A Vital KPI Key
There is one thing about KPIs to always remember
KPIs are Key Performance Indicators;
not the ultimate panacea of perfect business
KPIs can really be powerful when used in conjunction with other tools and methods they can transform businesses, however by themselves they are not superheros.
I often hear people saying “once we get our data warehouse, and report on KPIs, all will be well”; and I have been hearing this even more regularly of late! Every single time I have a niggling feeling this expectation is unlikely to eventuate unless some extra work and factors are used.
Lets start back at why KPIs are popular – they deliver to the maxim “What you measure you can manage“
For years and years I have been a firm believer in this adage until recently when I realised, in three different circumstances, great measurements do not ALWAYS lead to better management.
Now, maybe this has something to do with these businesses measuring the wrong things, I recognise there are many soft skills and qualities that are non-quantifiable, these are important factors in managing that may be difficult to measure. But I actually believe the real issue is something quite different… The tech bubble explosion in the late 1990s; the GFC – they all had very clear measures and indications things were “not as they should be”. Even at a more micro level with businesses I know and who are very good at measuring, are having some challenges generating improvements – perhaps they were measuring but not managing?
For a KPI to be powerful they need to enable easy decisions and instigate action:
- Things are looking bad: Decision = need to investigate, Action = ask for more information
- Things are looking good: Decision = need to investigate, Action = ask for more information
- Things are on Track: Decision = no need to investigate, Action = none required
Asking for more information is also not exactly ‘managing’; managing is about handling, directing, and controlling. However, making sure the right supporting information is available, will enable management to manage effectively.
There are three different types of measures, but not all are directly ‘manageable’:
* Indicators – Information at a high level “bird’s eye view” used to inform senior management, executives etc, about the current performance and to reveal IF change is needed. A KPI is generally calculated on a high level outcome dependent upon a lot of contributing influences, and because the KPI reflects a combination of activities it is unlikely to pinpoint exactly which decision is needed to improve the current outcomes. I know how fast I am going.
* Drivers – Information about the sources of work and customers – Drivers are usually external to the business and therefore not directly controllable by management. These measures reveal WHY change is needed are used to assist with understanding the business environment, planning for future capacity, product mix, and innovation. e.g. Weather is a key driver of the electricity industry, if it is going to be extra hot demand increases as all the air conditioners get switched on, and as soon as it gets extra cold everyone fires up their heaters. None of the power generators have any influence over the weather, but they need to be very aware of the next weeks’ forecast so they can ensure the right level of supply is available. I know how fast is ideal.
* Levers – Information about what business operations are doing and reveal HOW a change is needed. These are measures of all the KPI contributing influences that management is supervising and directing on a day to day basis, and consequently there are lots and lots and lots of these every business can track and manage. Because they are so numerous watching all of these, all of the time, would be overwhelming which is exactly why KPIs were developed. I know what to do to correct my speed.
This last one, Levers, is the only type of measure that delivers information about what can be changed to improve performance. So, it really doesn’t matter how well KPIs are being measured and monitored if none of the underling levers are being managed at the same time – Levers are the measures that need to be investigated when KPIs are off track, and where decisions need to be tweaked to get the KPIs back on track.
Think of the Speedometer in your car – just like the one below:
- Indicators – the speedo is the KPI it tells you what you are doing right now – this is the speed you are going. It is an indicator of speed, and therefore an indicator of possible danger, both of which are relative to your circumstances at any point in time. This speedo certainly doesn’t tell you what you to do or why.
- Drivers – the conditions are the drivers they are what governs what should be happening – what speed is appropriate. There are probably signs on the side of the road giving you an indication of what is safe, based on what the road authority has researched for this specific area given the road conditions, but you may also need to add in other factors such as your driving experience, the weather and visibility, as well as the age of the car. To make a decision about what is appropriate in these conditions you also need to know the “drivers”
- Levers – the accelerator and the brakes are the levers they are what you need to press to create change – how to change speed. The speed shown on the Speedo is affected by one of two things, your foot on the accelerator, or your foot on the brake the only decision that can affect your KPIs are should you move your foot on the accelerator lever to speed up or over to the break lever to slow down? The answer to this depends on both where the indicator is, are you currently doing 100km/h or 10km/h, and what the drivers are, are you on a freeway or a driveway.
KPIs are only Indicators
Capturing and reviewing data is not a magic pill for resolving all business woes. It is decision-making that creates change, and there also needs to be guidelines in existence to provide clues as to when change is required and how to assess if the changes made are “good”.
The power of KPIs lies in the actions taken to drive changes when, and where, these indicators show change is needed; without action KPIs are just another set of useless numbers on a page.
The Best way to use KPIs
Different types of measures are needed throughout the organisation by various management groups:
- Top Management: KPIs as measures of achievement including a mix of financial KPIs augmented with key non-financial KPIs reporting a snapshot of overall performance.
- Middle Management: a broader range of departmentally specific measures, both a mix of Indicators and Drivers, reporting on progress towards strategic goals, and enabling the adjustments to goals when necessary.
- Operational Management: the focus of measures will be increasingly on levers and non-financial data, reporting direct fast feedback about performance against targets and supporting learning and improvement, and enabling decisions for operational change.
Make life easy on yourself – no matter what level management you are at or if you are a solo-preneur, keep it simple!
Choose 4-6 KPIs to keep an eye on, and combine these with a further 6-8 other measures on your monthly report that also cover some Levers and Drivers. This way you will be looking at measures that enable you to lead rather than simply react.