By rule of thumb, how many key performance indicators do you think are there? 300? 500? Far from it! There are a whopping 17,000! At least if one is to believe the author of the book KPI Mega Library. Given this large number of KPIs, the question arises as to which to choose best in order to monitor and measure strategic progress. Unfortunately, there is no straight answer to this question. Too big are the differences between industries and companies. But here are some basic things to keep in mind when selecting KPIs:
KPIs should be systematically derived from the business strategy. Therefore, first identify the critical success factors (CSF) for achieving your strategic goals. Typical examples of CSFs are the quality of customer relations, the order processing speed, or product quality. Next, for each of your CSFs define one or more KPIs. For instance, a frequently used KPI for measuring the order processing speed is the average lead time. KPIs help you to measure what is really important for the success of your company. Or in other words, everything which is not relevant to achieving your strategic goals does not need to be measured.
Fig. 1 Deriving of KPIs from business strategy
- Audience- and Purpose-oriented
Metrics that are important to one department are not necessarily important to another. Therefore, KPIs should always be determined and complied individually for each function within the company. What matters, though, is to make sure that they are in sync with the top-level KPIs of the company (cascading effect).
- Less is More
The number of KPIs needs to be manageable. People in charge should be able to track the company’s performance at a glance, for instance by using dashboards. As mentioned earlier, focus on what is really important. Experience shows that seven to ten KPIs are sufficient in most companies.
KPIs should be clearly defined and easy to understand. All employees that influence the KPIs through their work should understand what exactly is being measured, why it is being measured, and how it is being measured. More importantly, they should be able to interpret measurement results appropriately and, when needed, take corrective action.
Employees can improve the performance of KPIs only if they can actively influence them through their behavior. Therefore, ask yourself whether the person responsible is empowered to make necessary changes in order to drive performance of the KPI.
- Good Combination of Lagging and Leading Indicators
KPIs should provide a historical, current, and future view of the company’s performance. Therefore, aim for a good combination of lagging and leading indicators. Lagging indicators document the output of past activities. They tell us whether or not the company was able to achieve its stated goals. Examples of lagging indicators are turnover, ROI, or market share. Leading indicators, on the other hand, drive future performance. They help us to spot problems early on and take counter measures when needed. An often cited example of a leading indicator is the error rate. Changes in the error rate affect the quality of products and services produced, which in return may affect the company’s result in the mid- or long-term. While lagging indicators provide a look in the rear mirror, leading indicators help us to predict the future.
KPIs must be measurable so that they can be easily compared and trends become instantly visible. That doesn’t mean, however, that only financial key figures should be measured. Soft factors, such as customer satisfaction, may be measured as well, for instance by counting the number of customer complaints.
Make sure the data required is consistent over time and across departments.
In order to manage KPIs effectively, regular reporting is essential. When selecting KPIs, make sure to pick some which can be collected without much effort, ideally automatically. To be able to act as agile as possible, it is also advisable to focus on those indicators that can be measured at short intervals (daily, weekly, monthly). Indicators that can be measured only once a year are less suitable.
KPIs are an important tool for strategic controlling, provided they are carefully selected with reference to the corporate strategy, find the acceptance of the employees, and are regularly reviewed to ensure they are up to date. They serve to control, coordinate, and optimize business processes, create transparency, and lead to action. The selection of KPIs is an important management task that should not be underestimated.