology here – Understanding the Balanced Scorecard – which is used by 50% of large organisations worldwide to manage business performance.
How are KPIs different from regular business metrics?
As we touched on previously, a KPI is selected for being ‘key’ to the underlying strategic goal or objective that it measures. It will be an objective measure that can be compared, counted and used to evidence the degree of objective attainment (or lack thereof!) A KPI will also be used within a defined and specific time period, and be objective in its nature. KPIs should also be compared with benchmarks or comparators in order to provide a broader context and genuine interpretative value.
It’s vital to clarify the differences between a KPI and a regular metric because no organisation can keep a close eye on everything that is happening across the entire operation. The executive team must be in a position where they can focus on select priorities – ensuring the strategic wellbeing and long-term viability and success of the business. This means that they must focus on the KPIs which support broad strategic goals and objectives, to keep their eye on the ball. This is often aided by presenting KPIs within a regular dashboard for ease of review and analysis by decision-makers. If, upon review, these high-level KPIs flag up any degree of concern, they can then be further analysed; drilling down to supporting and base level information if the agreed tolerance level or success measure isn’t met.
KPIs and comparative thresholds
Although the concept of KPIs is intuitive and easily understood by managers, the subject of comparative thresholds is less well known and yet absolutely vital to the success of KPI measurement and assessment. Remember, a KPI without a benchmark of a comparison lacks value. To extract meaning, it must be compared to a defined level of what would be considered good performance, acceptable performance or poor performance for that KPI. These thresholds can be defined by agreed theoretical or desired values, based on earlier performance or benchmark data. Alternatively, they can be predicated on anticipated future performance. By setting these performance thresholds in advance, an alert can be automated to occur if their outer limits are breached. Additionally, trend information can be gathered over time by gathering historical data and using it to support informed future decision making.
Where do you start with KPIs?
Many businesses make the error of focusing immediately on KPIs. It’s understandable, as their tangibility and potential power feel like an obvious way to implement immediate action and improvement into an operation! But remember, a good set of KPIs can only be developed through a sound understanding of the organisation’s intended direction. Know where your executive team are steering your business before clarifying the roadmap to get there. The first step, after setting this strategic direction, is to assign agreed objectives and goals and only then use these to generate meaningful KPIs which will help to track and manage progress.
Find out more
Please contact the team at Intrafocus to find out more about strategic business planning, KPIs and the Balanced Scorecard. You can also download our e-book; How to Create Meaningful KPIs. which provides an excellent KPI overview.