Businesses tend to lean towards objective metrics, but qualitative aspects are critical because they have a very high impact on performance
KPIs (key performance indicators), are an essential tool for all the areas of business management. KPIs are a set of measurement tools that provide quantifiable values used to verify the degree to which an objective has been met.
Objectives can be financial or non-financial. Some examples of financial objectives are: increasing earnings before taxes by 7% next year, positioning ourselves among the five largest companies in our sector, lowering certain expenses, improving the ROI, etc. Examples of non-financial objectives are: attempting to enter a new market, launching a certain product before the competition, positioning ourselves as a reference in using a specific manufacturing technique, etc. The concepts can even be more ethereal, such as being known for our work-life balance practices, increasing customer satisfaction, or conveying an image of being a technologically innovative company.
Businesses tend to lean towards objective metrics, but qualitative aspects are critical because they have a very high impact on performance. And performance must be measured. Business practices have resulted in the classification of many KPIs, but creativity is just as important. For example, how do we measure the degree of customer satisfaction? Through the use of surveys, of course. However, they cannot be the only indicator because it is well known that surveys are not always filled out with a high degree of sincerity or attention. A multitude of digital tools are currently available that allow us to analyze consumer behavior in order to deduce opinions of our product or service. With a little imagination, we can create new methods, adapted to our specific needs, to obtain more detailed information about what drives our customers.
In order for a KPI to be useful, it must fulfill a series of conditions that are summarized by the SMART abbreviation:
The obsession with KPIs is a source of major inefficiencies in many organizations. Data is sometimes accumulated with no rhyme or reason, with the high cost of the non-productive time that this entails.
Applying KPIs consists of five consecutive phases:
- Answering “for what?“
- Identifying the key indicators (relevant, achievable…)
- Collecting data
- Interpreting the data obtained
- Making decisions
Starting with the first point, how do I decide what my objectives are? This is undoubtedly the most important question regarding KPIs. It is not so much a matter of how we use them or how we obtain accurate and useful data for decision making, but rather what we use KPIs for. In other words, for what purpose? It is surprising the ease with which endless lists of KPIs appear in a report if there is no focus.
We must ask ourselves, just as a trainer: Why? Or better yet, we should ask ourselves this question three times, just like Korean executives do before accepting the answer: Why? Why? Why? The reason for insisting is that each time we ask ourselves something, we are able to understand the question on a deeper level. Our colleague Pau Blasi describes a past situation in which, upon insisting on the reasons for measuring certain management parameters at a company, the person in question finally answered, “We measure them because a former boss told us to do so.” A sincere (but devastating) response to the question was obtained thanks to this method.
The obsession with KPIs is a source of major inefficiencies in many organizations. Data is sometimes accumulated with no rhyme or reason, with the high cost of the non-productive time that this entails. This is why it is important to know the ideal number of objectives to be monitored using performance indicators, and the number of performance indicators we need in order to measure each of our objectives.
Statistics and common sense provide us with an estimate. A standard strategic plan is usually divided into four levels: business vision, market and customers, processes and organization, and future challenges and staff. At most companies, each of these four levels has between three and five associated objectives. If there are less, then essential aspects within the organization are likely to be omitted; if there are more, then perspective may be lost as to what is truly important. To know the degree to which each objective is fulfilled, it is advisable to have as few measurement instruments as possible. In the best case, one indicator should be enough, although it is more common to find three to five indicators. With these references, most companies have between 40 and 80 KPIs in their first strategic level.
On the other hand, industry standards and the management culture at each company should be considered as additional factors in determining the type and number of indicators that are used.
These basic ideas, combined with small doses of common sense and experience, mark a major difference in how KPIs are managed. In a future article we will explain how these metrics should be expressed in reports in order to prevent questions like “What does a red zero mean?”