At Intrafocus, we often act as facilitators of a three-day strategy workshop based on the Balanced Scorecard strategic methodology. Recently, we conducted a workshop which began with the tricky subject of terminology. Everything went smoothly until we reached the term ‘key performance indicator’, or KPI. With fourteen people in the workshop, there were three different definitions, all from senior decision-makers with strategic responsibility for their businesses. The reality is that many business executives struggle with defining a KPI and identifying true KPIs that allow them to drive the business forward in a way that achieves its strategy. If we can understand what a KPI really is, it becomes far easier to identify ‘true’ KPIs – and not mistakenly include regular business metrics.
There are several common errors here:
- Misunderstanding the nature and features of a KPI
- Choosing a measure which isn’t actually a KPI but rather an operational metric or a business objective.
Let’s address these in turn.
1. What is a KPI
Although Key Performance Indicators will be different for any given business, they will share several common features as follows:
- Relevant to the organisation and tied intrinsically to the organisation’s strategic goals and objectives
- Specific and clearly defined for consistent understanding (no abstract concepts or jargon)
- Measurable and verifiable – so that underpinning data can be collected using robust systems and so information accuracy and consistency can be assured.
- Attributable so that that clear owners can be identified for each KPI
- Responsive to change
- Realistic, so that it can be achieved with the necessary degree of stretch.
2. Is it a real KPI?
There are two common errors here. The first is to choose a KPI, an operational metric required for reporting purposes. An example might be a call handling target for a client or a health and safety incident threshold for a regulator. These are operational measures that ensure the business is meeting its targets, but they are not KPIs which will drive the business forwards to achieve its strategic goals and objectives. The second error is in choosing a business objective rather than a KPI. This can happen if the objective is described as a percentage, for example, perhaps a 10% increase in profit. This goal to increase profitability may be common and desirable in a commercial business, but it isn’t a KPI; it’s an objective. Profit is a lagging metric that shows whether or not the business strategy was achieved. It can only be measured at the end of a reporting period and it cannot be influenced at the time without that data. A good mix of leading and lagging KPIs should be used. Leading KPIs are important because they can influence the delivery period to achieve the intended outcome. In this example, if the objective is to grow profitability by 10% within a defined period of time, our leading KPIs would include SMART definitions that deliver that outcome. Perhaps the successful implementation of new technology, faster call handling times, certain training for employees and so forth. Once defined in SMART terms, these controllable activities could make strong KPIs as they will determine the organisation’s focus and attention. The underlying profitability objective can then be measured at the appropriate accounting period.
Two key signs of a true KPI:
The rule of timing
KPIs are critical progress indicators that show whether an organisation is moving towards its desired end result. They focus minds, provide a framework for measurement and provide a basis for decision making. Remember, as Peter Drucker says, “What’s measured improves” A key factor in a true KPI relates to its timing. To be effective, a KPI must be regularly measured. For example, financial and operational reporting might happen once a month, and a strategic-level KPI might be measured quarterly. (Operational management metrics with tight turnaround times might even be measured hourly in contrast, such as helpdesk responses.) Whatever the appropriate timing schedule, the KPI must be regularly measured.
The rule of thresholds
The second rule relates to thresholds. Every true KPI will have a defined threshold of acceptability, usually measured with the Red, Amber, and Green system. For any KPI to have true value, it must have defined thresholds that show whether performance is considered to be above-target, on-target or below-target. Without this, the analytical and objective measure becomes subjective and loses its value.
Every organisation will have a huge array of metrics to satisfy various purposes. These will include accounting reports for taxation, operational data for client satisfaction, performance for supplier and partner arrangements, customer satisfaction scores, regulatory performance and so forth. But Key Performance Indicators are the true measures that assess our progress toward a business strategy. They must be defined and chosen with great care, using SMART measures and the guiding principles above. For organisations that are newer to the process or keen to refresh their understanding, the help of a strategic consultant can be valuable. At Intrafocus, we work with our clients according to their needs but often begin the process with a facilitated strategy workshop that defines terminology and understanding from the beginning. Keen to find out more? Please get in touch, and we will be delighted to assist your business in its journey towards strategy success.