Another Look at KPIs
Google "key performance indicator" or "KPI," and you'll find almost as much has been written about KPIs as has been written about Britney Spears. KPIs are a topic we deal with daily at BPM Partners, because nearly every client is or will soon be choosing a set of indicators. We recently attended a business intelligence focused conference, and the most popular topic during breakout sessions and around the breakfast buffet seemed to be the development of appropriate KPIs. This month's column collects some of the best current thinking on this topic.
In reading many of the articles published in the last year, there's a clear path to select and define KPIs. You identify the key business objectives and then pick the KPIs to measure progress against those objectives. There are lists aplenty of the Do's and Don'ts of selecting KPIs.
However, there are obstacles and missteps that many companies encounter. Reid Karabush of Decision Systems points out that some executive teams choose KPIs that are outcomes rather than causes, results rather than drivers of success. These KPIs are consistent with the strategy and vision, but they produce a picture quite similar to a financial statement. In other words, they give you what you already have. Which would be more useful to a retail executive as an addition to existing reports: a KPI that shows declining sales, or a KPI that shows a decline in customer satisfaction?
Taking this further, some companies tell us, "We hear that KPIs should be non-financial metrics because a financial KPI just mimics a financial statement." This view is too extreme. We believe there are financial KPIs that meet the criteria for a good KPI: they are strategic, they are actionable and they will make a difference in improving the business. In many cases, a 50/50 split between operational and financial measures would be optimal.
Another business performance management (BPM) expert, Chris Iervolino of ITEC, has mentioned the "too high - too many" problem. This may be a symptom of simply trying to do too much with KPIs. When KPIs are too high-level, they might not reliably correlate to actual results. As a result, their utility to management is greatly diminished. Too many KPIs, on the other hand, are unwieldy and result in a lack of management focus. "Basically," says Iervolino, "somewhere in the extensive negotiations of creating the KPIs, the 'K' got lost."
You're Not So Special - And That's Good
It is difficult for many companies to devote the executive time it takes to properly evaluate and develop a corporate scorecard - but you must do it, right? Actually, the answer is only a qualified yes. Your industry counterparts - your competitors - have probably already done some of the work and tested KPI sets that are relevant and valuable to you. As it turns out, approximately 70 to 80 percent of the key metrics for a company are nearly identical to those of other companies in their industry, much like different species have only a tiny bit of difference in their DNA. The more regulated the industry, the more metrics they have in common.
This brings us to the industry dashboard, which comes pre-populated with best-practice metrics for your industry. If you locate a dashboard that is pre-populated for your company's industry and you like the KPIs you see there, you can now focus your attention on the smaller group of KPIs that are unique to your business - based on your competitive situation and growth stage. And, if your competitors use many of the same metrics, it's much easier to make apples-to-apples comparisons. You can see an example of an industry dashboard at www.bpmpartners.com/indexpack.shtml.
A company will have many metrics, but relatively few KPIs. Here we confront one of the toughest challenges: How do you get to that short list of agreed-upon key measures? You need a team approach, and the team needs to work down from the strategy to determine the key business drivers. For example, if the strategic goal is to be the number one supplier in the industry, then some key business drivers might be your distribution coverage in strategically important geographies, productivity of the sales force and customer retention rates.
The bottom-up approach, where a team starts with a huge collection of metrics and then asks, "Which of these are the most important?" has several problems. What one VP defines as "most important" may not tie directly to the company's strategic direction. Another risk is that the group only looks at existing measures. If you don't already measure client satisfaction, for example, it won't even be up for consideration as a KPI. The top-down approach helps ensure that the KPIs measure execution of the strategy.
I am a strong believer that the most crucial element is the process used to develop KPIs. Give careful thought to who should be involved, how to deal with the politics of developing KPIs that people in the meeting may later be compensated on, and how to ensure that the KPIs chosen are actionable and meaningful to all business units.
An encouraging note about this process comes from Chris Iervolino. The discussion itself, the back-and-forth about which KPIs to adopt, can turn out to be just as important or even more useful than adoption of the KPIs themselves. These discussions of how to measure and view the business can prompt new, robust conversations about how the business and its environment have changed over time, what future challenges lie ahead and how these challenges can be addressed in a timely manner.
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