The art of setting KPIs

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The mantra behind key performance indicators (KPIs) is imprinted on the brain of every executive in the world – ‘If you can’t measure it, you can’t manage it.’

KPIs are all held together by one principle – they are shaped by the company’s strategy and operations. They can cover many areas and there are different measures for different roles. The trouble is that many companies don’t know what to measure. The result is bad management, mixed messages, confusion and employees focusing on the wrong things.

Some companies use many KPIs; others have a handful. But they all need to use the right ones. Typical KPIs include cost of sales, the mix of products sold, sales against target, sales conversion rates, delivery on time, employee turnover, number of new ideas generated, how many ideas become profitable, rate of conversion of web traffic, customer acquisition cost or inventory turnover, lost time due to injuries, error rate and customer complaints.

The KPI is the indicator of where the company is headed. But it is also the one area that many companies screw up because they are not thinking about how a KPI is helping the company meet its targets. Kevin Dwyer, founder of change management consultancy firm Change Factory tells of one big financial services company that had three conflicting KPIs – containing bad debts, days that people hadn’t paid, and costs.

‘If they pushed hard on costs, it pushed bad debts up’, Dwyer says. ‘To keep bad debts down, you might have to spend more and put another 100 people on at the call centre. By pushing down on costs, bad debts might go up but to keep bad debt down, you might have to spend more.’

Goals are not KPIs

Dwyer says another mistake managers make is to confuse KPIs with goals. The two are not the same. ‘If a company wants to get $200 million in sales, they assume it’s a KPI – it’s not’, Dwyer says.

‘The KPIs should be about the sales process. They might be about how many new customers, how many customers visited gave a repeat visitation, how many of those visits ended up in a presentation and how many of those were closed as deals.’ The KPI has to measure a process. You want the KPI linked to the corporate goal but it is not the goal itself.’

He says some companies make the mistake of having KPIs that have nothing to do with corporate goals. There are sales teams, for example, that have KPIs around whether they completed reports on time – something that will not sell a thing. And every industry has a mix of formal KPIs that are written down (often as part of a job description) and informal KPIs that are not written down. Like the incongruent KPIs pulling in different directions, they can leave employees confused and disenchanted.

‘You might have a call centre with a formal KPI of ensuring customers deliver on their promises to pay on time. The employee might spend more time on the phone helping the customer do that, offering deals and different ways of paying, so the average time on the phone goes up. This might not be the published KPI but in call centre land, the time you spend on the phone is something people jump on. So the formal KPI is promises kept, the informal KPI is minutes per call. Guess which one affects behaviour?’

Queensland based performance measurement specialist Stacy Barr, who helps companies, not-for-profits and government agencies develop KPIs, says KPIs are not about measuring people. ‘KPIs are there to measure the performance of the organisation and KPIs are tools that people can use so that they can work, not just in the business, but also on the business. In other words improve the way the business works and improve its performance.’

Setting targets attached to KPIs

Some KPIs can stretch employees. Barr says stretch KPIs need to be handled with care. ‘How high a target it is has got everything to do with the comfort of the company, how well it understands how they are currently performing and what sorts of resources they are willing to throw at improving performance,’ she says.

‘You don’t achieve a target by working hard. You achieve it by working differently and working differently means redesigning business processes. It should be aspirational but not a target that people become cynical about. The idea is that the target should stretch you away from where you are and often you might miss the target but its power has pulled you away so far from where you were.’

John Hogg, Managing Director at STL says all stretch goals need to be economically viable. ‘You may set your inventory accuracy at 99.5% and that’s your target but your goal is 100%’, Hogg says. ‘If your 100% is going to cost you more than 0.5% in controls because you need three extra people and another million dollars of machinery, you accept that 99.5% is economically viable and 100% is economically unviable.’

Working with staff to develop KPIs

Grant Hyman, founder and director of sales solutions specialists Sales Central, says it is absolutely critical for managers to develop the KPIs in consultation with the employee.

‘You talk about two things. The first is what the person is employed for, the second is what is going to give them satisfaction that will ensure they stay loyal and motivated. It needs to have direct relevance to the company’s main goals and the employees’ motivations.’

He says the KPIs need constant monitoring. ‘It has to be done that way because it has relevance. If it’s only monitored quarterly then it becomes like an exam. It becomes an extra to the business and that’s where the problems arise because they can be extraneous to the employee doing the job. They then become onerous things that we are being checked on.’

Jessica Schebesta, a director of Frank Team, which helps young entrepreneurs set up businesses, says it is critical to work with staff to develop stretch goals. ‘If they feel it is too far out of reach and ridiculous, they are not going to try. But if we have a strategy in place and they know how to strive for it, they will push’, Schebesta says.

She says monitoring KPIs is easy these days because much of it is at the fingertips. With manufacturing, it can be done by the machinery. With services it can be done with online tools that can be purchased or that are free.