It can be fairly straightforward to define financial KPIs, such as a measure of total revenue, as it’s one of the most obvious indicators of business performance, but be mindful of the impact KPIs can have on employee behaviour. For example, a revenue KPI could incentivise the sales team to make sales at unfavourable margins to meet targets.
KPI selection becomes more complex when applied to subjective or vague areas of a business, such as customer or employee satisfaction, or the quality of a product, process, or service.
Here we set out a framework that business owners and managers can use to guide them through the KPI selection process.
The KPI selection framework
1. Set your objectives
The first step in choosing your KPIs is deciding what outcomes you are working towards. This generally starts by identifying a problem or situation in your business, which leads to an objective and should be directly linked to your strategic goals.
For example, you might be getting a high number of customer complaints. An objective might be to increase the number of training days per employee. You might start with a list of 10 – 20 potential objectives or problems you’d like to solve, but you will want to cut it down to five core indicators by the end of the process. To do this, you can study historical data to see if there are any worrying or encouraging trends. What you think is a problem might not be after looking at the numbers.
Tip: It can be a good idea to undertake this process collaboratively. Depending on the size of your business, this can be achieved by holding a workshop with all staff, or a meeting with the managers of each department. This can improve buy-in and understanding across the organisation and is likely to give rise to fresh and innovative ideas.
2. Set your targets
This is the aspirational part of the process. Decide how you would like the results to look moving forward.
For example, you may aim to reduce the number of customer complaints by 30 per cent over six months, or provide three paid training days for each employee per year. The goal is to set targets that are specific, achievable and actionable. They should clearly communicate expected performance and be quantifiable. Also, make sure you define the time period you are working within.
3. Filter (and filter again)
It’s important to put your possible KPIs through the ringer.
Filter the initial list down to a smaller list. Then filter them again, choosing the ones that are linked most strongly to your company’s strategic goals. You want to end up with a list of KPIs that will have the greatest impact on your business. We recommend choosing no more than five key KPIs.
Anything that’s vague or superfluous can go. The additional data will be there if you need it, but remember that these are your “key” performance indicators. This is all about measuring the metrics that will elevate the performance of your business and lead to you reaching your strategic goals.
4. Put processes in place
Now that you know what you’re working towards, implement processes that are going to help your staff achieve your objective or solve your problems. This could require a complete overhaul of current processes or a few tweaks, checks and balances to make things run more effectively.
Extra tips for choosing effective KPIs
In addition to the framework outlined above, these tips will help to add another dimension to your KPI selection process.
- Effectiveness before efficiency
Management consultant Peter Drucker wrote: “Efficiency is doing things right, effectiveness is doing the right things.” When setting KPIs, you first need to make sure you’re doing the right things. Effectiveness KPIs are tied to outcomes, solving problems, answering questions. Once these are in place and you’re on the right track, then you can look at how to implement efficiency KPIs.
- Financial before non-financial
While financial and non-financial KPIs are equally important, it’s likely that measurements, such as growth and revenue targets, will drive all other strategic goals. Therefore, it makes sense to set these KPIs before any others.
- Output before input
It’s only possible to start thinking about leading (input) KPIs once your lagging (output) KPIs have been set. For example, you must know what your production target is before you can put KPIs in place relating to the production process.
- Study your competitors
Understanding your industry and your competitors can assist you with setting your KPIs. A common way of doing this is benchmarking—measuring and comparing your performance against others, and then using lessons learned from the best to make targeted improvements. Depending on your industry, you can also compare your financial information against industry standards and historical data. Draw on a wide range of resources in order to choose the right KPIs for your business.