Aiming for the right key performance indicator (KPI) targets ensures that your business is on a trajectory for improved performance.
Read more: Harnessing KPIs for Better Business
Targets are about having an intended destination in mind; a clear understanding of where you’re heading as a business; that's the true intent of KPI reporting.
In the case of an Olympic sprinter, a target might be to shave one-tenth of a second off their 100-metre dash within the next three months. For a retail business, a target might be to increase inventory turnover (products sold compared to total inventory held) by 10 per cent over the next six months.
Consider a target as a pin on Google Maps, or a flag on top of a mountain—it’s a specific goal or destination that your business is moving towards. Most business owners are aspirational with goals of being bigger, better, and more efficient as quickly as possible. But when setting KPI targets, it’s important to show some restraint, be realistic, and move forward with your long-term strategy in mind.
Setting targets helps businesses to:
- Ensure staff have a greater focus on quantifiable outcomes,
- Have a stronger focus on executing strategic business goals,
- Make connections between staff and department objectives,
- Identify areas of the business that require improvement,
- Determine, measure and communicate expected levels of performance, and,
- Motivate managers and staff to bring about change.
A guide to setting KPI targets
1. Link targets to KPIs
You must show the relationship between a target and its corresponding KPI. A KPI is a measure of how your journey towards your target is tracking. It keeps you informed of your progress and performance.
To use the flag on the mountain analogy again, if you know that the peak is at 1700 metres, and your target is to reach the peak in five hours, an obvious KPI would be “elevation gained”. There is a clear relationship between your target (reaching the peak at 1700m in five hours) and your KPI (elevation gained per hour). If at the three-hour mark you were only at 400m elevation, you would know that you need to make changes in order to reach your target. If those changes can’t be made easily, it might also mean that your target was unrealistic to begin with, or that the plan to attain the target did not work.
A KPI example that does not work in that instance could be the number of steps you take per hour. You might find that you’ve taken 6,000 steps in three hours. However, you would have no idea how far from the top you were. The relationship between the target and the KPI is weak.
2. Set realistic targets
Managers and employees have to feel comfortable about trying to achieve your KPI targets.
If you know that the average time to climb a 1700 metre mountain is five hours, don’t expect your staff to do it three hours.
Setting unrealistic targets lowers staff morale and can lead to either burnout or staff not even attempting to reach the target. You should be able to look at past KPIs and data trends to get an idea of what’s achievable over a certain time period and what’s not.
3. Does everyone agree?
Make sure that the executives and managers responsible for hitting the target mutually agree that it is suitable and achievable. This can be done by setting KPIs and targets collaboratively as a team. Ownership of a target is crucial to get buy-in from the team.
Managers of a business unit or department can sometimes have a better idea of past performance and what their staff are capable of than the business owner. Make sure they buy into your targets. That way, there will be a greater chance of reaching your strategic goals.
4. Mitigate risk
Business owners and managers need to strike a balance between setting high expectations to encourage greater performance, without inciting risky behaviour.
This is again walking the line between being aspirational and effective. Setting the bar too high can result in shortcuts being taken that, in the long run, can be detrimental to a business. To use the mountain analogy again, expecting someone to climb to the peak in three hours might lead them to looking for a faster route and getting lost, or pushing their physical limits and getting injured.
Always strive for greater performance, but take a balanced approach.
Playing the long game
It’s is a good idea to set targets for the long-term and short-term that align with the overall strategic direction of your business.
For example, you might have a five-year plan to grow revenue, or market share by 20 per cent.
To achieve that, you should be setting intermediate and long-term targets for around the three and four-year marks.
You will also have short term targets (potentially measured daily, weekly and monthly) that track your progress en route to your final destination.
Learn more about using KPIs to maximise your business performance in our free ebook!