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What KPI’s are Right for You and Your Organisation?

Here’s a universal truth: Key Performance Indicators, or KPI’s, are an essential building block to achieving your most important organisational objectives. But are you using the right KPIs? Picking the best KPIs isn’t easy as most people try to stuff every metric possible into “key” performance indicators. What KPIs are right for you and your company?

Managers selecting their KPIs from an article on the “This Year’s 10 must-know KPI’s”, or trying to analyse 20+ KPIs, or continuing the same processes year-on-year when they still don’t hit their targets are all symptoms of a larger problem — a misunderstanding of what a KPI really is.

Today, I want to clear up any ambiguity by establishing a definition for a KPI and show you how to pick the KPIs that are “key” for your organisation.

What is a Key Performance Indicator

Consultants and executives like to define key performance indicators as specific metrics, like revenue, customer profitability, cash conversion cycle, on and on. The internet is flooded with articles on the “must-have” KPIs and every conference features a KPI expert. This happens because defining a KPI as a particular metric is easier for us to understand and wrap our heads around.

While the metrics I listed above certainly could be your KPI’s, this type of mindset have caused a lot of organisations to collect and report on everything — treating their key performance indicators more like metrics.

So, let’s clear this up together. A KPI is any metric, financial and non-financial (we’re seeing a rise in the latter), that your organisation has chosen in an effort to help achieve your most critical objectives. The right KPIs will help you realise an ROI for new improvement initiatives and it will increase the probability that you hit your strategic objectives.

Unfortunately, most managers are struggling to identify the vital few, so here are some best practices for picking your KPIs.

Best Practices for Key Performance Indicators

The reason KPI’s are treated like metrics is that managers or executives lose sight of the word “key”. That’s often caused by the fact that each department within an organisation will have their own objectives — growth, profitability, revenue, retention, cash flow, market share, etc.

For example, the marketing department could measure KPIs such as conversions or average order value, which is unlikely a good KPI at a high-level. Those KPIs will typically roll up to the manager or executive, where they’re left analysing hundreds of “KPIs”.

As a rule of thumb, each person should have no more than 10, but three to four is ideal. Too many metrics means they aren’t “key” and finding time to analyse them can be near impossible. Your KPIs should be the vital few that will help you achieve your objectives. Collectively, they will help your organisation — or department at lower management levels — achieve its objectives.

Let’s say your organisation is looking to expand and gain market share outside of Sydney, specifically into Melbourne and Brisbane. By expand, we mean significantly over the next year (double or triple percentage growth).

Using a balanced scorecard approach, you might create a few initiatives for reaching your goal. For example, to expand market share, you might create marketing and sales initiatives, such as developing channel partners, deploying a larger sales force to acquire new customers, or engaging a web based marketing campaign ?. You might also look at retention initiatives, since the more customers you can keep, the less you have to acquire.

That’s pretty standard, but what should the KPI be? I’ll give you a second to think about it.

Is it the Scoreboard or What Drives it?

Remember, a KPI is any metric, financial and non-financial, that your organisation has chosen in an effort to help achieve your most critical objectives. Meaning, our KPI’s should measure how effective each initiative is at achieving our objective — not the “success” of the initiative itself. So, we’re interested in what contributes to the score, rather than the scoreboard itself (a cricket team will unlikely win a test match if they drop 10 catches or have a slow run rate in a T20 game).

The most common mistake that I see is picking metrics that measure the “success” of an initiative without framing it around the company’s objectives. For example, let’s say you decided to push an initiative to decrease “wait time” on the phone — assuming that this will improve customer service and increase retention.

It’s easy for managers and executives to pick “wait time” as the KPI. But if our goal is to increase market share, then at a middle management level, retention rates might be a better KPI and at an executive level, it could be market share using a YoY comparison. In this example, an executive should ask, is decreasing the wait time leading to higher retention thus allowing us to increase our market share? And any initiative that doesn’t increase market share, regardless of successful implementation, should be cut.

Image courtesy of Performance Magazine

As a high-level executive, your KPIs should be focused on the company’s critical objectives. For a department, they will create KPIs based off initiatives and objectives that tie into the most strategic objectives.

This is what I refer to as cascading and rolling up. The initiatives within an objective become the objectives for departments.

More Best Practices for KPI’s

Okay, a few more best practices for picking your Key Performance Indicators. Before you finalise your KPIs, you should test your assumptions. Using driver based planning, you can discover how your business is impacted pulling the levers on different variables.

Next, your KPIs should be dynamic and living. They need to evolve as your business evolves. Presented graphically and able to be easily drilled from to the detail supporting them.

We covered a lot and this way of thinking might be new to you, so let’s recap:

  • A KPI is a metric that you’ve chosen to help you achieve the organisation’s most important objectives.
  • A KPI can be anything and needs to be based on your goals.
  • What’s right for one company isn’t right for another.
  • It usually is not what’s on the scoreboard that counts – it’s what drives the score.
  • Use driver based planning in conjunction with your KPI’s
  • Implement a balanced scorecard approach to help manage them.

Now to you, what KPIs would you use if you’re trying to expand market share?

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John Vaughan

John Vaughan is a highly experienced Accountant and Consultant. He has experience in the pharmaceutical, FMCG, distribution, professional services, manufacturing and financial service industries. With over 25 years of commercial experience and 20 years working with the Cognos products, he...

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