Setting The Right KPIs
It is fairly easy to find suitable financial KPIs for an organization, such as a measure of total revenue. But defining KPIs is less straightforward when applied to more subjective or vague areas of a business, such as customer satisfaction or employee development.
In these instances, more creativity is needed. For example, an appropriate KPI for measuring employee development might be the number of training days per year taken by each staff member. To make the selection of KPIs more systematic, organizations need to be particularly careful when developing them.
The following is a typical sequence for developing KPIs within an organization:
Identify a problem, situation or objective you are trying to address, e.g., reducing the number of defective products at the end of the manufacturing process.
Develop a view on how you would like the results to look, e.g., target number of defective products to reduce from 20% to 5%.
Develop a process for how you want things to be achieved, e.g., this could involve reengineering the whole process or it could be achieved by introducing quality assurance checks at various stages of production.
Develop effectiveness KPIs before efficiency KPIs. This is because you first need to establish your benchmark, e.g., how many units you produce in a given period of time, before you can begin to think about measuring related efficiencies.
Develop stakeholder and financial KPIs before other KPIs. Stakeholder KPIs for a government organization, for example, might be that every child receives education. For a company, it is likely that the financial KPIs, such as growth and revenue targets, will drive all other strategic objectives. Hence, it’s logical to set these KPIs before any others.
Develop output KPIs before input KPIs for each objective. It’s not possible to start thinking about input KPIs before output has been determined. For example, you need to know what your production target is, i.e., how many cars you need to produce, before you begin to think about KPIs relating to the manufacture of those cars.
Select best-fit KPIs, share, approve and document them. Companies should always have a flexible and creative mindset when developing KPIs, as their ultimate goal is to drive the performance changes required by the corporate strategic plan. KPIs cause divisions and departments to act differently, improve certain processes and drive discussion and agenda items at the executive level. Well-designed KPIs enable management to ask the right questions, rather than give neat answers and results. In other words, KPIs are tools to create a climate for action and to support dynamic high-level discussion.
Dr. Rachad Baroudi
CEO - KPI Mega Library