In our last post we talked about how you can kill the effectiveness of your Key Performance Indicators (KPIs) by trying to measure too many of them.
I think that a big reason why business owners overdose on KPIs is that they don’t know how to develop a meaningful KPI, and fall into the trap of “what gets measured, gets done.” However, after a few months, both the owner and the staff are frustrated and confused because there are just too many metrics.
You need to be strategic as to which KPIs make the cut and can be put on your dashboard. Here are the six traits we use to determine if a KPI will be effective.
- Measurable: I know what you are thinking… well, duh, a KPI by definition has to be measurable. However we find many companies claim to have KPIs that aren’t really KPIs. A KPI has to be able to be measured using tangible data that is consistently– and most importantly– systematically produced. There are many things that are important to running your business that aren’t necessarily KPIs. Employee culture, for example, is not a KPI, but measuring employee sentiment via surveys with hard data could be.
- Relatively easy access to data: This is one we run into a lot. There are some great KPIs and metrics that can be pulled together, but the process of pulling that data together is so manual or so time consuming that it isn’t worth the effort. If you have to go to more than two systems to pull the data together for a KPI, it is probably not one we would recommend. Yes, sometimes you have to marry data from your operating system with data from your financial system to craft an effective KPI. However, if you have to do some major spreadsheet jockeying or manual data entry to get the numbers, it’s typically a warning sign that KPI might not be the right metric to measure frequently.
- Timely: If the data is hard to access, it’s likely that it will take time to get. Timeliness of KPIs can also be impacted by when you can pull the data. For example, if you have to wait for data from third party vendors to come in to compile a KPI and it takes 2 weeks after the month is over to get the data, it might be too late to take action on that KPI. Remember, KPIs measure the past (typically) but they can also be leading indicators of your business’ performance. If you aren’t seeing your KPIs from the prior month until 3-4 weeks after the month is closed, you may want to re-think the KPIs you are using.
- Reviewed Frequently: It’s a shame that businesses typically spend a lot of time pulling data together, but don’t have a formal, timely review process to go over their dashboards of KPIs. It’s the equivalent of leaving the football at the 1 yard line. I’m stating the obvious here, but pulling together KPIs is important, but if you don’t review them you might as well not pull them together at all in the first place. We recommend incorporating your KPI reviews as part of your monthly financial review process. (You DO have a monthly financial review meeting— don’t you?!?!?)
- Actionable: There are two parts to this: 1.) Make sure every KPI has an owner and 2.) Make sure that you know what specific actions need to be taken to influence the KPI. For example, if one of your KPIs is Gross Margin, you know that you have three areas in which you can take action: price, cost and product mix. Knowing HOW you can influence a metric is as important as developing it.
- Balanced: Just like any portfolio, you want a balance of metrics on your dashboard. It’s important to take a step back and see how the KPI you developed enhances and provides balance to the other metrics on your dashboard. For example, if your dashboard of KPIs is only measuring sales-related metrics like closing ratios and number of leads and sales per month, you may be overlooking the fact that all the sales you are bringing in are coming at lower margins. Developing KPIs requires you to be strategic in the selection process to ensure those that make the cut and end up on your dashboard aren’t driving the wrong behaviors in your company.
There’s one thing you need to remember: setting KPIs is a process. It’s not a “set-it and forget it” exercise. You may come up with a dashboard of 10 or more metrics and use them for a few months, and then realize they aren’t the right ones for your business. It’s OK to ditch a KPI and replace it with a new one that’s more effective. And, if you are using, reviewing and taking action on your KPIs, you may also find that as you fix problems in your business you uncover new issues that requires different KPIs. That’s an effective way to driving your business using KPIs.