Key Performance Indicators (KPIs) are values which demonstrate an organization’s performance, strengths, and opportunities for improvement. Effective design and clarity of scope are crucial fundamentals in establishing and maintaining value added business indicators. When initially determining the nature of KPIs to track within a business unit, it is a common mistake to cast a wide data net. This can lead to a large number of KPI data sets which cannot be sustained and do not facilitate improved business operations. In order to maximize the benefit to an organization, KPI objectives must be investigated, defined, structured, and governed.
Key Performance Indicator Determination and Selection
It is crucial to align all tiers of key performance indicators to an organization’s corporate goals. As KPIs can be captured at every level within an organization, each functional area’s goals should be considered when establishing a KPI library. As some “higher level” KPIs may focus on personnel performance and financial budgetary activities, many of the more detail level KPIs can focus on issues concerning the processing time of a particular activity and the bandwidth of team members within a group, to name a few. KPI alignment with an organization’s corporate goals will ensure that team members at all levels within the company will derive value from the data.
While keeping an organization’s corporate goals in mind, it is also important to track KPIs for activities which can facilitate growth and improved business operations. Many believe that the goal of KPI tracking is to set and meet targets. This is a common misconception of the true purpose of this type of performance management tool. Associating KPIs to business operations which are already being executed at a high level of efficiency will only prove what is already known – things are going well within that particular function.
Real benefit is derived from tracking activities which have improvement opportunities in the form of efficiency, decrease in processing time and cost savings. It is felt by some that tracking and reporting data which highlights an organization’s weaknesses can lead to detrimental consequences to personnel and to the organization as a whole. It is the responsibility of the leadership team within a company to ensure that this fallacy is invalidated. KPIs should not be utilized to penalize members of a functional group or to place blame on particular functions or operations. The data derived from KPIs should be used as an indicator of where an organization can improve. This data can also be utilized to assist in the root cause analysis of how or why a particular function is not performing at the desired level.
Structure and Governance
Once a particular KPI has been selected and vetted through the necessary channels in the organization, the next step is to build the structure around how the KPI will be governed. This can be formalized within a specification or it can be managed through an informal document within a business unit. In either case, it is critical the KPI structure be agreed upon and documented. The following is a breakdown of the various types of structural governance that should exist for each KPI within an organization.
This section should clearly identify what is being measured through the particular KPI. The description should be self-explanatory requiring no additional information in order for it to be understood by any member of an organization.
This area of the document should outline the potential benefits of tracking the particular KPI. KPI benefits can be realized at all levels within a company and each should be well documented in this section of the document. Illustrating the benefits of the KPI in this manner will ensure that the data associated with this metric will add value to all levels of the organization.
Performance Goals / Industry Benchmarking
The performance goals or targets associated with the KPI should be established and documented clearly. This goal can be set at the onset of the tracking cycle but should be adjusted as data is collected and reported. It is rare that initial targets remain constant throughout the lifespan of a KPI. Some KPIs are common throughout the industry and in these cases industry benchmarking data should also be included in this section to validate suggested targets.
Within the data source section, all primary and secondary contributors of source data should be clearly identified. Most KPIs are tabulated from a variety of source data sets. It is critical that all sources are accounted for and well defined. It is also important to indicate which group supplies each data set. The format and frequency of the source data should also be documented in order to facilitate the determination of the final KPI output time interval.
Format and Frequency
The format of the KPI output should be documented at the onset of the tracking cycle. Some formats can include graphs, data tables, charts, etc. It is important to select a format which displays the KPI data in a clear and understandable fashion for all potential customers of the data. This section of the KPI specification should also indicate how often the KPI output will be supplied.
Adapting to Key Performance Indicator Results
When evaluating KPI data outputs, it is important to understand whether the data is considered to be “leading” or “lagging.” Leading KPIs are typically influenced by the types of “inputs” that are associated to the particular function. For example, the amount of time that is spent on a particular activity in order to complete the activity by a specified deadline can be an “input” leading indicator. Meaning, if the amount of time spent on that activity increases, the likelihood the deadline will be met will also increase. Lagging KPIs are usually outputs of past performance and are much more difficult to influence in a positive manner. A good example of a lagging KPI is the amount of money spent over a specified period of time to outsource a particular activity. Both types of indicators can add benefit to an organization, however, there should be a healthy mix of indicator types within a company’s KPI library.
Once data has been collected for a meaningful amount of time, process improvements can begin to be evaluated. The amount of data that should be evaluated for a KPI will obviously vary based on how often the data is reported and the frequency with which the subject of the KPI occurs. It is important not to make “knee jerk” reactions to unfavorable data. Many organizations are over eager in their desire to make process improvements once KPI data begins to accumulate. It is important leadership teams be patient to allow trends to be established for the KPI activity before any adjustments are made in the organization.
However, once enough KPI trend data has been collected, it is vital steps are taken to utilize the information to make positive changes within an organization. If the data is not utilized to improve business operations, the value of the KPIs will diminish to the point of nonexistence. Team member engagement will also continue to decrease if steps are not taken to utilize the KPI data in a positive manner. It is essential to remember that the root cause associated with most organizational challenges are multifaceted. With that in mind, process improvements must be calculated and singularly focused. Changing multiple facets of a particular process concurrently will challenge an organization’s ability to determine the effectiveness of the process improvement. The most import part of the KPI process improvement cycle is action. However, the actions taken must be controlled, measurable, and aligned with corporate objectives.
Effective KPI adoption within a company is a process similar to any other organization change. The process takes time and engagement at all levels within the organization. KPI implementation sponsorship at the leadership level is crucial to the successful implementation of meaningful performance measurement tools such as KPIs. However, it is the responsibility of each member in the organization to find value and derive benefit from the data collected within key performance indicators.
Associate Director Business Process & Integration