What identifies a strong KPI?

Definition of the concept KPI

A KPI is something that can be counted and compared; a number that indicates the degree of goal achievement across a period.

Here’s an explanation of the concepts used in the definition

Counted:
Something that can be given a number, a percentage or an amount. Projects should not be measured continuously on the number of hours consumed, but the degree of success when it is finished.

Compared:
There are many numbers that may be of interest, though only numbers that can measure against an optimal, acceptable or not acceptable value, are suitable as KPI values.

Goal achievement:
A KPI only has a value if it contributes towards a goal.

Period:
Everything must be tied to a period. Same KPI should always measured for equally long periods to make it possible to watch development over time.

Defining the Goals

Before one can decide on KPIs one has to decide on the goals. This is probably just as difficult and an even greater task then deciding on the KPI’s. What is important is that one defines what one want to achieve and why. The methods used here are depending on whether it is a public agency, a non-profit organization or a company that manages business strategies.

A checklist for the goals

  1. Does the goal support the organisation's or corporate
    strategy and visions?

  2. Is the goal important and will it contribute to making a difference?

  3. Is it ONE goal, or should it be divided?

  4. Does one have enough control to effect the goal?

  5. Is it measurable?

From Goal to Indicator

The acronym SMARTO is often used when goals are designed.

S = Specific (Concrete)
M = Measurable (One should know when the goal is reached or not)
A = Ambitious (Something to reach toward)
R = Realistic
T = Timely (There is a deadline for when the goal should be reached)
O = One responsible (Only one person is responsible for the goal achievement)

If you would like to learn more about SMART planing, we have a blog about this here.

Describe the results

It is important to define the desired result for each goal. Think of goals as concrete results, something that can be measured and use words which describes how we physically perceive things. An example: A goal can be to implement a sales plan. The problem is that this is an activity and not measurable on other than the hours we use to do so. Time consumption is hardly anything that is part of a corporate strategy.
The goal must include more about why we want to implement a sales plan. For example: "... to reduce conversion time, from lead to signed contract ". Now the goal describes one specifically wanted result. But we are missing time perspective.We should possibly  write ".. to reduce the number of days it takes convert a lead to a signed contract"
So to describe the results one has to:

  • Check that the goals are actually goals, not an activity, an initiative or a project.

  • Make sure your goals use one result-oriented language

  • Remove blurred things and Include concrete things.

How to measure

Now we move away from the target definition itself of how the goal can be quantified and how indicators must be defined.  The calculation method must be defined and ownership to the measurement must be given.

Examples of good KPIs
Churn rate
How often a customer quits customer relationship, by quitting subscription, stop shopping or choose a competitor?
Calculation method can be"lost customers per month as a percentage of the number of customers at the start of the period ",”Number of critical errors in percent of total number of errors” software development can do let this be a method to measure how good your test routines are. “The number of inquiries answered within reply deadline.” This is useful when you have helpdesk or support functions and in public management. “Number of visitors to one web page that results in actual customers” This can be difficult to measure, but for those who have the opportunity to do so, this is a good KPI.

Also make sure

  • There must be room for the employees to focus on other important aspects of
    the job than those that can be measured.

  • That goals and indicators that feels absolute and indispensable often will give a lower work motivation and finally end up getting worse achievements.

  • Too strong use of KPIs in one organization can create dissatisfaction among employees.

  • Some KPIs may lead to the focus to be on some processes instead of the whole picture.

Automation enables Performance Management

A survey conducted by Bernard Marr, reported in his book “Strategic Performance Management” confirms the strength of custom software for performance management. It shows that those who uses software, communication linked directly to the data, centralization of data entry and automatic data extraction are most satisfied. Those who still use spreadsheets are the least satisfied. Almost half of the companies that participated in the survey still used spreadsheets for performance management. The trend shows that more and more companies are converting to automated solutions.

The problems with spreadsheets

  • Information stored in standalone spreadsheets does not allow collaboration and communication with the data as a starting point

  • Spreadsheets are often spread on different PCs and shared disks

  • Analysis is complicated because it is time consuming to collect all data sets

Advantages of Automation

  • Integrates data from different sources and keeps these updated automatically

  • Enables cross-strategic analysis elements and comparison across industry or earlier years

  • You can collaborate and communicate where the data lies and directly in the context to a target or indicator

  • Data can be collected in the mobile app or in the web-based system, regardless of where the responsible for the KPI is located.

  • Management information is available regardless of geographical location and is always updated.

  • All historical data is stored and easily accessible, something that will add to the business or organization knowledge and facilitate learning and organizational development.

Balanced Scorecard

Balanced Scorecard is a management method for performance management seeking to balance the focus and divide the goals into four perspectives:
Financial perspective - How the company looks out for the shareholders?
The customer perspective - How the customers look at the company?
The internal perspective - How well manages company to handle operational processes?
Innovation and learning - How to handle the company continuous improvement and value creation, and how to learn and grow organization?

More on the financial perspective

This is concerned with the shareholders' view of results. Shareholders are concerned with many aspects of financial results, eg: Market share, revenue growth, profit margin, return on investment, economic value creation, return on investment of capital employed, operating cost management, operating conditions and losses, prospects, profitability, growth, better processes and cost savings, increased return on assets, earnings growth, cash flow, net profitability ratio, sales revenue, growth in
sales revenue, cost reduction, ROCE, stock price and return on shareholder funds.

More about the customer perspective

How do customers perceive the company? Here the focus is on analysis of different types of customers, their degree of satisfaction and the processes used to deliver products and services to the customers. Measurements within the customer perspective can include customer satisfaction, customer loyalty, response times,
market share, ability to supply, number of complaints, average time of treating
orders, returned orders, response time, reliability and perceived value for money.

More about the internal perspective

This perspective seeks to identify how well the business performs.

  • If the products and services offered meet customer expectations.

  • The critical processes to satisfy both customers and shareholders.

  • Activities where the firm or the organization excels?

  • And where it must excel in the future?

  • The internal processes that the company needs Improved if it is to achieve its goals.

This perspective is concerned with assessing quality people and processes. Potential targets for the internal perspective is to improve core competencies, improvements in technology, streamline processes,stock management, quality and motivated employees.

The following KPIs can be used for measurement success in relation to the internal perspective:

  • Streamlining

  • Reduction in unit costs

  • Reduced waste

  • Improvements in moral

  • Increase in capacity utilization

  • Increased productivity

  • Percentage of error in production

  • The amount of recycled waste

More about the innovation and learning perspective

This perspective is concerned with questions such as:

  • Can we continue to improve and create value?

  • In what areas must the organization improve?

  • How can the company continue to prosper and create more value in the future?

  • What should be done to make this happen?

Potential goals for innovation and learning perspective includes:

  • Development of new products

  • Continuous improvement

  • Technological leadership

  • HR development

  • Product spread

The following calculations can be used to measure success in relation to the perspective
innovation and learning:

  • Number of new products

  • Percentage sales from new products

  • The amount of training

  • Number of strategic skills learned.

  • The value of new product in sales

  • R&D as a percentage of sales

  • Number of amendments from employees

  • The extent of employee independence