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Setting Savvy KPI’s That Work

Guest post by: Steve Major

Article Overview: KPI's provide a sound basis that you can utilise to build and develop your business, but the metrics that are being used must be the right ones. In a world where we can measure everything the brands and companies that will win are the ones who know what to measure. In this article Steve helps you to better understand the measures in your business that matter and how to set savvy KPI's that work!

Setting Savvy KPI’s That Work

In business, too often we find Key Performance Indicators (KPI) that do not help in leading, or even managing a business. There is a maxim that has become nearly a cliché, that what you can measure, you can manage. Whilst I agree in principal with this, it does not mean that we should measure everything – we need to measure what matters.

In a world where we can measure everything the brands and companies that will win are the ones who know what to measure.

KPI’s lie at the heart of a failed organisation. If we are measuring the wrong things, our focus can be directed to the wrong areas, our resources can be allocated incorrectly, our team members can be directed in their efforts to areas that are not productive. As a result, the business or organisation can lose its way.

Conversely, KPI’s may also lie at the heart of the success of an organisation. If we are truly measuring what matters to our customers, then we can align our business to what is in the interest of the customer. We can get a view into our operations and as a result we can lead the business. We can get a picture of what the customer wants; not just today, but maybe even around the corner or further down the road. A non-business example might be useful to illustrate this point. In the Vietnam War, Robert McNamara, the Secretary of Defense (United States), implemented a key metric, which was the body count. There was an effort and a focus to count how many Viet Cong that the U.S. Army Defence Force killed. With such a metric, whilst notionally easy, it became farcical as the body count tallies that were published by the U.S. Defence Force shows that they killed more Viet Cong than were in the whole country!

They did not measure what mattered, which was winning the hearts and minds of the communities. They measured something that was easy, but became farcical because it became easy to abuse. I am not saying that just because of that measure the Vietnam War was won or lost. However, there is no doubt that the focus was not on the right area.

Remember, with respect to Key Performance Indicators, you cannot manage a business by its numbers only. The human context emotional dimensions are an important aspect of being able to lead and manage a business. The KPI’s give a very sound basis that you can utilise to build and develop, but that is only the case if they are the right metrics.

Problems of Existing Key Performance Indicators

There are a number of problems and I will discuss only a few in this article:

1. Lagging Key Performance Indicators

Most of the Key Performance Indicators are ‘lagging’- they are looking at history. It is like trying to lead a business by looking at the past.

For example, if you are just focused on the sales turnover, whilst it is a useful KPI, it is not the main KPI that you would lead a business with. Consider the time frame that it takes from when a customer might make a decision to do business with you, to then the order being placed, the sale being recognised, the sale being delivered and finally, the money in the bank. That could be quite a significant time frame, depending upon your industry.

If you are looking at the sales figures a month after the sale was recorded, there could be quite a few months back to when the actual decision was made by the customer to do business with you. This is a lagging indicator. You cannot lead a business by looking at the past.

2. Measuring Efficiency versus Effectiveness.

Every day we are confronted with the message to be more efficient.

There are efficiency ratings on white goods. Businesses produce reports about the efficiencies of operations. Governments focus on the efficiency of various departments. I believe they miss the point.

The first criteria should be effectiveness not efficiency – you can be awfully efficient at the wrong thing.

Those buggy manufacturers would have been highly efficient, the day they went out of business. They were put out of business by the automotive industry.

Mindless pursuit of efficiency can be the death knell of business.

The first question in designing Key Performance Indicators is are we asking the question about effectiveness?

We must be doing the right thing; then do it right.

3. Too Many KPI’s

The next problem that is identified is that there are too many KPI’s.

I once dealt with a business where there were 137 KPI’s. This was obviously too much. In asking the financial officer how many she actually looked at, I was told no more than ten, and in reality probably only five.

We can be caught by the trap of trying to measure everything and missing the point of having a handful of metrics that measure what matters.

Andrew Carnegie, who founded U.S. Steel, which became the biggest company in its time in the early 1900’s, a company bigger than the combined strength of Microsoft and Google today, once said “You can manage a business on the back of an envelope”.

That was a business that had 200,000 employees. Too many KPI’s just cause people to lose focus on what really matters. Manage the business on the back of an envelope.

4. Inconsistency

The next problem is inconsistency. This is where we have metrics pulling us in different directions.

We could have a measure that is focused on productivity and then we try to have a measure that is focusing on customer service.

Depending upon which measure is given, the reward and recognition in a business is the one that will be focused on. We need to be careful in our design of measures, that we are not inconsistent.

5. Objections

The last problem is that of objections.

I often encounter, both from senior management and owners of businesses the comment, “I’m too busy for this,” “Profit is all that matters,” and many other objections to setting KPI’s that matter.

It is through setting real, savvy measures that matter which will enable you to lead a business and develop a business that is going to give the results for everybody in it. It’s a bit like saying “I am too busy to sharpen the saw, I am going to keep trying to cut this tree with a blunt one.”

These measures give us a foundation upon which we can make smart decisions.

Observable Impact.

In designing measures, we firstly must consider that “Success is defined by the customer”.

Peter Drucker said, “A business only exists to serve a customer,” but we need to be looking at our business through the customer’s eyes, not through the eyes of our product or service.

We need to be asking the questions:

“What is going on in the personal and business lives of those we do business with?”

“What is it that is of particular importance to our customer?”

“What need/s do our products or services address?”

That is the way that we need to look at our business; we need to measure what is success.

People are buying our products or services for a whole host of reasons, some of which is price, but there are other reasons that they do business with us. If we look at the business through the eyes of our product, then we will taint the vision – we need to look at it through the eyes of the customer. Remove our product and service from the equation and find out what is going on in the lives and businesses of our customers. That is the measure.

You can’t measure everything, is a common statement.

I am of the belief that if something is important in a business, then it is important to our customer and thus important to us. It will have an observable impact. There will be some identifiable action or event that is occurring because of this aspect. It is that observable impact that we need to be looking for and then designing a measure, a metric.

Too often we try to measure some glorious term like customer engagement or staff engagement. I ask the question, “What do you mean by that?” The second question, “Why do you care?”

Keep drilling down. If our customers are engaged with us, what does that look like? What will that mean in our business? What will our team be doing? What will our customers be doing? Drill down. Keep asking those questions and you will get to those observable impacts of customer engagement. Around those observable impacts you will be able to then design a key metric. There is nothing that is important that cannot be measured. Once we have identified the observable impacts of what we wanting to measure then we can start designing the metrics/ kpi’s.

Designing Our Metrics

We have those observable impacts. We have worked out exactly what is going on. In designing our metrics, we need to then consider these four aspects, variation, linkages, preferences and dynamics.

1. Variation

Variation is the range of possibilities. If we are looking at sales then there will be seasonality. There will be a range of possibilities that can happen in our sales pattern. In looking at a metric and understanding it, we also need to understand what that range of possibilities could be.

2. Linkages

There will be linkages between drivers and output.

As an example, you hear in the media that increased amounts of television being viewed by a child can be interrelated with child obesity.

There is no doubt that there is a correlation between child obesity and the hours that the television is being viewed. There is, however, another variable that potentially links child obesity and the hours a child spends viewing television. This variable is socio- economic factors. The lower socio-economic factor may lead to obesity and also higher hours of television viewing.

It is important that we understand cause and effect of the linkages within our business.

I use the above example, which is non-business related, to help illustrate how the links in our business might be the key to explaining that which we are noticing.

3. Preferences

The next thing is preferences. In diagnosing our customer’s and our team members preferences, we must understand and be able to use the metrics as defined by us. This might be a particular product mix, a combination, or an aspect of the product that they prefer more than another.

4. Dynamics

Things change. People react to change.

We must remember that because a metric is relevant today, it will not necessarily continue to be relevant into the future. It might only be relevant for the next six months, or it may be relevant for the next two years. Do not get locked into a Key Performance Indicator forever. We need to understand what is changing in our markets and what is changing in our business and therefore, what may need to be changed in our metrics.

We also need to be conscious of the fact that people react to change within our business. For example, when a new metric is introduced, staff will try to work out a way to fudge the figures to get the result that management is after. Employees will react to it. They will try to take the shortcut.

It is this ‘gaming’ of the system that we need to be aware of; this dynamic that is at play, both within our market and within our business, we need to understand how that is impacting on our business.

Measures that Matter

Once we have the measures that matter, there are a couple of important points to consider.

1. Behaviours impact the Results

Everybody within the business, this means the lowest-level staff member to the highest-level staff member, must be aware of what the metric is and how their actions affect the metric.

How do their behaviours impact on the result?

2. Easy Representation

It must be easily represented in a dashboard. If we have three or four key metrics that are important to leading this business that ‘matter’, then we need to put these in a simple dashboard, something that staff can easily understand. This dashboard needs to be published regularly. Graphical representation often works best.

To conclude on this point, I just wish to give the illustration of Singapore Airlines. The key metric that Singapore Airlines measure, that staff are reported and rewarded on, is what they call their compliments to complaint ratio.

They are after 34 compliments to one complaint per day and that is a good standard.

This is not a measure that is found on the profit and loss or balance sheet. It is not a measure that comes by looking at the past.

It is a measure that says; “If there are more compliments to complaints, then we know that our customers are happy. That they will fly again.

We know our staff are doing the right thing.” It is the observable impact of having happy staff and happy customers.

What is your compliment to complaint ratio?

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Article Tags: business business management, Business Growth, Business Performance, Decisionhq, KPIs, measures that matter, Steve Major
Referred by: http://www.dglong.com



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