Key Performance Indicators (KPIs) are metrics used to evaluate the success of business objectives. The business should select KPI metrics strategically and set goals utilizing data. However, this isn’t always the practice. Consider the following scenario: a financial services company’s business objective is cross selling accounts. Instead of leveraging data to analytically select KPIs and strategically assign goals for those KPIs, senior management decides the goal will be 8 accounts per customer, because 8 rhymes with great. This reportedly happened at Wells Fargo in 2016 and what ensued was behavior harmful to the business (Glazer). While this example may be an extreme case of KPI ignorance, not leveraging data effectively to set business goals is unfortunately common among businesses in all industries. This blog will take you through how to leverage data to select the most valuable KPIs and set meaningful targets to improve your company’s performance.
Three Tips to Choose the Best KPIs
Start by defining your business goals.
Consider “the why”- why does your company invest in specific products or services? With that in mind, consider utilizing the SMART method to nail down business objectives. The best business objectives will be:
- Specific- be clear about what you want to achieve
- Measurable- make sure the goal can be measured
- Achievable- make sure the goal is attainable
- Relevant- ensure your goal is related to your business’s direction
- Timely- set realistic deadlines for your business objective.
Once business objectives are defined, KPIs can be selected that highlight those objectives.
Be selective in your KPIs
You’ve likely heard the widely known phrase “What can be measured is managed”, however it’s important to remember we only want to manage what adds value to the business. The sheer amount of measurable data is often overwhelming and can lead to too many KPIs. Don’t measure something because it can be measured. Instead, use your business objectives to select a few key metrics that highlight the objective’s performance. The risk of too many KPIs is spending time analyzing metrics that don’t add insights for data driven decisions.
Select Diverse KPIs
Lastly, it’s important the KPIs we are measuring not only add valuable insights, but also paint a full picture of the progress a business is making towards its goals. For example, two of the most common KPIs are customer and financial indicators. Let’s say a business objective relates to improving a product’s financial performance. If the two KPIs of sales and customer retention are above targets, this paints a picture that the business objective is heading in the right direction. However, if employee satisfaction is low and process efficiency is decreasing, the quality of the product will likely decrease, eventually leading to lower sales and decreased customer retention. In this example, employee satisfaction and process efficiency are leading indicators, while sales and customer retention are lagging indicators. Considering People and Process to select both leading and lagging indicators will help paint a more complete picture of performance.
How to Increase Performance Through Applying KPIs in Your Business
You’ve selected KPIs that highlight your business objectives. The KPIs are selective and diverse, but how will they lead to improved performance? The key to utilizing KPIs to increase performance is establishing accountability and setting value goals. The following steps provide guidance on how to accomplish this.
Establish a KPI owner.
KPIs without owners are just numbers about your business. The KPI owner is an individual from the operational team who is ultimately responsible for the KPI’s value. This person should have the influence and authority to make data driven decisions based on the KPI’s value, including operational changes.
Review historical performance when setting a KPI goal.
This will establish a benchmark of where you started and give you information on variability over time.
Look at the big picture when setting a KPI goal- use ratios and percentages.
Instead of looking at the benchmark and arbitrarily selecting a better value to be the goal, consider the big picture and utilize ratios or percentages. For example, instead of increasing sales by $X, a better goal is to consider what percentage of total sales you want to increase by. For a company with annual sales of $15,000, setting a goal of tripling your sales is more powerful and provides more context than setting a goal of increasing sales by $45,000. This ensures you are looking holistically at the business’s performance and have the big picture in mind.
Set Guardrails and Review Trends.
In contrast from a goal, a guardrail is a KPI value that is the lowest acceptable performance before your business objective is at risk of being missed. When a guardrail is hit, the KPI owner is responsible for reviewing the data and taking strategic action to improve the KPI. Trending KPI information gives your team insight into long term performance, if you’re heading in the right direction. It may also allow for corrective strategic action to take place before a guardrail value is met.
Not utilizing data effectively when establishing Key Performance Indicators and targets is equivalent to blindly strategizing for your company’s future. This may be in the form of selecting KPI targets without establishing an owner, or not reviewing benchmark or trending information. Or this may be in the form of simply selecting too many KPIs that don’t provide effective insight into the business objective’s performance. Following the considerations in this article will provide you with full vision to strategically meet your company’s business objectives.
Glazer, E. (2016, September 16). How Wells Fargo’s High-Pressure Sales Culture Spiraled Out of Control. Retrieved from https://www.wsj.com/articles/how-wells-fargos-high-pressure-sales-culture-spiraled-out-of-control-1474053044
Roman Pichler. (2017, February 04). 10 Tips on How to Choose the Right Product KPIs. Retrieved from https://www.romanpichler.com/blog/10-tips-how-to-choose-the-right-product-key-performance-indicators-kpis/