Good KPIs take into account business context, predict success, show early warning signals, validate achieved results, and for sure, they are accepted by your team. This time-proven system will guide you step-by-step towards excellent KPIs that are right for your business.
The steps of the system are not presented in hierarchical order. Instead, I’m following the natural sequence of challenges and responses that our clients normally deal with, and I will illustrate them by the dialogs with Peter. Peter is not a real client, but he faces all the same problems with KPIs that most business professionals do.
Step 1. Define business context
When someone struggles with finding good metrics, it is often a sign that there is no clear idea about the business context. Define business goals first, only then should you start searching for KPIs.
- Peter: “We need some KPIs for the HR department.”
- Alex: “OK, what are the goals of HR in your company?”
- Peter: “Well, we just need some KPIs to be able to track the HR performance!”
- Alex: “Yes, that’s where KPIs can help, but what are the goals? Does everything work smoothly, or do you want to change something?”
- Peter: “In the most areas we are doing good, but we want to confirm it by some numbers and benchmarks; and I guess our main goal is to improve the training process in the company”
- Alex: “OK, so you want to track some performance metrics; and you need to find some indicators to track the improvement in the training process…”
- Peter: “Sounds good! How can we start?”
Another typical scenario is the case when a client asks for some “out of the box” KPI scorecard. I shared my opinion about such scorecards in the Q&A section below.
Before moving ahead with the rest of the steps it makes sense to review this diagram below. It helps to sort out the role of KPIs and how they relate to the other parts of the business context.
Step 2. Find “inputs” and “outputs”
Find the “inputs” and “outputs” related to the business goal or process. Let’s continue with the dialog to illustrate this idea.
- Alex: “You want to improve the training process… How do you plan to do this?”
- Peter: “We hoped KPIs would tell us…”
- Alex: “KPIs don’t work in this way; they will not give you straight answers, but will help you to measure the results of your educated experiments.”
- Peter: “OK, then what we want to try is to prepare more training materials and get more employees trained.”
- Alex: “Fair enough. Would be an input and an output of these goals?”
- Peter: “The input might be “the number of training hours,” and the output might be the “actual training hours,” or the “% of employees” covered!”
Step 3. Divide the “activity” and the “results”
A famous quote by Ted Levitt:
- People don’t buy a quarter-inch drill bit; they buy a quarter-inch hole.
What about KPIs? In many cases people measure the activity, but not the result:
- Alex: “I see, achieving certain coverage is important, but what do you really see as an ultimate goal of that training? How does it help your organization?”
- Peter: “Trained employees are more skillful. They are supposed to do better job within a shorter period of time…”
- Alex: “Sounds reasonable. Shouldn’t we then skip the activity measures and move directly to the result-oriented ones?”
- Peter: “Yes, this makes sense. We can then measure improvement achieved in the performance of employees. We can use some after-training tests for this!”
Step 4. Find success factors
What we have been doing for now is trying to analyze past results and see if what we did actually worked or not. Why don’t we take control over the situation?! Try finding metrics that will help you to predict the success of the process.
- Alex: “What would you do if after the training you don’t see the expected results?”
- Peter: “Hm… probably something went wrong during the training. We would review the whole training process and try to analyze what was wrong…”
- Alex: “What would you be looking at?”
- Peter: “How the employees were engaged, how well the course is explained, if and how the course is relevant to our business challenges…”
- Alex: “Sometimes we cannot wait for the actual results to analyze the reasons for the problem. Why don’t we do it pro-actively?!”
- Peter: “Great idea! During the course we can measure the engagement of the students; and before the course we can analyze the relevance of the suggested training program and the experience of the trainer.”
Step 5. Make things measurable by design
Measuring “student engagement” or “relevance of the suggested training program…” It can be easier said than done. The secret here is not trying to measure something afterwards, but to make things measurable “by design,” before the process was started.
- Peter: “To measure student’s engagement we can use some surveys afterwards…”
- Alex: “This is one option; another option is to implement some metrics into the training process itself. I’m sure you can come up with many ideas. Some of them were discussed in the previous articles.”
- Peter: “Yes, we can track how actively participants of the training are interacting with the IT system used for the training.”
- Alex: “That’s a good starting point. You won’t be able to force people to be more engaged, but at least you will see early warning signals.”
- Peter: “What about “training program relevance?” How do we measure this?”
- Alex: “The easiest approach is to ask the trainer to share key take-aways of the training with you, or probably even the training KPIs!”
Step 6. Do controlled experiments
For some questions you won’t find answers. We are getting to the area of the “unknown” (see the “Complex” area on Cynefin Framework) where one needs to do controlled experiments before making any assumption and trying to measure things.
- Peter: “For many performance related questions we don’t have answers yet… For example, we have no clues about what will increase a team’s engagement during the training. What should we do?”
- Alex: “Controlled experiments! You will formulate some educated hypothesis and then will try to confirm it.”
- Peter: “For example, one of our ideas is to try smaller groups, can this be a hypothesis?”
- Alex: “Excellent idea! The engagement indicator that we talked about will help you to confirm this hypothesis.”
Step 7. Find bottlenecks
In many cases it simply doesn’t make sense measuring all the relevant metrics, because 90% of them will always be in the green zone. Instead, focus on the metrics related to the performance bottlenecks.
- Peter: “It is now clear enough how to deal with goal-related KPIs. What about other indicators for HR? Do we need to track them?”
- Alex: “It makes sense tracking them until the measurement process doesn’t consume too much time.”
- Peter: “How can we focus our efforts then?”
- Alex: “One technique is to find “bottlenecks.” Those might be process bottlenecks or critical business goals.”
- Peter: “For example, in the case of HR, we can ask questions like “What stops us from finding and hiring best performers?”
- Alex: “Exactly! This can be later formulated as an excellent performance-oriented goal.”
Step 8. Among all goals choose strategic ones
A goal to monitor some routine process can hardly be called “strategic.” We’ve discussed why the difference between strategic and operational is important. Make sure you really have strategic goals, and there are indicators aligned with them. If you have a KPI, and the only action plan is “keep an eye on it,” then most likely you could spend your resources on something better.
- Peter: “Is “Turnover, %” applied to HR a good KPI? Or better ask, how can you make it be a good one.”
- Alex: “It is hard to say without seeing the context, but from the first look “HR Turnover” falls into the category “keep an eye on this indicator and do something when it is in the red zone.”
- Peter: “So, it is an operational indicator. In this case a “strategic” indicator is one that is aligned with some strategic/change goal?”
- Alex: “Exactly! For example, the problem might be identified as a high turnover rate of the top performers, in this case the Turnover rate indicator is aligned with strategic goal, which is to “Improve conditions to attract and keep top performance,” makes perfect sense.
A few more questions related to the topic of the goals were discussed in the Q&A section below.
Step 9. Do formal description of a KPI
Once you know what, why, and how you want to measure, it is time to put down all the information so that it will be easy to share with others.
- Peter: “What technical parameters should a KPI have?”
- Alex: “Its name of course, and a meaningful description. People need to have an agreement about what stands behind the KPI.”
- Peter: “What about measurement units and if the value of indicator should be increased or decreased, what about calculating the performance of a single KPI, and the whole scorecard? I assume we will need all these details as well.”
- Alex: “Yes, these details are a must.”
- Peter: “How can we automate?”
- Alex: “On a certain stage one can do everything with MS Excel, but sooner or later a professional scorecard software is a must. “
There is a more detailed answer to the “automation” question in the Q&A section.
Step 10. Visualize KPIs on a dashboard and strategy map
From the very beginning we were talking about business context, strategic goals, and how KPIs should be aligned with them. Needless to say, you need to be able to tell the story about where your business is at and where it wants to go. A performance dashboard, or a strategy map with cause-and-effect connections might be a great way to do this.
- Peter: “I can now see the “big picture” of what needs to be achieved. Our team needs to take into account many factors, and focus not only on the indicators, but on the business context. What should we use – dashboards or strategy maps?”
- Alex: “Yes, the best way to do this is to use such tools as dashboards and a strategy map. On a dashboard one can visualize many relevant charts and diagrams, while the strategy map is a great way to show the cause-and-effect connection between business goals, and aligned KPIs.”
In the Examples section one can find some free examples of strategy maps and KPI scorecards.
KPI System Template
Questions and answers about KPIs
Below you will find some frequently asked questions about KPIs and my answers to those questions. Feel free to ask more questions in the comments in the end of this article.
“We are doing fine without any KPIs; do we need some?”
It’s like using a GPS in your car. When you drive the route that you are used to driving every day, then most likely you won’t turn a GPS on. Does it mean that you don’t need it in more complex situations, like for example, trying to find some street or checking out the latest traffic information? The same can be said about KPIs, the more complex your business environment is, the more you need good KPIs. You can find more examples in this article.
“Is “Implement new HR training program within 1 year” a good goal? Does it need a KPI?”
The goal in this case sounds more like a milestone or an action goal. In the end of the year one can give a “yes/no” answer to the question whether the program was implemented or not. The way that the goal is formulated now doesn’t imply an achievement of any performance results, so there is no sense in using key performance indicators. If you would focus on improving the efficiency of HR training programs, or reducing of the operational costs, then this could be a good performance goal, and respectively there can be used performance indicators.
“Is “Improve employee morale by 15%” a good goal? What KPI would you suggest for it?”
There is a known mantra that goals need to be specific and measurable, that’s why many of the goals incorporate the measurement part. That’s one of the possible approaches, but personally I prefer to divide the goal part and the measurement part. The goal in this case is to “Improve employee morale.” A morale index might be used a as a metric. Formulated in this way it makes much more sense.
“Is “Double employee productivity” a good goal? Do we need a KPI for it?”
Many companies have such goals on their scorecards in order to motivate their staff. For my opinion goals like this one have two major flaws:
- The goal is unrealistic: why exactly do we need to double the productivity; why not increase it by 10% or 30% or by 12.75%?
- It is not clear how to measure the productivity for tasks like marketing, software development, copywriting…?
“Do we need a software for our scorecard?”
It depends on how serious you are about KPIs. If you need to maintain KPIs in several perspectives, calculate their performance, take into account their relevant importance, visualize them on strategy maps, then I would go for some professional software.
I know some Excel gurus who can create a real state of the art scorecard, but the question is how hard is to maintain those scorecards. A freeware BSC Designer Light might be a good starting point.
“Is a KPI that I have “leading” or “lagging” one?”
These terms are contextual, one KPI is leading or lagging only in the context of a certain business goal, therefore in many cases there is a no clear difference between “leading” and “lagging.”
“What is a correct term: KPI, metric or indicator?”
When talking about terminology there is a difference. And for sure, it is a good idea to understand this difference and use the correct terms in each case. A practical experience; however, shows that the term “KPI” is used interchangeably. A minor metrics might be called a “KPI” and adds some confusion. To stay on the safe ground, I’d use “metric” or “indicator” as terms.
“What KPI template do you recommend?”
Actually, none of them. There are some popular industry-standard KPIs, yes, they look very professional and they might be a good starting point, especially if your boss just wants you to “find some KPIs.” But the impact of a few tailor-made KPIs designed by your team for your business goals is much higher than the impact of 50+ KPIs found on the Internet.
“It feels like my team doesn’t accept new KPIs… Why?”
Two most typical reasons are:
- Those KPIs are not aligned with real business problems.
- The KPIs are not the product of the discussion.
“My employee allowed a KPI to move to the red zone. How should I react as a manager?”
In my opinion this situation is a chance to start a discussion about what can be done better in the future. That’s why we have KPIs: to understand our business better, to prevent problems in the early stages.
“How do we cascade KPIs across the company?”
While many automation softwares (including BSC Designer) support cascading by indicators, it makes much more sense to cascade business goals, and only then find relevant indicators for each level. We’ve discussed this in detail in this article.
“Do you recommend to use KPIs for bonus calculation?
If you do it to control your team in a “carrot-and-stick” style, believe me, they are cleverer than you are and they will find some ways to game the system. We have discussed possible approaches to this task in the previous article.
“What number of KPIs do you recommend to have on a scorecard?
If you passed though the steps described above, just a few KPIs will survive the process. Other will be deleted, or moved to the scorecards of the teams or individuals that work specifically on that problem. A good formula to have in mind is 1 business goals = 2 metrics (one leading/predictive and one lagging/result).
“We have 40+ metrics that we track only for marketing. What we are doing wrong?”
Nothing wrong with this, but I guess most of those metrics are not key performance indicators. Those are operational metrics. Getting back to the car analogy, you are checking all you see on the dashboard: oil level, engine temperature, traveled distance, the state of safety belt, and so on. Indicators are important, but when your goal is to get from point A to point B (execute a business strategy), then you need to focus your attention on a few KPIs. And the steps of the system help you to find those KPIs among many possible metrics.
“If you could give only one bit of advice about KPIs, what would you suggest?”
Create and carefully maintain a proper measurement culture in your organization!