23/03/14

4 Steps to the Right KPIs

 

key performance indicator dartboard

Too often, organizations prematurely embrace what they think is the right list of KPIs. They spend a great deal of time and money extracting data, building database and dashboards, only to realize that the effort does not produce the expected results. Management should take the time to focus on what metrics to use and why. The result provides the foundation for success going forward. Taking the time to understand problems thoroughly, to appreciate why metrics are important to monitor, and to comprehend how this insight will contribute to efforts to change and address poor results is key to creating a useful and productive dashboard.

Management should plan to focus on four areas as they build the list of KPIs: problems, critical paths, drivers and competitors.

  1. Problems: First and probably most important, ask what is the problem we are trying to solve? Managers may be able to identify the problem, but not really understand what it is. Take the time to define all aspects to gain a thorough understanding. Otherwise, determining the proper KPIs may be a waste of time.
  2. Critical Paths: Next, look at your business critical paths. What is critical to running your business? Refine this thought process further by clarifying what information is critical to running your business successfully. Management should encourage this activity by brainstorming around more specific questions such as “Is it more than just the financials or forecasting?” Taking the time to dig as deep as possible through this initiative is time well spent. Failing to align the critical path and the problem you have identified can result in inaccurate goals and wasted time.
  3. Drivers: Organizations must understand business drivers for the continued success and growth of the company. Yet, while the question is simple, “What are the main drivers of your business?” the answers are not as straightforward. Management may say that close ratios, net cash flow, revenues, turnover rate and customer satisfaction are the primary drivers, but the key to understanding those examples is identifying what processes and data roll up into those drivers. Again, time spent in analysis here means time and effort saved in the end.
  4. Competitors: Lastly, competitive exploration can be helpful. What are your competitors measuring as best as you can gather? Further, what measures are critical to them and why? This data can guide companies to areas they might not have otherwise considered.

The next exercise in building the list of KPIs is to further analyze why these metrics are important. For example, brainstorm and discuss why each metric is critical, why measuring it will contribute to achieving business goals and why it will provide insight into what needs to be adjusted.