The problem isn’t using KPIs (Key Performance Indicators) for business performance measurement. The problem is with KPIs themselves. Often KPIs are poorly chosen and misused, producing numbers that no one understands or that aren’t very useful. And they mostly tell you what happened but, rarely why.

For KPIs to be valuable they should be actionable metrics that immediately inform how things are progressing and what activities should be taken to improve performance measurement. KPIs should require little or no interpretation. When properly set up, KPIs deliver exceptional insight into how business is performing and what to do to affect change.

KPI Issues

Tracking business success is difficult. It’s complex to figure out what to measure, so most companies monitor values that seem important but actually are not. That may sound ridiculous, but it’s true.

According to Dean R. Spitzer, 93% of organizational leaders believe that measurement is important in influencing business outcomes, but only 51% are satisfied with their current systems, and only 15% are very satisfied. That’s a terrible gap in expectation to reality.

KPIs are overused but underutilized. Companies often spend months trying to establish effective KPIs to improve business performance measurement, but they are often abandoned shortly after implementation because the numbers being tracked are ill conceived and not suitable, so users quickly lose interest. That’s mostly because what’s often called a KPI isn’t key to the business at all.

KPIs are a great way to help identify how your business is performing, but if they aren’t well conceived, you may be relying on faulty values which may cause more harm than good.

KPI Definition

A KPI is a metric that informs how your business is doing. Many people confuse measures and metrics, so let’s define them:

Measure is a number that is derived from taking a measurement. A measure is the observed value of a number at a point in time. Measures are raw numbers and data points found in data or reports; often in corporate databases, call centers and other data silos. On their own, measures deliver little value.

Metric is a value derived or calculated from measures. Ideally, it should be expressed as a ratio, average, percentage or rate.

For example, ‘in-store visitors’ is a measure, while the ‘percentage increase of in-store visitors’ is a metric. Simply knowing how many visitors we had at a point in time delivers no real insight unless we know how many we had before. The calculation to arrive at the metric does that for us. So, by monitoring the metric we better understand how store traffic is changing. That may be very important to know when evaluating how promotional programs are driving customers to stores.

Since there are hundreds or even thousands of measures and metrics produced in our daily corporate lives, KPIs should only focus on the ones that are essential or impactful to business performance measurement. A KPI, as the name implies, measures key items that are necessary for success. They should monitor actions and events that tell you about performance.

KRI (Key Results Indicators) Definition

KRIs measure the results from your many business actions, whereas KPIs track specific actions or activities. Don’t confuse the two. KPIs don’t measure goals; KRIs do. Unlike KPIs, which measure the precise actions we take to obtain certain results, KRIs report on results of many activities, are backward looking and inform what has happened.

KRIs measure the effect of business activities but ignore the cause. Revenue, ROI, product efficiencies, staff turnover are KRIs and only inform how you did but not why. For that we need to establish KPIs.

Monitoring Revenue is obviously important, but if it changes, you don’t know precisely why and what to do differently. Instead, you need to track the activities that caused Revenue to change. Those activities are tracked with KPIs. If one of those KPI values changed, you know exactly what action to take.

The reason we make the distinction is that many people incorrectly track the results of many actions or activities and call them KPIs. It’s certainly important to track goals, but you don’t know what caused the goal to be reached or not if you don’t track the actions or activities that align with those goals.

What action would you take if revenue dropped? To identify what you need to do, you will have to drill down further into the activities and processes that cause the revenue to change.

In his book, “Key Performance Indicators”, David Parmenter states that KPIs have a significant impact on the organization and that they must clearly indicate what action is required by staff. And that’s the part that most KPIs don’t do.

Just measuring high level results such as revenue or number of customers is a missed opportunity because it doesn’t answer how you got there and what should be done next. Instead, we need to evaluate the events that caused those results. Certainly, we can conclude that if Revenue increased to meet our goal, we succeeded, but we don’t know what we did that caused it. It could have been due to improved customer retention, higher conversion rates, better margins, more affiliate partners, more sales people, opening of new markets, new product launches and so on.

How and Why KPI Karta was developed

KPIs can create a great deal of consternation for companies and their teams. Numbers are being asked of people that don’t seem to make much sense. In our consulting to help clients better measure business success, we discovered that KPIs often didn’t align with overall goals. KPIs were encouraging behaviour inconsistent with what the company was trying to accomplish. And KPIs were causing frustration.

There were two reasons for that: KRIs were being used as KPIs; and KPIs were chosen from lists or inherited from past systems.

Our consulting showed us that the right way to select KPIs is to start with what the Goal of the company or team is. That seems obvious. But we didn’t start crafting KPIs from just the Goal. Instead, we then uncovered further layers in increasing detail to reveal strategic initiatives that eventually lead to actionable activities. That’s what KPIs should be based on. We delivered consulting workshops using this methodology for over 10 years to help clients create and track effective KPIs.

Once a goal is identified, we then look at what critical things need to be accomplished to meet that goal. We then look at the sales phase (acquire, engage, convert or retain customers) we are in. We then identify the customer segment we are targeting, and the overall approach we want to take, and finally what specific actions we are deploying. From there we establish KPIs and Targets for each Action.

This thought process creates a hierarchical, decision map. By showing the logical structure of how KPIs are conceived, team members understand how they are determined, what activities people are working on, and how their work affects business performance and the overall goals for the company. It’s valuable to see how work aligns with corporate goals and that work assignments make a difference.

 Calculating the right KPIs

Although the following example is about marketing, the logical flow is the same for any business discipline. Saying that gaining greater blog activity will increase Revenue is a flawed approach and not well thought-out. That’s just guess work and people don’t buy into targets if they are not supported by logic.

Instead, figure it out systematically.

1. You might say that your goal is to increase Revenue;
2. a critical item to accomplish that might be to improve your overall presence in a certain market;
3. to do that, the salesphase is to acquire and engage with;
4. the customer segmentof engineers in North America;
5. the overall approachwill be to show thought leadership; and
6. the action to accomplish that may be to blog regularly;
7. you establish a KPI to monitor Percentage increases in blog interactivity; and
8. you set a target of 5 interactions per month and a 20% increase in blog interactions for each quarter. Or you might add a KPI to monitor how engaged your blog posts are by tracking comments people leave and how that improves over time.

As the example illustrates, there is a logical flow to decision making and in the evaluation of what is important to do. It shows an increasingly detailed dissection of the work or processes needed to accomplish the stated goal. What we have done is to make increasingly more refined decisions to arrive at effective KPIs and the targets we will assign to them. Here are the building blocks we used:

The KPI Karta subscription service offers a cloud-based service that mimics the workshops we have delivered guiding clients through the process of building these hierarchical maps. Here’s an example.

Show your work-just like in grade school

“A mere 7% of employees today fully understand their company’s business strategies and what’s expected of them in order to help achieve company goals,” according to Harvard professors and co-authors Robert Kaplan and David Norton. By establishing KPIs that align with corporate goals all team members feel more engaged because they can see how their work affects the bottom line.

Creating KPIs in a logical, structured way, using the KPI Karta methodology, helps identify what to measure, and it also shows others the roadmap of how you got there. That provides several advantages because it shows:

• progress of critical work
• who is responsible for each activity
• everyone that what they do is important and how their work directly drives corporate goals and objectives
• how much has been accomplished

Be open about your KPIs. Tell the whole company about them. Make results visible for all.

End-game

We created KPI Karta to make it easier for organizations to figure out what numbers they need to track, and to then monitor them. This new cloud-based service mimics the successful consulting we have delivered for years in live workshops.

We hope you like it!