How to Develop Effective KPIs
Developing key performance indicator (KPIs)for a business is not a simple task. There can be many that you can identify which may soon become an overhead for every person in the organization. So, how do you decide which one is relevant and would help you achieve business goals?
KPIs should serve as a lead-indicator to future problems and they shall be solely used for this purpose. It is important that you identify the right KPIs which gives you insights into the performance of the functions rather than becoming a set of measurements through which you can hardly infer anything. The right KPI will help you in decision making.
How to Define KPIs?
The best way to select an effective KPI is a 3-step process:
- Start with the identification of business/strategic goals that you are trying to achieve
- Develop KPI in line with your strategic goals which indicate that you are moving in the right direction
- Decide the measures required to derive the KPIs and mechanisms that need to be put in place to capture the data related to the measures
Identify Strategic Goals
Strategic planning is crucial for running a successful business. You may use SWOT analysis to determine the strenghths, weaknesses, opportunities and threats that your organization may face. This will give you a high level view of the critical areas that needs to be focused on and help you identify all the internal and external factors, including political, economic, financial,environmental, your internal values, culture, knowledge, etc, that impact your business. You also get an insight on the risks and opportunities that needs to be addressed. Defining the business goals to handle some of these critical areas at this point will aid you in defining your KPIs. This will help you in shortlisting and focusing on only key indicators instead of creating a huge list of indicators which serve no purpose.
Your company’s strategy is, therefore, the initial point for defining the right KPIs. A well-defined and clear strategy will help you define strong goals, which will in-turn help you define a clear set of KPIs to achieve these goals.
Develop the KPIs
Once you are clear on what your strategy is and the goals you want to achieve, you have narrowed your KPI identification to a set of critical parameters. Now the remaining work is just to identify what exactly will help you achieve the company’s goals. This will make the relevant KPIs quite obvious. Ask questions, the answers to which will lead you to the right KPI. If increasing customer satisfaction is your goal, asking a simple question “What are the areas you need to focus to increase customer satisfaction?” will give you a lot of answers. These will guide you into choosing the right indicator which is relevant to your strategy.
Define the methodology for tracking KPIs
Once you have identified the KPIs, the next step is to find out how you will measure the data required for the KPIs and what are the existing mechanisms in place to derive the measurements. You may have tools or have manual computations available or you may need to define new mechanisms to capture the data to get to the KPI values. Identify the gaps in your measurement process and define clear mechanisms that will help make data collection a seamless process. There may already be a lot of data that is being collected by different departments; what is required is to determine how these mechanisms can be tweaked to get what you want for your KPIs.
Also, define the right methodology for tracking these KPIs. Define the base measures, frequency of data collection, tools/devices that will be used to collect the data, person responsible to collect this data, frequency of reporting the data for calculation of KPIs, etc. Also determine the targets for each KPI, looking at the current achievements in that area and where you would like to take the KPI targets to meet your strategic goals. The methodology should be defined based on the relevance/impact of data. For example, you gather customer satisfaction data in June and report it in December, it may have lost its relevance after 6 months.
The methodology should clearly define the person responsible for the analysis and interpretation of the KPI and the person responsible for data collection. Analyses of data is also an important activity, this will give important insights when the person responsible for this exercise looks at the KPI, interprets it, monitor how it’s varying and makes a decision on the basis of it.
How to Monitor and Review KPIs?
Once the KPIs are determined and methodology defined, the next step is to establish these organization-wide and use them to monitor your progress. This again is a 3-step process:
- Get the buy-in from employees
- Analyse KPIs and convert into actionable plans
- Review KPIs to improve your performance
Get Buy-in from the employees
Getting buy-in from all stakeholders is an important activity to make sure that the KPIs are established organization-wide and are being used to run each function/department. Commitment from each person is required in achieving the targets set for the KPIs. It’s important that all employees in your company are aware of the KPIs, the targets that you have set and the mechanisms you have put in place to track these KPIs. Each employee should know how the work they do, contribute to the achievement of the KPIs and what decisions he needs to take which will lead to the achievement of the KPIs. The management, once they have established the KPIs need to make everyone understand how these are connected to your strategic plans. This will ensure that employees understand their role in the achievement of the KPI and in the overall business strategy. Without explaining to everyone, it will become difficult to get buy-in from everyone to collect the data that is required for these KPIs.
Analyse the KPI data
Once you start getting reports on your KPIs, analysis of the data is an important activity. Interpret the data and identify root causes behind the drop in the trends or when KPIs do not meet the targets. Based on the root causes identified, plan actions to bring the KPIs back to where they are intended to be. It is essential that you make your teams aware of what the achievements are. A report just filled with numbers may not make sense to all the employees. A visual representation of data along with trends and important insights into the data will be more relevant to the employees. This will also ensure that the employees remain engaged when they see the results.
Make the data clear, available, unambiguous, and actionable with correct interpretation and making everyone aware of the actions that would be required. Ensure that these actions are taken and closed.
Review your KPIs and their targets
The purpose of having a KPI is to improve your performance, to give a view on current achievements and set goals for improvement. The KPI should help you make important fact-based decisions and if the KPI is not able to do that, it is better to discard that KPI. It is also important to revisit your targets so that they are relevant in the current scenario. A target that you have already achieved last year and you are still sticking to the same target will not help you improve. You need to continuously review the KPIs and the targets to ensure that they are useful in the current scenario you are working in.
If KPIs are used properly, they can add a lot of value to the business. They can become a vital tool to improve your performance and can help you move ahead of your competition. However, it is important to define the right ones and not to go overboard with the KPIs. The ‘key’ of the KPI signifies ‘critical’ and they should be few important ones only that help you measure your ‘performance’ i.e. the ones’ that define the success of your organizational mission or strategy. And they should be a predictive ‘indicator’ which help you make the right decisions and helps you improve or change your course when required.
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