5 Steps to Developing Practical KPIs

If You Can’t Measure It, You Can’t Manage It

Yes, it’s a well-worn business cliché, but the thing about such statements is they only become clichés if they are around for a long time. And the only reason this particular statement has been around for a long time is it’s so true!

To allow a business owner or manager to get a clear picture of where a business is heading and when intervention might be needed, it is good to look at the big picture. Look at trends and when there is deviation explore why this as occurred and what need to be done to address negative trends or exploit positive trends.

KPIs (Key Performance Indicators) are a critical tool for any manager wanting to stay on top of their business and understand underlying trends – sadly many owners and managers fail to implement a sound practise of performance measurement and are left ‘wondering what happened’ while they were micromanaging their team.

Measuring core efficiencies at different points in the business (individual, region, product, process etc) can provide indications of poor performance and allow early intervention. Conversely, unexpected upturns in business should be investigated to determine if there is a measure problem, poor KPI been set or, hopefully, capture ‘what went right’ so it can be reproduced.

What you measure will vary from business to business and any specific areas on which you need to focus. Here are 5 basic steps to help you develop practical KPIs for your business.

  1. Define your core processes

Determining the right points to measure performance, you need to first clearly understand the processes within your business. Of course you’ve got the high level process of enquiry – delivery, but there are many more processes within this high-level process – sales, supply chain, manufacturing, delivery, customer support etc. Drawing a simple flow chart of your key processes will help you define to most critical steps that you can control, measure and improve.

  1. Allocate roles and determine goals

Goals should be set at a business and process level. Once you have set your overall business goals, work backwards to determine the goals within each area of you business. At each step in your business processes you need to allocate ownership. In smaller businesses, one or a few people may have responsibility for the entire or several processes, but what is important is that someone is accountable. Sales Managers may be responsible for revenue goals, Operations Managers for production goals, Logistics Managers for delivery goals etc.

  1. Identify your Critical Success Factors

Critical Success Factors are the limited number of activities that need to be focussed on to achieve success; to achieve your goals. These will vary from industry to industry, business to business and department to department.

For example, over the next year you may want to increase sales by 10%, decrease delivery time by 5%, reduce the ‘time to construction’ in a building company by 5%. This is a key part of the KPI design process and should be undertaken with vigour and where appropriate should include the staff members identified in Step 2 above.

  1. Establish you KPIs

Once you understand you goals, who owns each goal and your Critical Success Factors, it is time to delve deeper and determine the specific measurements that allow you to track your progress in achieving your goals and delivering on your CSF’s. To simplify this explanation, below are some real world examples:

  1. Sales – over time a client has developed a very good understanding of his average sales value and from this knows the number of sales required to meet his revenue goals. His sales and marketing teams have set KPIs relating to the number of enquiries generated/month, the number of proposals/enquiries, the number of orders/proposals.
  2. Construction – a builder knows that the time from the client agreeing to proceed to starting construction is critical to his cashflow (home builders in Australia get a significant percentage of revenue relative to costs when construction starts). He has control over the activities prior to the development application being lodged with the relevant authority and then from when approval is received to when construction starts. Knowing this he has developed a small number of KPIs relating to contract signing, development application submission and construction preparation
  3. Customer satisfaction – using a simple Net Promoter Score survey, a client is tracking their customer satisfaction performance.
  4. Website performance – number of visits, page views, bounce rate, time on site are simple indicators that are found with Google Analytics. Tracking these key stats has allowed many of my clients to fine-tune their website and online advertising to increase customer engagement, enquiries and sales.
  1. Measure and Report

KPIs are useless unless measured, reported, reviewed and acted on in an appropriate manner. There are many software programs and Apps that will help you report on your KPIs, but I find the easiest way to get started is using a simple spread sheet. Track you performance at the times you have set and generate a line of bar chart for each KPI. With these you have a simple ‘dashboard’ that shows you the trends, quickly identifies deviations from the goals and allows you to investigate further – is the deviation and anomaly, seasonal or is it a warning of problems that need further investigation?

There is plenty of information available online to help you determine the most appropriate KPIs for your business. What is important is to remember the old management adage that has stood the test of time, “If you can’t measure it, you can’t manage it“, so start measuring.

 

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