Key Performance Indicators (KPIs) can be an incredible force for good. However, they can also be extremely dangerous if they are turned into targets. Many argue that poor KPIs fall just behind poor leadership as driver of poor performance. Moreover, implementing poor KPIs increases the risk of failure and so decreases the chance of success – something every business strives to avoid. Nevertheless, a business that takes the time to establish strong and meaningful KPIs are a force to be reckoned with. As a result, these businesses are usually miles ahead of their competitors when it comes to utilisation of their assets. Furthermore, they’re much more productive when it comes to detecting changes in internal or external environments. Therefore, it allows them to determine whether or not these changes are having a positive or negative impact on their organisation’s ability to achieve its goals.
Why effective KPIs are important?
For those of you that don’t already know, KPI’s are a form of performance measurement. Implementing these allow companies to understand how they are performing. A good KPI will act as a compass that helps you and your team understand whether or not you’re heading in the right direction to achieve your strategic goals. As a rule of thumb, you should ensure your KPIs have the following attributes in order for them to be effective:
- Crucial to achieving your goal/goals
- Applicable to your line of business
- Well defined and quantifiable
- Communicated throughout your organisation
However, due to this being so broad, in addition to the amount of KPIs there are out there, it can be difficult to chose ones that suit your business. Nevertheless, by researching and understanding some of the most important KPIs, you’ll have a better idea at to which best suit your business, and which will benefit you.
How can you ensure you pick good KPIs?
It’s beneficial to work towards more than one KPI. Therefore, it’s a good idea to categorise them. For example, you could start by looking at financial metrics such as:
- Profit – This should be considered as one of the most important KPI’s. You should analyse both gross and net profit margin in order to understand how successful your organisation in at generating a high return
- Cost – Measure cost effectiveness and find the best ways to reduce and manage your costs
You should also consider consumer metrics such as:
- Customer lifetime value – Establishing this allows you to understand the value you’re gaining from your long-term customer relationships. You should use this KPI to decide which channel helps you gain the best customers form the best price
- Net promoter score – NPS is one of the best ways to indicate long-term company growth. To get your score, you can send out surveys quarterly to your customers to ask them how likely they are to recommend your organisation.
What should you avoid when choosing KPIs?
- Linking KPIs to incentives – Linking bonuses or pay rises to KPIs can be extremely dangerous as it can created unintended consequences. Always remind yourself of the true purpose of a KPI, which is to help people to understand where they are in comparison to where they want to be. If linked to incentives, they become more of a target an individual has to hit rather than a navigation tool. As a result, individuals may begin to manipulate the information or their behaviour to ensure they receive their incentive.
- Not linking KPIs to strategy – There is no point implementing KPIs if they are not aligned to your strategy. KPIs are extremely useful if they deliver mission critical information that is relevant to the business. You should use your objectives to select relevant KPIs.
- Not acting on your KPIs – If utilised correctly, KPIs can shape your strategy and help make fact-based decisions within the business. However, this is only possible if you act on them. You could have established the best KPIs that align brilliantly to your strategy but if you don’t act on them, they’re useless! A well-designed set of KPIs should provide a clear indication of current levels of performance and help your people make better decisions that bring the business closer to achieving its strategic objectives.