KPI selection: How to choose the Right Measures for your Business
About the Author:
Matthew Smith
Business Advisory Manager at Bellingham Wallace
Matthew is a leading advisor and cloud integrator for high performing businesses in New Zealand. Matthew believes cutting edge KPI analysis is an essential component to any business reporting framework.
Delivering high-impact key performance indicators (KPIs) is crucial to a company’s performance and growth. However, not every company understands what makes a good KPI or how to go about setting one.
Every company is unique and, therefore, their KPIs will also be unique. But all successful KPIs contain the same key attributes.
What makes a good KPI?
To optimise your KPIs, it is important that they have each of these four characteristics:
A good KPI is simple
Ask yourself these two questions: How easy is the KPI to understand, and how easy is it to measure? KPI’s should assist decision making, not raise further questions. Staff at every level of the business should be able to understand how the KPI is calculated and what they can do to positively affect it. The KPI must be a single metric that can be benchmarked and measured over time. The simpler, the better.
A good KPI is measurable
KPIs need to be clear. They can be qualitative or quantitative but not open for interpretation. For example, if you are striving to improve customer satisfaction, a good KPI might measure the number of customer complaints or the percentage of customer renewals, which will provide you with clear trends as to how satisfied your customers are.
It is imperative that all KPI information is captured accurately and stays relevant with the business over its life cycle. It is not efficient to change a KPI due to incremental growth or declines in the business. However, fundamental changes to your business may mean adaptations are required to your KPIs. Your metrics should focus on factors that enable growth but highlight issues in tougher times. Place emphasis on linking KPIs to key drivers of the business that relate back to wider strategic goals so effective decision making can occur.
A good KPI is achievable
KPIs should be aspirational as you work towards your long-term strategic goals. However, milestone targets should be implemented to help track and foster progress towards these long-term goals.
If you want to disillusion and demotivate your staff, give them goals that they will never reach. KPIs must be achievable so that you have buy-in from all levels of the business. But they must also be reported to stakeholders that hold the power of influence to ensure process adherence, make efficiency changes or even improve the overall performance of the business.
A good KPI is actionable
Staff should know how to take action to influence a KPI. A good KPI prompts decisions and leads to action in a business. For this to be possible, you should be able to exercise control of the events grounding the KPI. There is no point in measuring something that cannot be improved.
Assuming a KPI is simple, measurable and achievable then the stakeholders can regularly report on their progress to the business owners/board, creating greater accountability within the organisation.
KPIs should answer questions
A KPI’s job is to tell you one of these three things:
1. Am I safe?
2. Where can I grow?
3. Where can I improve?
What does a KPI look like?
KPIs are measurable values and tend to be:
Percentages.
Industry indexes (benchmarking).
Rankings.
Ratings.
Ratios.
The KPI Selection Framework
Selecting the right KPIs for your business is an important part of achieving your strategic goals. However, with the masses of data available to businesses in the digital age, it can be difficult to know which KPIs will deliver the most value.
It can be fairly straightforward to define financial KPIs, such as a measure of total revenue, as it’s one of the most obvious indicators of business performance, but be mindful of the impact KPIs can have on employee behaviour. For example, a revenue KPI could incentivise the sales team to make sales at unfavourable margins to meet targets.
KPI selection becomes more complex when applied to subjective or vague areas of a business, such as customer or employee satisfaction, or the quality of a product, process, or service.
Here we set out a framework that business owners and managers can use to guide them through the KPI selection process.
Set your objectives
The first step in choosing your KPIs is deciding what outcomes you are working towards. This generally starts by identifying a problem or situation in your business, which leads to an objective and should be directly linked to your strategic goals.
For example, you might be getting a high number of customer complaints. An objective might be to increase the number of training days per employee. You might start with a list of 10 – 20 potential objectives or problems you’d like to solve, but you will want to cut it down to five core indicators by the end of the process. To do this, you can study historical data to see if there are any worrying or encouraging trends. What you think is a problem might not be after looking at the numbers.
Tip: It can be a good idea to undertake this process collaboratively. Depending on the size of your business, this can be achieved by holding a workshop with all staff, or a meeting with the managers of each department. This can improve buy-in and understanding across the organisation and is likely to give rise to fresh and innovative ideas.
Set your targets
This is the aspirational part of the process. Decide how you would like the results to look moving forward.
For example, you may aim to reduce the number of customer complaints by 30 per cent over six months, or provide three paid training days for each employee per year. The goal is to set targets that are specific, achievable and actionable. They should clearly communicate expected performance and be quantifiable. Also, make sure you define the time period you are working within.
Filter (and filter again)
It’s important to put your possible KPIs through the ringer.
Filter the initial list down to a smaller list. Then filter them again, choosing the ones that are linked most strongly to your company’s strategic goals. You want to end up with a list of KPIs that will have the greatest impact on your business. We recommend choosing no more than five key KPIs.
Anything that’s vague or superfluous can go. The additional data will be there if you need it, but remember that these are your “key” performance indicators. This is all about measuring the metrics that will elevate the performance of your business and lead to you reaching your strategic goals.
Put processes in place
Now that you know what you’re working towards, implement processes that are going to help your staff achieve your objective or solve your problems. This could require a complete overhaul of current processes or a few tweaks, checks and balances to make things run more effectively.
Business Advisory Manager
Bellingham Wallace
Ph 09 309 7851
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