The power of personally-assigned key performance indicators, or KPIs, is tremendous. If done incorrectly, KPIs might be used like a drunk would use a light post, for support not illumination. You could call KPIs industry-speak for one method to measure employee, departmental, and/or organizational performance. If effectively constructed, they can drive the right workforce actions supporting strategic and operational objectives. Yes, they could be tied to achieving an operational goal, such as on-time customer shipments, best-in-class inventory turns, or an industry-leading order-to-cash (Finance) or procure-to-pay (Procurement) process. Selecting the right KPIs is very important because they will drive employee behavior.
You might want to consider cross-functionally-shared KPI targets like revenue, EPS, EBITDA, or even gross margin % because an organizationally-shared KPI can reap additional benefits. Making revenue a company-wide KPI can help cement a cross-functional, collaborative, ‘we are all in this together’ corporate culture. It’s human nature to want to work more closely and collaboratively with people that have a shared interest in your success. Of course, there’s going to be KPIs useful to finance (Think Cost of Finance-to-Revenue, or even Close-to-Report days) which will certainly be quite different than marketing’s (Think Validated Leads). Personal and organizational KPIs can make up one scorecard.
So, how many KPIs is the ‘right’ amount? Well, I’ve seen as many as 40 KPIs for certain individuals. Is that a best practice? No. Absolutely not. There are levels of KPIs and, in this particular case, the person in question has their primary KPIs and their secondary KPIs. The primary ones drove their behavior (and, by the way, these primary KPIs determined his compensation as should everyone’s primary KPIs…just sneaking in a best practice approach for ya!) So, to answer the question of what’s is the right amount of KPIs for each individual, the answer is no less than 4 but no more than 12. If really pressed it’s 6 KPIs per employee. If there’s too many they’re probably going to spread this individual too thin while too few KPIs might mean there’s some activity for which isn’t accounted.
The most important element to be aware of is the law of unintended consequences. You want these KPIs to drive the right behavior. Be careful what you measure because it will dictate employee actions, especially if you tie it to compensation (which you should). Conversely though, if you don’t tie these KPIs to compensation then don’t call me if they’re not properly focused. Invariably people do what they like doing if they’re not directed otherwise. They may be comfortable with some tasks versus others so they do what they like doing most. Everything else may be left at the altar. Hello, runaway bride. A set of KPIs by which they’re measured will enforce (stick) the right employee actions while, by the way, tying them to compensation (carrot) helps nudge them in the right direction too.
These personal KPIs ensure people are doing the right things and not working on non-essential tasks that don’t directly contribute to the organization’s or department’s primary goals and objectives. If they don’t you at least can have an intelligent discussion with that employee and/or department to see if the related activities are important enough to continue doing. They also provide a benchmark by which to measure each employee’s progress not to mention being effective at assigning accountability while better aligning the company. To determine KPI targets most companies will look at industry benchmarks for certain KPIs where actual decisions can then be made regarding what’s a reasonable target given not only current conditions but also what the organization’s goals are because these KPI targets need to be aligned with those corporate goals and expectations. KPIs clearly linked to enterprise strategy promotes greater transparency from the ivory tower executive suite down to the people in the trenches. People start thinking about how they can achieve their KPI targets and who the influencers are that can help them get there. They’re collaborating more. They have a sense of purpose now. They know what they’re supposed to do and they’re being empowered to do it. No shades of gray. The corporate culture soon changes. KPIs become the stitching in the corporate quilt. Employees start to learn how to use the KPIs as a guide to clearer thinking in problem solving and weighing multiple options. They’ll start asking questions about what data elements, departments, and individuals (internal and external to the organization) influence their KPIs. This is the epitome of using data to drive better decisions. It’s partly about the actual data put in front of the individuals or teams; the other part is the resulting questions it inspires and behavior it drives. This is the behavior we’re trying to inspire when we talk about the power of analytics and smarter decisions.
KPIS & THE BUSINESS ANALYTICS PLATFORM
Of course, for KPIs to be leveraged most effectively you’ve got the provide the information technology infrastructure behind them to support constant updates to the actual KPI metrics. This would include drill-thru capabilities so that employees, managers, and executives can quickly and easily learn why they’re on- or off-target for each KPI, say on-time customer shipments, by drilling-thru for more detailed reporting and analysis. Once they’ve explored the reasons they’re on- or -off target, they’ll then need to be able to quickly run scenarios to see the operational and financial effects of each option to help them determine the best course of action based on this analysis. At this point, the forecast is updated to reflect the decision made and its expected outcome(s). This is business analytics. This platform is the holy grail of fact-based decision making for enterprises today. Yes, I know just when you were getting comfortable with Performance Management as a business practice we throw Business Analytics into the mix.
To further reinforce this concept, think of Business Analytics as a single platform of tightly-integrated solutions empowering users to run their ‘personal data analysis’ where each employee can easily measure and monitor – when possible, in real-time – their KPIs through a dashboard or scorecard. Once they’ve evaluated their KPIs in their dashboard or scorecard, they’re able to drill-thru within the same screen on that metric in question to understand why this item is reported as such (Why are we off- or on-target?). Now, they’ve got real context around why they’re on- or off-target. Perhaps, they discovered there’s been a shortage of inventory in their Denver plant or poor weather in northern Europe caused a critical shipment of product to be delayed. At this time they can perform scenario and predictive analytics to evaluate different options to resolve this issue. Once an option has been determined the results can be updated in the enterprise forecast.
These actions are nothing new. It’s simply that all of this would be done in a single, integrated platform to run through this decision-making process in its entirety. The real question is, how difficult is it for each employee, manager, and executive to get this type of information which we know they need to make their day-to-day decisions not to mention the more strategic decisions? Better yet, are they even getting this level of information in the first place?
For now though we’re hear to discuss KPIs. KPIs drive behavior through better alignment, accountability, and transparency across the business. We’ll explore further in future posts.
Between now and then, here’s a quick exercise: Think about how your KPIs are created today. Are they manual or automated? Are they trusted by their owners to be accurate and timely? Do they understand what the drivers of the metrics are so they know what actions on their part will influence them? Are these KPIs tied to compensation?
Hope this was helpful. Any feedback is certainly appreciated.
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