So far, we have talked about performance management from the ground up. We started by laying our foundation, and building our strategic objectives so we know who we are and where we are going. Then we talked about the structure of our organization, and how work gets done inside of it, making sure we build in a system to monitor our progress. A working performance management system will add amazing value to your business, and we understand that over the next little while you will build it into something to be admired. Now that you have started to lay out your objectives, action plans and KPIs, it's time to have a look at something a little bit different; your Keystone KPI.
If Key Performance Indicators are to be effective, they must be fully accepted by the employee occupying the position. If they are seen as just another form of control, they will cause more problems than they solve.
Value propositions were introduced earlier in our conversation on how work gets done in your business. If we were to look at your value proposition, and in particular the way in company delivers your value proposition, we'd most likely be able to pinpoint one thing that's holding your company back from delivering value more than any other. Imagine your value proposition to be a garden hose whereby you deliver value to your customers. At certain points along the way, there are blockages or hose clamps that are restricting the flow of value through that hose. There is one particular block, or hose clamp, that's restricting the flow of value more than all the others. For some businesses, it will be a lack of investment capital, or critical resources. Some businesses may not have the right people trained in the right way to do the right job. Some businesses may be having difficulty delivering value simply because they have not yet made a big enough impression in their market.
Take a few minutes to think about some of the bigger obstacles your business faces when it comes to delivering your core value to your customers. Is it a lack of customers to deliver to? Is it trouble in the supply or distribution chain? Maybe the biggest obstacles you face is to do with systemization or organization. Whatever it is, make a list of your three biggest obstacles in the space below. Highlight the one that affects your ability to deliver value to your customers the most. That is what we will call your Critical Constraint.
Now let's spend a few minutes getting to the root of your critical constraint. This may be something you want to come back to when your mind has had time to play with the idea. Ask the question, "Why" as many times as necessary, to get to the bottom of the issue. When you get to the bottom, make sure the answer is something that's within your control. Don't settle for an answer that puts the blame on something that's external to your company. There will always be something that's within your control that will make a difference.
Revenues and Profitability are down for this quarter.
Why? We are unable to produce enough to meet demand.
Why? We don't have enough trained skilled workers.
Why? We have not focused on skills training.
Why? We failed to set and monitor training objectives.
Your Keystone KPI will be the performance indicator that acts to remove the root problem of your critical constraint and allow the value to flow out from your company. In the case on the previous page, the company will continue to under perform, lose market confidence and market share unless they invest resources in training and hiring initiatives. It's critical constraint is that it can not produce fast enough, and the way to remove that constraint is to train and/or hire new workers. KPIs should be set up around training and hiring, with thresholds to tell department managers and ownership when training levels drop below determined amounts to remove the critical constraint.
Your Keystone KPI must be a company-wide initiative that's supported by all stakeholders. Every department must understand, the biggest obstacle to fulfilling the company's basic role being monitored by your Keystone KPI. In the previous example, production was the critical constraint, and it was determined that the most effective way to increase production was to increase training and or hiring of skilled labor. As a company-wide initiative, at first glance, it's a little difficult to see how a department like administration or finance would feel the same buy-in for production training and hiring, but if that really is the biggest obstacle your company is facing, it must be championed throughout the entire organization. There's nothing more important at that point than increasing the production department's ability to deliver on the core competencies of your company. The admin and finance departments would be aware that training was important, and when a request for training came across their desks, it would be handled as though it was their most important task, and not put off until it was convenient.
Your Keystone KPI is not usually something that appears at first glance to be the highest priority. It's maybe a lower level performance indicator which, when elevated to a position of importance, has the ability to effect change in a powerful way in your business. The secret to the effectiveness of Keystone KPIs is that they are enforced with 100% accountability across your organization. In our example of training, any time training levels fell below the determined required amount to remove the critical constraint of production shortfalls, the CEO or owner is required to get personally involved and find out why. If the Keystone KPI for a catering company is on-time arrival, the CEO or owner would have to become personally involved every time a delivery arrived late. This level of accountability shows the entire organization that there is a commitment to improvement, but it's critical that the CEO or owner is consistent and follows up on any deviations.
If you do your job well, focusing on your Keystone KPI will have a number of effects on your business.
- Align your departments so that they work together to accomplish a united vision.
- Remove the critical constraint, allowing you to deliver your value proposition.
- Add to your company's profitability.
- Help you move up the Value Pyramid.
As you can see, once you have removed a critical constraint, it will become less important for that KPI to be considered your Keystone KPI. At this point, you will once again refocus on the garden hose that's your value proposition and determine the next critical constraint that requires attention. The example that we have been using was limited in the number of products it was able to deliver by a lack of skilled employees producing products.
At some point, focusing on this deficit will have the effect of production catching up to and surpassing sales, and it may be that sales will become the critical constraint to delivering more value. This is an ongoing, never-ending circle in the life of your business. Your business's ability to deliver value will continue to grow as you continue to focus on removing the obstacles that restrict it.
In this chapter you should have designed, shared, and made a plan to review your:
- Process Map that illustrates how work gets done in your business.
- Process Maps for your departments.
- Revisited your Strategic Objectives and insured that they are SMART.
- Departmental Objectives.
- Positional Objectives for each employee in your departments.
- Departmental Action Plans that coincide with each Departmental Objective.
- Critical Constraint and Keystone KPI (Identified).
- Top 5 KPIs to monitor progress toward Objectives in each of your departments.