A wise man once said “If you can’t measure it, you can’t improve it!”, and we think they were right. But a KPI, or set of KPI’s, is much more powerful than that; a common set of KPI’s used consistently can synchronise your business activities and increase productivity and output!
What is a KPI?
Key Performance Indicators (KPI’s) are measures used by businesses to periodically track and evaluate the performance toward the achievement of specific set of goals. In this article, we’re just going to focus on internal KPI’s – those directly relevant to the internal workings of your business.
Let’s break that statement down a little:
- Periodic can mean, quarterly, monthly, weekly or even daily. However, if you’re not going to carry-out any meaningful actions from weekly or daily KPI’s we wouldn’t recommend spending the effort on producing them at that frequency.
- Evaluate means that the measures aren’t just captured for the sake of it, they are analysed and assessed to determine what steps can or should be taken next, in response to that periodic snapshot or the trend now appearing.
- Achievement of specific goals is the crucial element. KPI’s need to have a purpose and, when done well, can be an effective way of getting all your employees pulling in the same direction.
How to define your KPI's
Start by thinking about what you want to achieve for your business. There are two types of KPI’s you need to be aware of here: lagging and leading.
- Lagging indicators are those that result from business activity, like profit and sales figures.
- Leading indicators are those that underpin the lagging indicators, like product adoption rate and customer growth.
Whilst the temptation is always to establish the easier-to-define lagging indicators, successful businesses always have a set of leading indicators to run the business with!
There are 5 simple steps to defining you leading KPI’s:
Step 1: Identify your business goals
List your company’s goals and objectives for all areas of your business, including revenue, assets, geographic reach, etc. With this first step, be as broad as you can be, taking into account the vision and mission for the company, and any particular strategic objectives thata have been set by the Board or senior leadership.
Step 2: Determine your Critical Success Factors
List your company’s Critical Success Factors (CSF) that must be met in order for the business goals to be delivered. So, if your goal is to achieve higher gross profits, the CSF would state what that target profit figure is, which product/division that relates to and put a time-frame on it. For example, gross profit for the sale of widget x must meet or exceed £20m for the 6 months leading up to the end of Dec 2021.
Step 3: Establish your Leading Key Performance Indicators
Leading Key Performance Indicators (KPI) are what must be delivered in order to achieve your Critical Success Factors. So, sticking with the CSF from Step 2, the KPI could state that average gross profit for widget x sales is no less than 50%.
Step 4: Start measuring your business
Start taking measurements (or collecting the data) for every part of your business. The more numbers you can collect, the more you’ll be able to improve over time. Most businesses are already capturing lots of measurements, but they won’t know how to get to them easily. The solution here doesn’t have to be perfect, but the more you can automate this process the better, since this can be extremely time-consuming for your employees!
Step 5: Turn your measurements into metrics
Metrics are presented as percentages, ratios, rates, etc. It’s worth noting that all KPI’s are metrics, but not all metrics are KPI’s. Armed with your KPI’s and metrics, you can now start tracking your business with real data. The more granular your measurements and metrics, the more granular you can effect improvements.
Synchronise your business
Now you know how to define your Leading KPI’s, try putting a few together for your business. When you’re doing this, keep in-mind that some KPI’s might only impact a single team or department. As long as all KPI’s are driving your team to deliver on the CSF’s, which in-turn are helping you achieve the business goals, you will be able to synchronise your business to ensure everyone pulls in the same direction.