The art of setting KPIs

Smart Company E-Newsletter 10 June 2010

The mantra behind key performance indicators (KPIs) is imprinted on the brain of every executive in the world: “If you can’t measure it, you can’t manage it”.

The trouble is many companies don’t know what to measure. The result: bad management, mixed messages, confusion and employees focusing on the wrong thing.

KPIs need to be handled with care. Some companies use many KPIs, others have a handful. But they all need to use the right ones.

Kevin Dwyer, founder of change management consultancy firm Change Factory tells of one big financial services company that had three conflicting KPIs: containing bad debts, days that people hadn’t paid and costs.
“If they pushed hard on costs, it pushed bad debts up,” Dwyer says. “To keep bad debts down, you might have to spend more and put another 100 people on at the call centre. By pushing down on costs, bad debts might go up but to keep bad debt down, you might have to spend more.”

KPIs cover many areas and there are different measures for different roles. Typical KPIs include cost of sales, the mix of products sold, sales against target, sales conversion rates, delivery on time, employee turnover, number of new ideas generated, how many ideas become profitable, rate of conversion of web traffic, customer acquisition cost or inventory turnover, lost time due to injuries, error rate and customer complaints.

So many KPIs, but all held together by one principle: they are shaped by the company’s strategy and operations. A retailer will have different KPIs to a warehousing company.

The KPI is the indicator of where the company is headed. But it is also the one area that many companies screw up because they are not thinking about how a KPI is helping the company meet its targets.

Goals are not KPIs
Dwyer says another mistake of managers is to confuse KPIs with goals. The two are not the same.
“If a company wants to get $200 million of sales, they assume it’s a KPI – it’s not,” Dwyer says.
“The KPIs there should be about the sales process. They might be about how many new customers, how many customers visited gave a repeat visitation, how many of those visits ended up in a presentation and how many of those were closed as deals.”

“The KPI has to measure a process. You want the KPI linked to the corporate goal but it is not the goal itself.”
He says some companies make the mistake of having KPIs that have nothing to do with corporate goals. There are sales teams, for example, that have KPIs around whether they completed reports on time – something that will not sell a thing. And every industry has a mix of formal KPIs that are written down (often as part of a job description) and informal KPIs that are not written down. Like the incongruent KPIs pulling in different directions, they can leave employees confused and disenchanted.

“You might have a call centre with a formal KPI of ensuring customers deliver on their promises to pay on time. The employee might spend more time on the phone helping the customer do that, offering deals and different ways of paying, so the average time on the phone goes up. This might not be the published KPI but in call centre land, the time you spend on the phone is something people jump on. So the formal KPI is promises kept, the informal KPI is minutes per call. Guess which one affects behavior?”

Queensland based performance measurement specialist Stacy Barr, who helps companies, not-for-profits and government agencies develop KPIs, says KPIs are not about measuring people.

“KPIs are there to measure the performance of the organisation and KPIs are tools that people can use so that they can work not just in the business but also on the business, in other words improve the way the business works and improve its performance. I help companies create KPIs that give them feedback really objectively and quickly about how various aspects of the organisation are performing. Anything companies decide are strategically important usually ends up as the goals or objectives in the business plan and the KPIs track those.”

Setting targets attached to KPIs
Some KPIs can stretch employees, and Barr says stretch KPIs need to be handled with care.
“How high a target it is has got everything to do with the comfort of the company, how well it understands how they are currently performing and what sort of resources they are willing to throw at improving performance,” she says.

“You don’t achieve a target by working hard. You achieve it by working differently and working differently means redesigning business processes. It should be aspirational but not a target that people become cynical about.”
“The idea is that the target should stretch you away from where you are and often you might miss the target but its power has pulled you away so far from where you were.”

John Hogg, managing director STL Warehousing which provides warehousing services says all stretch goals need to be economically viable.

“You may set your inventory accuracy at 99.5% and that’s your target but your goal is 100%,” Hogg says. “If your 100% is going to cost you more than 0.5% in controls because you need three extra people and another million dollars of machinery, you accept that 99.5% is economically viable and 100% is economically unviable.”

Working with staff to develop KPIs
Grant Hyman, founder and director of sales solutions specialists Sales Central, says it is absolutely critical for managers to develop the KPIs in consultation with the employee.

“You talk about two things. The first is what the person is employed for, the second is what is going to give them satisfaction that will ensure they stay loyal and motivated.”

“It needs to have direct relevance to the company’s main goals and the employees motivations.”

He says the KPIs need constant monitoring.
“It has to be done that way because it has relevance,” he says.

“If it’s only monitored quarterly, then it becomes like an exam. It becomes an extra to the business and that’s where the problems arise because they can be extraneous to the employee doing the job. They then become onerous things that we are being checked on.”

Jessica Schebesta, a director of Frank Team which helps young entrepreneurs set up businesses, says it is critical to work with staff to develop stretch goals.

“If they feel it is too far out of reach and ridiculous, they are not going to try. But if we have a strategy in place and they know how strive for it, they will push,” Schebesta says.

She says monitoring KPIs is easy these days because much of it is at the fingertips. With manufacturing, it can be done by the machinery. With services it can be done with online tools that can be purchased or that are free.
KPIs will vary by the business and the role. A bad workman will always blame the tools. But the role of managers is to pick the right ones.

KPIs for a sales person
For a sales team, the goal might be to increase sales to $200 million a year.
To do that, the KPIs need to be built around the process for generating profitable sales.
Sales KPIs can include:

  • Customer retention
  • Cost per order
  • Cost per customer
  • Mix of products
  • Number of leads
  • Lead conversion rates of suspects to prospects
  • Presentations for prospects
  • How many proposals get signed off
  • Relative performance of different marketing activities (eg. advertising versus online marketing)
  • Conversion rate of marketing and sales campaigns
  • How many new customers
  • Sales turnover for new customers
  • Profit per customer
  • Dollars per sale
  • How many presentations
  • Average sales per customer per year

KPIs for an operations team member
KPIs for operations depend completely on the business and where the operations people are. Experts say there are no off the shelf KPIs. These need to be worked out by the managers, preferably in consultation with employees.
But broadly speaking some operations KPIs used at various companies have included:

  • Time spent from order to delivery
  • On-time delivery to request
  • Error rate
  • Stock on shelf
  • Customers coming back with problems
  • Number of complaints
  • Customer feedback
  • How many reworks
  • Cycle times
  • Average time to complete and order
  • Lost time due to injuries
  • OSHA-reportable incidents per year.


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