Of course Key Performance Indicators (KPIs) are important in business. But, when push comes to shove, KPIs are only really useful if you identify the right ones for your business. And they will only deliver mission-critical data if you use the KPIs and analyse what they tell you on a regular basis to inform your decision making. In this article I outline 10 essential steps that will help you do just that. By following these steps, you can ensure your business doesn’t fall prey to the common KPI errors companies (both big and small) make.
1. Start with strategy
You should always start with strategy. Without a firm stake in the ground around what your business is seeking to achieve, it’s incredibly easy to end up with a dauntingly long list of possible indicators that you feel you could or should measure.
Your strategy therefore acts as a starting point for designing appropriate KPIs – but only if it’s clear! All too often companies create a 30–40-page strategy document that no one ever reads or understands. A great way around this is to create a simple one-page strategy. This will help you clearly define your objectives, and help you work out what you need to put in place to achieve them.
2. Define the questions you need answers to
Linking your KPIs to your strategy will immediately sharpen your focus and make the relevant KPIs more obvious. Identifying the questions you need answers to will further narrow your focus, because questions give the indicators context.
That’s why, as well as KPIs, I always advise my clients to think about KPQs: Key Performance Questions. These will help you work out what data you need to gather, and, therefore, which KPIs you’ll find most useful. For example, if you plan on executing a simple strategy to increase your income by focusing on the most profitable areas of your business, you could ask “Where are we making profit and which processes are most costly compared to the returns we receive?”
Once you are clear on the questions you need to answer, you can make sure that every indicator you subsequently choose or design is relevant not only to your strategy, but also provides the answers to very specific questions that will guide your strategy and inform your decision making.
3. Identify your data needs
Once you know what questions you’re trying to answer, you need to define your data needs to establish what KPIs, metrics or data you need in order to answer those questions.
In this phase, forget about reality for a moment and consider what information and knowledge you want to have in an ideal world. After all, everything can be measured!
4. Evaluate all existing data
Having worked out your ideal data in the previous step, perform a gap analysis by comparing what data you would ideally like to have with what you already have – that way you can easily see what’s missing. Ask yourself what you need to change, tweak or implement to ensure the data collection is completely aligned with the strategy and will fully answer the questions you need answered. And then come up with the right indicators to deliver those objectives.
Remember, most companies are full of data. Often KPIs are already being collected for all sorts of different reasons by different divisions and different managers. It makes sense, therefore, to determine whether what you need is already being gathered by someone somewhere in the business, or perhaps it’s almost being collected and a few tweaks to the collection process would deliver exactly what you need.
5. Find the right supporting data
KPIs are incredibly powerful in the right hands, but we need to acknowledge that we also have access to vast quantities of supporting data that is every bit as insightful and useful as traditional KPIs. By finding the right supporting data – be it industry information, demographic data, trend statistics, or whatever – you can triangulate and verify your findings.
The datafication of our world, where vast amounts of information are being created and stored every minute, means there is a great deal of supporting data that can potentially provide information that is relevant to your strategy. By finding the right supporting data, you can make much better sense of the world, much more quickly, which helps you make better, faster business decisions.
6. Determine the right measurement methodology and frequency
Knowing what you need is one thing, working out how to access and measure that information is another. Finding the right measurement methodology is critical. Therefore, once you know what information you need to collect, you need to find the right measurement methodology to get it. This is especially true if you have to develop new KPIs or tweak existing ones.
It’s always preferable to align measurement frequency with how and when the data is used in the organisation, because all data has a “shelf life”. This means measurement frequency must be in line with the reporting frequency. If it’s not, the data may lose impact and/or relevance. For example, if you collect customer satisfaction data via survey in the summer and report on the findings in the winter, then the findings are already six months out of date.
7. Assign ownership for your KPIs
Effective KPIs require two types of ownership. The first is the ownership of the KPI in terms of its meaning and interpretation. Someone needs to be in charge of looking at the KPI, interpreting its meaning, monitoring how it’s changing and deciding what that means for the business.
The other ownership refers to the data collection. Sometimes you can automate the process but, more often than not, data collection will require some human interaction. Perhaps certain personnel are involved in transferring data from one database to another, or they have to collect it manually. Again, this ownership needs to be clearly set out and followed through.
8. Ensure KPIs are understood by people within your organisation
It’s essential that everyone in your business is aware of what you’re trying to achieve, and how you’re measuring progress towards those achievements. This is especially important for those who are charged with ownership of the KPIs, but it’s also important for people right across the business, at any level. KPIs should form part of the decision-making process for every employee, and everyone should be able to answer the question, “How will what I am doing today affect our KPIs?”
You therefore need to ensure everybody understands how the metrics you are gathering are linked to your strategic priorities. This will increase “buy in” – how personally involved and enthusiastic your staff feel about your priorities – and ensure that constant review and improvement are at the heart of everything your people do. If you simply tell everyone that they have to collect a whole heap of extra data from now on without explaining why, you are likely to end up with a very cynical and disengaged workforce!
9. Find the best way to communicate your KPIs
It’s always wise to think about how best to communicate your KPIs so their insights are obvious, engaging and apparent to all. So many KPIs are reported in long reports full of numbers or tables, perhaps with a traffic light graphic to indicate urgency. This is not good enough. There is absolutely no point hiding important insights in excessively long reports that no one ever reads.
Really effective visualisations clearly illustrate trends and variations in data, and engage the reader. Try to find the right picture for your KPIs and create an explanation of the insights so that the nuggets of wisdom extracted from the data are clear, unambiguous, accessible and, most importantly ,actionable.
10. Review your KPIs to ensure they help improve performance
If a KPI isn’t useful in helping you or others in your business make better decisions, which, in turn, will improve your business’s performance, then it’s just noise. You therefore need to constantly review the metrics you are measuring to make sure they are genuinely useful and you aren’t spending hours (or asking your staff to spend hours) measuring data simply to tick off boxes.
Used properly, KPIs provide a vital tool for improving performance, making better business decisions and gaining a competitive advantage. I hope these 10 steps help de-mystify KPIs and provide a simple framework for making KPIs work in your business.
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Bernard Marr is a bestselling author, keynote speaker, and advisor to companies and governments. He has worked with and advised many of the world's best-known organisations. LinkedIn has recently ranked Bernard as one of the top 10 Business Influencers in the world (in fact, No 5 - just behind Bill Gates and Richard Branson). He writes on the topics of intelligent business performance for various publications including Forbes, HuffPost, and LinkedIn Pulse. His blogs and SlideShare presentation have millions of readers.