Chapter 2
Types, Targets and KPI Mistakes
In This Chapter
Understanding the different types of KPIs
Setting the right targets
Identifying the most common errors
Successfully implementing KPIs involves more than meets the eye. Often the indicators themselves can be quite straightforward, so it’s easy to under-estimate their relevance. This chapter is all about context, and making sure that you fully appreciate the various types of KPIs, and what they can and can’t measure, as well as looking at how many KPIs you should have, how to set suitable KPI targets and the top three KPI mistakes to watch out for.
Understanding that KPIs can be Strategic or Operational
KPIs can be used to measure strategic objectives, that is, monitoring where you are now in relation to where you want to be in the future or to measure operational objectives, that is tools for monitoring operational performance on a daily basis. But the two outcomes are not the same – they require different types of KPIs.
Operational KPIs seek to get closer and closer to ‘real time’ measurement, so you can assess what’s actually happening in the business on an hourly, daily, weekly and monthly basis. These insights help you to do things better. They offer up important information about where systems, processes or people are falling behind or veering off course so that you can take corrective action quickly, solving the issue before it escalates into a full-blown problem. This real-time performance monitoring is not required for strategic measurement.
You don’t need to monitor strategic measures day-by-day, and certainly not hour-by-hour. Strategic KPIs are more about monitoring progress or trends toward a stated destination, and as your strategy shouldn’t change that much, nor should the set of KPIs you use to measure progress toward that stated destination. It’s important to monitor the same KPIs over time so you can get an accurate picture of progress.
Strategic and operational KPIs are equally important – they just provide different information for different purposes. However, a disconnect often exists between the metrics a company uses at a strategic, board level and those indicators people use on the shop floor to measure performance. For KPIs to yield all their promise strategic and operational KPIs must be linked together so that everyone in the business can see the connection between what they do and what the business achieves.
To get the most from your KPIs, you need to follow four main steps:
- Use KPIs to verify that your chosen strategy is valid.
- Create high level strategic KPIs to help you establish whether you are on- or off-course against that strategy.
- Create a performance framework (more on that in Chapter 4) to measure all the critical elements that will deliver on that strategy
- Add operational KPIs which will allow you to measure those areas in real time.
The pear tree analogy
Think of linking strategic and operational KPIs as being like a pear tree. The pears on the tree are the product or service you offer to your customers. Your product or service is the visible output of your business in the same way as the pear is the visible output of the pear tree. But the pear didn’t arrive on the tree by magic: It is the product of a visible and invisible network of connections and interconnections, just like your product or service. The major branches of the tree represent the various departments within a business – each with their own operational objectives that make the pears possible.
Buried deep in the soil, invisible to anyone looking at the pear tree, are the hidden roots. The stabilising roots allow the tree to access the tangible and intangible resources it needs to grow the pears. The roots draw nutrients and water from the soil and direct it to the right part of the tree at the right time. In your business your tangible and intangible resources – for example money, people, systems and processes – work in the same way as the roots of the tree, drawing the needed nutrients and pushing them to the right place.
In the middle is the trunk of the tree which represents the core competencies of the business that support all the various departments and the common threads that run through the business such as finance, administration, and people. The trunk gives the tree strength and connects the resources to the departments that make the pears possible. See Figure 2-1
Figure 2-1: Your business as a pear tree
Your business is a single entity creating your product or service in the same way that a pear tree is a single entity creating pears. The trunk alone will never create pears. The branches without the roots will never create pears. Pears are only possible when the roots connect to the trunk which connects to the branches to create pears. In the same way your business will not produce your product or service efficiently and profitably unless your roots, trunk and branches know what you are seeking to create, why and how each part of the business connects and contributes to that objective.
Linking the strategic objectives to the operational objectives and using appropriate KPIs to measure how your business is doing against those targets is the only way to make this possible.
To be successful you must understand more than just your product, service or market. You need to know how to get the most out of your tangible and intangible resources so you can produce the best ‘pear’ possible and stand out from your competitors.
Why we can measure everything and how to do it
People can often shy away from KPIs because they get hung up on the idea of using them for measurement. Measurement implies the application of some unambiguous mathematical or numerical characteristic. Too often people think of KPIs in these narrow numerical terms. It is, after all, easy to quantify things like money spent, number of customers served, number of complaints, or units sold. But of course, not everything that matters can be defined in such a way, so skeptics discount the value of KPIs. They assume that it is not possible to measure things like employee engagement, customer satisfaction, strength of customer loyalty, reputation or culture because they are much too complex and fuzzy.
This assumption is wrong. Everything can be measured, as long as you define what you are actually trying to measure first. You might think, for example, that you can’t measure the culture in your business. The omnipotent and mercurial nature of culture does make it impossible to measure – certainly at a first glance. But if you ask yourself what you mean by culture you can begin to uncover elements that you can measure. For example you may decide that happy, engaged employees are critical to your culture. How happy and engaged your employees are can be measured. You may decide that innovation is an important part of your culture. That can be measured. By drilling down and defining exactly what you want to know or observe about your culture, you can then ask the right questions and design KPIs that will measure those various aspects of company culture.
We really need to move away from the notion that KPIs are about providing an objective, uniform or quantified picture of reality. Certain KPIs such as profit, sales or return on investment can deliver rigorous, quantified data but not everything that matters is quantifiable. However, that doesn’t make things which are less easily quantifiable any less relevant or important to monitor. As Albert Einstein once said, ‘Not everything that can be counted, counts and not everything that counts can be counted!’
KPIs are called indicators for a reason – they indicate performance. Quantifying how many people are on welfare indicates how many people are living in poverty but it doesn’t measure poverty. An intelligence test can indicate whether someone has a certain type of intelligence but it doesn’t measure their intelligence. We’ve all met people who are incredibly bright and yet lack common sense. In the same way KPIs are indicators of performance but they don’t measure performance or provide the whole picture.
Creating the Right Set of KPIs
Creating the right set of KPIs for your business is the secret to success. If you think of KPIs as a torch light, each KPI allows you to shine your light into a particular part of your business and illuminate performance. One KPI alone isn’t much help because too much of your business remains in darkness. If however you create the right set of KPIs then you get a much broader, clearer and more informative view of the whole business.
What is a good number of KPIs?
I’m often asked how many KPIs is a good number to have. Unfortunately there is no right answer to this question. Ultimately how many KPIs are right for you will depend on your strategic and operational objectives and unanswered questions you have that you need to answer.
That may require 20 KPIs or it may require 30 or more. The number will depend on your business, but every KPI must have a specific purpose and provide a specific insight, or you should not include it.
As a general rule, I think that corporately a company should aim for between 15 and 25 high-level KPIs, and then have similar numbers for each business unit.
Tracking the tangible and intangible
To get a clearer picture of what is going on in your business it’s important to include KPIs that measure the tangible and intangible aspects of your business. The KPIs for tangible things, such as number of customers or volume of sales, are usually the ones that people rush to first because they are easy to measure.
KPIs for intangible aspects of business that explore, for example, whether you have the right brand image and reputation or whether you have the right people in the right positions and how engaged those people are, may be a little more difficult to measure, but they are equally if not more insightful.
Going back to the pear tree analogy, it is often the intangible elements of business, the ones are not immediately visible (such as culture and customer satisfaction) that hold the greatest potential for elevated performance and results. You therefore must include both tangible and intangible KPIs in your performance measurement framework.
The leaders and the laggers
If you only measure outcomes such as the money you’ve made this quarter or the products you’ve delivered this month, then it’s a bit like driving a car while only looking in the rear-view mirror. Your financial performance or your sales performance today is an outcome of having done certain things in the past. These indicators are not very good predictors of the future – they only measure performance in the past. These types of indicators are known as lagging indicators.
Lagging indicators are important to include in your chosen set of KPIs because they indicate how the business has done against targets. However the information you receive from lagging indicators is provided too late to intervene or change the outcome if necessary. They just tell you what has happened and nothing about what might, should or could happen in the future.
Obviously knowing about the past is not enough: You need access to information that will also help you predict future performance. Indicators that help to prevent problems before they escalate, or help to nudge performance back on track before the problems cause breakdowns in service, or irritate customers, are called leading indicators. Again, going back to the pear tree analogy, leading indicators tend to focus more on the trunk and roots of the tree than the tangible outputs.
Companies need a good mix of both leading and lagging indicators to provide the most complete and useful picture possible.
Setting the Right Targets for Your KPIs
For KPIs to be genuinely useful you need to assign a target to each one. A KPI without a target is useless because it’s the target that puts the indicator into context and allows you to know where you are in relation to where you want to be.
For a commercial organisation these targets are usually considered in the context of shareholder value (that is, how much money they can help to make for people who invest in the company). For public sector organisations a host of stakeholders exist whom the organisation must consider, as well as the need to manage externally-imposed targets.
Targets can be set as:
- Absolute: Such as ‘increase by seven’
- Proportional or percentage: Such as ‘increase by 4%’
Targets should be defined:
- Relative to internal benchmarks: Such as ‘Surpass last year’s results’
- Relative to external benchmarks: Such as ‘Surpass competitor X’
- Relative to global best practice: Such as ‘Become as good as X’
KPIs vs. targets
People often ask me what the difference is between a target and a KPI and whether or not they are the same thing. They are not the same thing – even though when people speak about KPIs and targets they might use the terms interchangeably, which is not helping.
So to be clear – you start with a strategic objective (for example, to improve quality), you then decide how to measure it (for example, by reducing waste), and then define a target for your KPI, (for example, reduce waste by 10 per cent). You set your target once you have chosen the KPI you want to use.
Making targets specific
Considerable goal setting research and target setting practice shows very clearly that your targets need to be specific and time-bound. This specificity helps to define your desired target performance level and put a timeframe around the target to focus attention.
When the target is specific, you remove any confusion or ambiguity and allow the people involved to know exactly where they are and where they are heading.
Making targets realistic and achievable
Your targets should also present a challenge or ‘stretch’ when compared to current performance. But not too much of a stretch. If the people doing the work that is being monitored feel that the target is unrealistic – either too easy or too hard – then they won’t like the KPI, they won’t engage with it and they won’t strive to achieve it.
KPIs should be used as a mechanism for learning and delivering breakthrough, or at least continuous performance improvement, and setting the right targets can help to facilitate that outcome.
Additional tips for setting the right targets:
- Use existing and relevant information to review trends and history. A good starting point is to look at performance over time to detect trends and patterns.
- Where appropriate, consider seasonal or other variations in performance. There is no point creating a target that is only ever possible for 3 months of the year! For example, don’t set the same sales targets for ice-cream, if you know sales peak in the summer and tail off in the winter.
- If applicable, take national targets, best practice benchmarks into account. In other words, if you are not sure what a stretch target may be in your context have a look at performance levels of other companies in your industry or beyond.
- Take the cause and effect relationships in the business into account. For example there is no point setting top level outcome targets if you don’t then set appropriate operational targets for the people charged with delivering on that target. After all, you can’t expect to deliver better financial performance tomorrow unless you hit the right KPIs on customer satisfaction, efficiency and employee engagement today.
- Remember to take time lags into account. Sometimes it takes time for leading indicators (such as improved brand awareness) to translate into lagging indicators (such as increased sales).
Knowing Where People Go Wrong with KPIs
Before wrapping up this chapter and the basics of KPIs, I want to alert you to some of the most common pitfalls associated with them.
KPIs are incredibly powerful tools in modern business and most people have heard about them, which means that many businesses have sought to implement KPIs in some form or another. As a result, there is a danger that you could dismiss KPIs thinking, ‘Oh I’ve tried KPIs. They don’t work in my business,’ or ‘KPIs are not relevant in my business’.
KPIs do work and they are relevant in every business, from small family-run organisations to global multi-nationals. If you’ve tried to use them or you know someone who’s tried to use them and they didn’t deliver on their promise, then my guess is you or your acquaintance sprung one or more of the three common KPI booby traps.
Measuring everything that walks and moves
One of the biggest errors people make when seeking to implement KPIs is that they try to measure everything that walks and moves within the business. They ferret out every single metric, data point or information hot spot.
The assumption is that lots of information is better than no information, but actually it’s not. Too much information is as useless as too little, so seeking to squeeze every drop of data from every corner of the business without any regard for what you actually need and how you will actually use the vast amount of data you plan to collect is just as damaging as doing nothing.
In fact you could argue it’s more damaging, because you are wasting time and money collecting data you will never use: Not only pointless but very frustrating for the people who do the collecting!
Collecting the same measures as everyone else
The other big error people make is working out what KPIs to measure by looking at what everyone else is measuring. So a business leader may decide that KPIs are something she really needs to take seriously. However, rather than work out what information she needs and what critical business questions she needs the data to answer, she will look at competitor businesses or discuss KPIs with other senior executives inside or outside the business and gather a list of KPIs that everyone else is measuring.
Measuring what everyone else measures is inefficient and distracting. Unless you know what your competitor’s strategy is and your strategy is identical you are going to be collecting information that is irrelevant to your business. We are all busy enough without measuring stuff that doesn’t need to be measured. Your goal is to work out exactly what you need to measure to maintain performance and achieve your strategy and only measure that.
The tendency to jump on a specific KPI bandwagon can also arise if a particular KPI or metric gains popularity in leadership journals. Just because everyone is talking about customer satisfaction questionnaires or employee engagement surveys doesn’t automatically mean you need those KPIs. Whether you invest in these types of measure should only depend on your strategy and what you are trying to achieve, and not on perceived popularity.
Not choosing the relevant KPIs
The final clanger people make when implementing KPIs is they don’t choose the right ones. There are loads of KPIs to choose from, so many in fact that many business people are already completely overwhelmed by KPIs. If you also consider that the amount and type of data we have access to is constantly increasing, and with it number and type of KPIs, then it’s easy to see why people panic and just grab the easy, obvious or common KPIs. At least that way they can say, ‘KPIs – yeah, sure I have some of them!’
It really doesn’t need to be that hard. KPIs are only useful if they are meaningful and deliver mission-critical information. It follows that your strategy, and nothing else, should drive the KPI selection process.