Key Performance Indicators
In the last few pages, we have glossed over the idea of measurement. We have discussed aligning what goes on in your company with your company's objectives through the continual improvement of your employees' action plans. We highlighted the fact that the effects of your employees' actions, the efficacy of their plans, should be monitored.
The idea that we as business owners need to be measuring results won't come as a surprise to anyone, but it's the details of what needs to be measured, and how to go about that measurement, that pose the serious challenges. Since you have set your objectives, the simple answer is that we need to measure the effectiveness of your action plans at making progress toward your objectives.
As the name implies, a Key Performance Indicator is a measurement of meaningful performance. There are a million and one things in your business that you could measure if you wanted to. A measurement of the number of pieces of paper used by the operations department may be interesting, but if it doesn't have relevance to objectives (either on the positional, departmental, or strategic level) then it is not a Key measurement.
There are a lot of metrics that you will track as a matter of course in your business that may never become Key Performance Indicators. That doesn't mean they aren't worth tracking, it just means that they don't influence decisions right this minute. Some metrics come into play when analyzing systems that are not necessary to have available at your fingertips all the time.
Key Performance Indicators tell the story of performance. At a positional level, they tell a manager, as well as an employee how the employee is performing. They let the employee know what performance is expected. They turn performance reviews into straight forward objective conversations. At a departmental level, they tell everyone involved in the department as well as business owners and other stakeholders how well they are performing as a group. Strategic level KPIs tell the story of how a business is performing as an enterprise. Some strategic KPIs are shared with all stakeholders, and some of the more sensitive financial KPIs may remain available only to those who need to know.
Because there's so much involved in setting up a performance management system, it's critical for success that a champion be appointed for implementation. This may be you as a business owner at first, but the most successful companies have a champion that does the lion's share of the footwork involved in organizing inter-departmental, company-wide communication.
You may have attempted reporting mechanisms in the past that were met with less than all-out excitement from your staff. It's not uncommon for staff to see a new initiative as a passing fad, and not really put their energies behind it. One way to avoid this, and to make sure that all of this effort is producing results, is to appoint a KPI Champion.
These are the high-level indicators that give you an overview of your enterprise. They let you know how your business is progressing toward your strategic objectives. When you build your strategic objectives, you build in Key Performance Indicators to let you track your progress.
These are your mid-level KPIs that allow you to track the progress of a particular department's progress toward its objectives. They are often composed of collected positional KPIs. Your departmental KPIs are designed when you are building your departmental objectives.
These are the indicators that tell you about the performance of your individual employees. They also let your employees know exactly what is expected of them. They are constructed when you build your performance objectives.
It's also a good idea to regularly update your Key Performance Indicators. The frequency will depend on the position, but once a year is a good place to start. Of course, some may stay the same for years, but everything changes eventually, so it only makes sense to build flexibility into the process.
Targets and Thresholds
It's important to set targets and thresholds for your KPIs. This is doable when you track your KPIs on paper, or when using a spreadsheet system, but it's simplified by the use of a KPI software.
Targets - let you know you're on track to reach your objectives. When you fall below your targets for a given period, follow the lean principle of asking "why" as many times as it takes to get to the root of the issue.
Thresholds - Let you know when your progress has slowed to a point of needing intervention. Setting thresholds is particularly valuable when the accomplishment of an objective is of critical importance.