"Never tell people how to do things. Tell them what to do and they will surprise you with their ingenuity."
~ General George S. Patton
"Performance is your reality. Forget everything else"
~ Harold S. Geneen
"All of us here are trying to reach 100% in our work, no matter what our jobs are. That's all we struggle to do. We never do it, of course, but we never stop trying. And it's in that striving to achieve 100% where our performance lies. That's what the company gets really. It gets the struggle"
~ Conversation with a colleague as to why KPIs are important in measuring our effort
Most organizations, regardless of the field they occupy, will have some sort of Key Performance Indicators in place (KPIs) or Key Success Indicators (KSIs), in order to help the organization define and measure progress toward goals. Once an organization has analyzed its mission, identified all its stakeholders, and defined its goals, it needs a way to measure progress toward those goals, and usually sets up KPIs in order to quantify those measurements.~ Harold S. Geneen
"All of us here are trying to reach 100% in our work, no matter what our jobs are. That's all we struggle to do. We never do it, of course, but we never stop trying. And it's in that striving to achieve 100% where our performance lies. That's what the company gets really. It gets the struggle"
~ Conversation with a colleague as to why KPIs are important in measuring our effort
What's the use of KPIs?
Key Performance Indicators are, as stated above, quantifiable measurements, agreed to beforehand, that reflect the critical success factors of an organization. They will differ depending on the organization and what it wants to focus on. They can (and should) change from time to time.
KPIs are not just used in macro terms or for capitalistic ends. Examples where KPIs are used can include:
- A business may have as one of its Key Performance Indicators the percentage of its income that comes from return customers.
- A school may focus its Key Performance Indicators on graduation rates of its students.
- A Customer Service Department may have as one of its Key Performance Indicators, in line with overall company KPIs, percentage of customer calls answered in the first minute.
- A Key Performance Indicator for a social service organization might be number of clients assisted during the year.
Key Performance Indicators usually are long-term considerations. The definition of what they are and how they are measured do not change often. The goals for a particular Key Performance Indicator may change as the organization's goals change, or as it gets closer to achieving a goal.
KPIs Reflect The Organizational Goals
An organization that has as one of its goals "to be the most profitable company in our industry" will have Key Performance Indicators that measure profit and related fiscal measures. "Pre-tax Profit" and "Shareholder Equity" will be among them. However, "Percent of Profit Contributed to Community Causes" probably will not be one of its Key Performance Indicators.
On the other hand, a school is not concerned with making a profit, so its Key Performance Indicators will be different. KPIs like "Graduation Rate" and "Success In Finding Employment After Graduation", though different, accurately reflect the schools mission and goals.
KPIs Must Be Quantifiable
If a Key Performance Indicator is going to be of any value, there must be a way to accurately define and measure it. "Generate More Repeat Customers" is useless as a KPI without some way to distinguish between new and repeat customers. "Be The Most Popular Company" won't work as a KPI because there is no way to measure the company's popularity or compare it to others.
It is also important to define the Key Performance Indicators and stay with the same definition from year to year. For a KPI of "Increase Sales", you need to address considerations like whether to measure by units sold or by dollar value of sales. Will returns be deducted from sales in the month of the sale or the month of the return? Will sales be recorded for the KPI at list price or at the actual sales price?
You also need to set targets for each Key Performance Indicator. A company goal to be the employer of choice might include a KPI of "Turnover Rate". After the Key Performance Indicator has been defined as "the number of voluntary resignations and terminations for performance, divided by the total number of employees at the beginning of the period" and a way to measure it has been set up by collecting the information in an HR information system, the target has to be established. "Reduce turnover by five percent per year" is a clear target that everyone will understand and be able to take specific action to accomplish.
KPIs Must be Keys To The Organization's Success
Many things are measurable. That does not make them key to the organization's success. In selecting Key Performance Indicators, it is critical to limit them to those factors that are essential to the organization reaching its goals. It is also important to keep the number of Key Performance Indicators small just to keep every one's attention focused on achieving the same KPIs.
That is not to say, for instance, that a company will have only three or four total KPIs in total. Rather there will be three or four Key Performance Indicators for the company and all the units within it will have three, four, or five KPIs that support the overall company goals and can be "rolled up" into them.
If a company Key Performance Indicator is "Increased Customer Satisfaction", that KPI will be focused differently in different departments. The Manufacturing Department may have a KPI of "Number of Units Rejected by Quality Inspection", while the Sales Department has a KPI of "Minutes A Customer Is On Hold Before A Sales Rep Answers". Success by the Sales and Manufacturing Departments in meeting their respective departmental Key Performance Indicators will help the company meet its overall KPI.
Good vs. Bad
Early in my career, I was tasked with drawing up a Sales KPI for my region. Being young(er) and not all that experienced (my leadership experience at the time came from a slightly different background where KPIs were non-existent), I came up with the following result:
- Title of KPI: Increase Sales
- Defined As: Change in Sales volume from month to month
- Measured By: Total of Sales By Region for all units
- Target: Increase each month
"Thanks. A few questions: Does this measure increases in sales volume by dollars or specific items? If by dollars, does it measure all sales (including rebated items and specials) or not? Are promos considered and if so do the appear as an adjustment to the KPI for the month of the sale or are they counted separately? (maybe another KPI?) How much, by percentage or dollars or items, do we want to increase sales volumes each month?"
As you can see, my original submission lacked the details that would have satisfied the above mentioned criteria. Now contrast this with a KPI that I drew up a few years later:
- Title of KPI: Employee Turnover
- Defined As: The total of the number of employees who resign for whatever reason, plus the number of employees terminated for performance reasons, and that total divided by the number of employees at the beginning of the year. Employees lost due to Reductions in Force (RIF) will not be included in this calculation.
- Measured By: The HR Information System contains records of each employee. The separation section lists reason and date of separation for each employee. Monthly, or when requested by the SVP, the HR group will query the database and provide Department Heads with Turnover Reports.
- Target: Reduce Employee Turnover by 5% per year.
Managing the Issue
Once you have good Key Performance Indicators defined, ones that reflect your organization's goals, one that you can measure, what do you do with them?
You use Key Performance Indicators as a performance management tool. KPIs give everyone in the organization a clear picture of what is important, of what they need to make happen. You use that to manage performance. You make sure that everything the people in your organization do is focused on meeting or exceeding those Key Performance Indicators.
You should also use the KPIs as a carrot.
Post the KPIs everywhere: in the lunch room, on the walls of every conference room, on the company intranet, at the bottom of your emails, even on the company web site for some of them. Show what the target for each KPI is and show the progress toward that target for each of them. People will be motivated to reach those KPI targets.
If you have any suggestions or topics you'd like to see covered, or if you'd like help with an issue you're currently experiencing, please drop me a line at gbossinakis@live.com
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