Key Performance Indicators (KPIs) help companies and organizations understand how well they are performing in relation to their strategic plans and objectives. In other words, a KPI can give you important performance information that enables you to understand whether your company is on track or not.
You must measure what matters most
KPIs allow us to take a small number of key indicators in order to make performance more understandable for us. This is the same approach we use in our daily lives. For example, when you go to your doctor he might measure blood pressure, pulse, weight and temperature as key indicators of your health. With KPIs we are trying to do the same in our companies.
KPI’s are not perfect
In reality, the term KPI is too loosely defined and very much overused. For many it describes any form of data and performance used to measure business performance. Instead of clearly identifying the information needs and then carefully designing the most appropriate indicators to assess performance, we often observe what we have termed the ‘ICE’ approach:
- I is to Identify everything that is easy to measure and count
- C is to Collect and report the data on everything that is easy to measure and count
- E is to End up scratching your head thinking “What the heck are we going to do with all this performance data stuff?
So, why do we measure performance?
The reason why we measure performance in our businesses is often reduced to simple teaching, such as ‘what gets measured gets done’. The three main reasons for measuring performance are:
- To learn & improve
- To report
- To control
Of these three the first is the most important, the second is something organizations just have to do and the third one can cause major problems.
Measuring to learn and improve
Measuring for learning and improvement is the most natural form of using KPIs and something we do every day in our daily lives. The aim is to equip our employees with the information they need to make better informed decisions that lead to improvements. KPIs are used as the evidence of our management decisions, to challenge strategies and for continuous learning and improvement.
Measuring to report
Collecting KPIs is to inform management with reporting and information requests. When measuring for reporting purposes, any reports and associated indicators either have to be produced on a regular basis for financial statements, accounts, or performance reports; or can be on a voluntary basis such as forecasting or flash reporting.
Measuring to control
KPIs can also be used in a top-down command-and-control fashion to guide and control people’s behaviors and actions. Here, measures are used to set goals, to access the achievement of these goals, and to provide feedback on any unwanted variances. Here, the aim is to eliminate variance and improve conformity. In this structure, measures are often tightly linked to reward and recognition structures. Research has shown that this approach can lead to a culture of hitting the target but missing the point.
The Key is to using KPI’s correctly
The best organizations clearly understand what indicators are required for learning and improvement and focus on those, they separate out the reporting indicators that are not relevant to avoid confusion and data overload, and they create the right culture to drive high-performance.
We Can we measure anything?
Yes, there is nothing that we cannot measure. But at the same time we have to be aware that we can’t design the perfect indicators that will measure things perfectly. KPIs are there to give us information which helps us to make better informed decisions. It is all about reducing uncertainty.
What matters the most is that you measure the relevant things that will help you answer the questions that matter the most in your organization. So, a good starting point is to come up with the questions you want to have an answer to before you start designing KPIs. The great thing is, SGI has done most of the work for you.