Three fundamentals of Key Performance Indicators
Figure 1: Mockup of a KPI reporting dashboard
Measuring performance seems complex (and it is) but let's not lose sight of the basics. The trick with key performance indicators (KPIs) comes down to three questions:
What is KEY?
What is PERFORMANCE?
What are INDICATORS?
What is KEY?
What do you care about? You could apply this question to your personal preferences in life but what we are talking about here is what is important to your organization. Organizations don't have a single identity. Often you're trying to amalgamate a variety of disparate views, values, and opinions. Policy, organizational objectives and strategy documents, and one place to find those views. In the end, however, someone needs to be accountable to define what is actually 'important.' This could be the CEO, the budget holder, Chairman of the Board or the line manager responsible for that specific area, but you need to know exactly who. Only a single person can be accountable for determining the meaning of key, performance, and indicators. Committees can't-do it. If a committee is responsible, nobody is accountable.
Here are a few questions that might guide your investigations when establishing what is 'key':
What is the scope of this KPI? The whole organization? A small project? My workgroup?
What couldn't the organization survive without? You could take a 'red team' approach to this by getting a team together to ask "How could I cause this organization to fail?"
What are we trying to achieve here? Ie. What are the objectives of this organization/group/project?
Figure 2: Example KPI Dashboard
What does PERFORMANCE mean?
As the cliche says "what gets measured, gets managed." That's not true (see my previous article on this topic) but it is essential to have some metrics. That means you either need to ask binary questions (Eg: Is our gross profit greater or less than 10% of turnover?) or measure it quantitatively (Eg: What is our net profit?).
In some cases, you might also choose to use some semi-quantitative questions. These aren't quite as good as pure quantitative data but can at least provide some ordinal measure (Eg: Is the organization improving our score each year?). A simple example of a semiquantitative score is in the figure below. This example converts some basic 'word pictures' into an ordinal scale. One of the limitations of this scale is that it's subjective. That doesn't mean that it's not useful, but it means it has limitations. If you can think of 10 or more areas to measure, and are rigorous with developing the criteria for each of the four grades, you'll end up with a good idea where your weaknesses are. You'll also gain an insight into how you are tracking over time.
Figure 3: Example of a Semi-Quantitative Scale
Here are a few questions that might guide your investigations when establishing how to measure 'performance':
What is the timeframe that I'm interested in?
What would we consider as catastrophically bad?
What would we like to be able to report to the Board/boss/shareholders?
Would data would we need?
What information/data/statistics do we already have?
How much would it cost to get ALL the data that we'd need and how would we go about acquiring it?
What INDICATORS will give me the information I need?
What are the metrics that can help us measure our performance? This question above all others is dependent on context. Here are a few questions that might help with developing 'Indicators'':
Would data would we already have?
What information would we like that we don't already?
How much would it cost to get all the data that we'd need and how would we go about acquiring it?
Are there industry standards or legislated reporting requirements that we can piggyback on?
What compliance framework do we already have?
What systems (accounting, safety, incident reporting, sales, etc.) do we have in place? How could I change or integrate those systems to get a better result?
Which are lead and which are lag indicators?
Last but not least...
Keep at it. Ask lots of people for help, input and go with the simple questions. What's important to you? How would you measure it? What information would help you understand the business? Once you can get to these answers, (which is every bit as hard as it sounds) you have the exact set of KPI's your organization needs. More is waste; less is negligence.