The Ultimate Guide to KPIs
What Is A KPI?
Key Performance Indicators are about running your current business. KPIs are the the day-to-day pulse that will ultimately bring your long-term vision to life.
They're leading indicators. They let you know, in real-time, that each person on your team is executing on what's important now.
But beware. It's all to easy to confuse a lagging indicator with a KPI. For example, we might call "revenue" the very most "key" of all "performance indicators."
But revenue has to be booked and amortized before it can be correctly measured. And no single person can control it.
A well-designed KPI measures something that one person can control completely right now. Everyone at a company has something in their job that contributes to the company's success. The art of creating effective KPIs is to locate and define that one thing. Sometimes that's easy. Sometimes it requires some original thinking.
But it's always worth the effort, because they can effect everyone. Employees have a better understanding of their ultimate objectives, and so they are empowered to succeed. Managers are freed from making subjective judgments about performance and can focus on coaching to excellence. And executives or investors can receive incredible insights into operations.
KPIs are integral to the type of employee engagement and corporate culture that today's best managers wish to create.
KPIs measure something critically important to management and to the employee responsible for it.
The person responsible must be able to make the KPI move.
KPIs are part of a cultural revolution that can improve employee engagement.
Key Performance Indicators are the crucial numbers that drive success on a weekly basis. (Business Execution for RESULTS, Stephen Lynch)
Developing KPIs should be part of a strategic management process that connects the overall mission, vision and strategy of an organisation, and its short- and long-term goals, to specific strategic business objectives and their supporting projects or initiatives. Understanding the organisation’s value drivers and the core activities and competencies that underpin its value proposition is an important first step in this process. (CGMA Magazine)
Relying on instinct and intuition -- along with luck -- only gets you so far...If you aren't managing your business based upon facts and figures, you're not only sub-optimized, you're likely headed for ruin. (business.com)
In the world of KPIs, there is a big difference between "need to know" and "nice to know." In the former, the resources required to collect, analyze, interpret, and distribute the KPI information will almost certainly be worth the effort. Often, managers don't know the difference, and track the wrong things. (Huffington Post)
Organizations often begin to develop a KPI system by immediately trying to select KPIs without...establishing a sound environment in which KPIs can operate and develop. (Key Performance Indicators)
How To Design A Strategic KPI
Creating meaningful Key Performance Indicators is an art. To design a great one, consider the law of cause and effect. You know the outcomes you want. "Great customer service," "happy new clients," "more revenue" -- those things are on every entrepreneur's list.
So ask yourself, "In my business, what makes those things to happen?" You'll come up with a list of causes one level down. But then, when you think about it, you'll find that those "causes" are actually the effects of even more granular causes. Just keep following that chain of cause and effect all the way back to an individual's work space.
Once there, ask yourself, "What is completely within this employee's control that he can do, on a daily basis, that ultimately causes the big, broad effect we want?"
That is the art of designing KPIs.
They must be measured often -- daily, weekly, monthly -- and if they relate data from several different business applications, they provide real-time measurement of your enterprise's pulse. But the moment you can tell the great people you hired exactly where to focus their efforts to contribute to the company's success, they will do it happily and with a sense of pride.
Why? Because you've set them up to succeed -- often. That's the main reason KPIs can transform your company's culture.
A great KPI is completely within the control of the responsible employee.
Everyone can easily understand the chain of cause and effect from the KPI to the company's strategic goals.
The best KPIs can be measured often so the responsible individual can win often.
Measurement without targeted action is useless. (Gallup)
What gets measured gets done. (Peter Drucker)
When you've identified your KPIs, you'll be able to say: "If we get these things right, we'll have good results on our financial statements and increase the value of our company." (Business Execution for RESULTS, Stephen Lynch)
Quite frankly, if you try and track too many KPIs, you might as well just not track anything at all. Mike Volpe, HubSpot CMO)
A KPI is always a metric, but a metric may well not be a KPI. Key to the concept of KPI is that it must be a metric that will drive strategic competitive advantage (and in turn value) for the organization.(Industry Week)
A Manager's Greatest Ally Is Clarity
Clarity means people understand exactly what they're supposed to accomplish. They understand why. Well-designed KPIs are the fastest way to create clarity across your enterprise. When your employee knows they will be evaluated based upon how well they make their KPI move, they apply their creativity to the task. They will come up with solutions and methods that would never even occur to you.
We've seen it happen thousands of times. Even better, when everyone knows everyone else's KPIs, then you unleash a collective creativity where everyone pursues excellence. We've seen that happen thousands of times, too.
Since well designed KPIs are measured often -- daily, weekly, monthly -- you and your entire team can respond in real time. You can solve problems and compound successes every day. Great managers thrive in a situation like this. There's no "favoritism" or "unfairness."
Performance is evaluated constantly, and it is measured objectively, so everyone knows the score every day. And constant measurement means frequent hits, which raises the team's energy level, and creates a culture that celebrates success.
Well designed KPIs create clarity across your enterprise.
They invite employees to be creative and to learn from one another.
And they enable people to succeed often, creating a culture of excellence and celebrati
Many [managers] persist in measuring performance by the wrong standard — using unsubstantiated or ineffective metrics that ultimately lead nowhere. (Gallup)
Well-designed KPIs can provide a means for management and the board to monitor core activities of the business rather than simply...financial success. (CGMA Magazine)
As organizations flatten, companies need people who are self-motivated. That forces many organizations to become more like open source projects. Nobody “manages” open source contributors. Nobody sits around trying to figure out how to “motivate” them. (Drive, Daniel H.Pink)
The goal is to make the link between your objective and measures that employees can control through the application of skill. (HBR)
Business is more about waves than particles, but many leaders can’t get their heads out of spreadsheets long enough to notice the waves of energy swelling and crashing around them. (Forbes)
In flow, people lived so deeply in the moment, and felt so utterly in control, that their sense of time, place, and even self melted away. They were autonomous, of course. But more than that, they were engaged. (Drive, Daniel H.Pink)
Transparent KPIs Work For Employees
Most employees work without understanding why their job matters. Only 15% can name even one of their company's top priorities. Only 6% know their own priorities. Only 27% have seen their company's Strategic Plan. Worse, only 5% understand it.
They don't know what's important, and they don't know how their work contributes to their company's success. No one can excel in an environment like that, no matter how much they want to. Well-designed KPIs are the quickest and most effective way to solve this problem. KPIs measure an employee's day-to-day activities, which means the employee has complete control over where the measurement falls.
A good KPI also makes it easy for the employee to understand exactly how it relates to the company's Strategic Plan. That way, they know that when they make their KPI move, they are contributing to the company's success. They understand why their job is important. They know exactly how to excel. And they can get creative in their pursuit of excellence.
Everyone wants a job like that. Create them, and the great people you hired will take even greater care of your company.
KPIs let employees understand how their job relates to the company's strategy.
They let employees know exactly how to excel at work.
And they let the employee bring all their creativity to their work.
Engagement starts with establishing relevance. (CIO Magazine)
Identifying, measuring and – most of all – coaching to the right KPIs leads directly to behavior change and skill improvement across the entire team. (Forbes)
Once you have set goals and selected KPIs, monitoring those indicators should become an everyday exercise. And most importantly: Performance should inform business decisions, and you should use KPIs to drive actions. (Mark Hayes, CEO, Shopify)
Have you ever seen a six-month-old or a three-year-old who’s not curious and self-directed? I haven’t. That’s how we are out of the box....Human beings have an innate inner drive to be autonomous, self-determined, and connected to one another. And when that drive is liberated, people achieve more and live richer lives. (Daniel H.Pink, Drive)
Those who have a "why" to live, can bear with almost any "how." (Viktor E. Frankl, Man's Search for Meaning)
KPIs Work For The Company
Executives, Directors and investors who focus entirely on lagging indicators like financial measures are all too often blindsided by operational catastrophes that negatively impact financial results.
The examples are legion. In 2015 alone they hit every industry from manufacturing (Volkswagen), to food (Blue Bell), to mining (Vale & BHP Billiton). KPIs are the perfect measures to give those same players solid insights into operational excellence.
They can also show how employee engagement widens margins and reduces losses from turnover. More and more, corporate leaders seek out this knowledge not only to know that they have done all they can to circumvent those catastrophes, but also to track how employee engagement improves over time.
Because of that, KPIs can help any department -- from Human Resources to Marketing -- provide quantifiable proof that their work has contributes to corporate priorities.
Tracking KPIs lets you quantify operational excellence
KPIs let you prove employee engagement generates returns
And they show how each department contributes to corporate goals
Charts & Quotes:
When HR considers important KPIs, the first place to look is at corporate culture and what is most valued within that culture. (SHRM)
Using KPIs, HR can demonstrate organizational success as well as gain support for initiatives related to employee engagement. (SHRM)
Although employee engagement as a construct has a much shorter research history, the accumulating research evidence that it is linked to organizationally relevant outcomes is compelling. (SHRM)
Lynch, Stephen (2013-04-15). Business Execution for RESULTS: A Practical Guide for Leaders of Small to Mid-Sized Firms (Kindle Locations 3367-3368). STEBIAN.com.
Pink, Daniel H. (2011-04-05). Drive: The Surprising Truth About What Motivates Us (Kindle Locations 1500-1502). Penguin Group