Performance improvements require goal-directed action. Michael Carman outlines some of the tips and traps in utilising key performance indicators.
Driving improvements to performance is not the result of arcane processes or esoteric formulas. It is, rather, the result of sustained, focused and goal-directed action.
What is understood by many people, but practised by few, is that to improve performance it is necessary to define those areas in which performance really counts. Efforts can then be focused on improving results in those areas. And nothing sharpens the focus on results better than having a clear set of key performance indicators (KPIs).
KPIs can encompass any area of an organisation’s activities: they can be financial (for example, the return on assets), operational (defects per production run), customer, community or staff-related (customer satisfaction or staff survey scores) or community/stakeholder oriented (dollars given to support community organisations).
They are used by many businesses and organisations, not the least of which include McDonald’s (see Management Today, March 2009, p.11) and coffee and food supplier Cantarella Brothers (which supplies the Vittoria and Aurora brands of coffee).
Here are some tips and traps to guide you to an effective use of KPIs for your organisation and the improved results that can follow.
Tip: Don’t be surprised if defining KPIs and result areas is trickier than you think
Most businesses would maintain that growing profit is their key objective and KPI. But profit is derived from other things: so what levers do you pull to boost profits?
For example, a firm in a growth industry may be focused on differentiating its products from those of its competitors: its KPIs will probably reflect market penetration, market share, response rates and so forth in its effort to grow profits.
On the other hand, a firm in a mature or declining industry whose products are commodities will be more likely to have KPIs that reflect its efforts to control and reduce costs. The point is that both firms are businesses that want to increase profits, yet they have different means of accomplishing this and, hence, different areas of focus for performance and results. The result is, therefore, different KPIs.
KPIs must reflect an organisation’s strategy; its way of doing things and allocating resources. So it’s entirely understandable that if the latter hasn’t been fully articulated, the former (the relevant sets of KPIs) won’t be immediately obvious. And that’s without considering the many other objectives faced by businesses, or that confront public and non-government organisations alike.
So don’t be discouraged if KPIs are not immediately obvious or generates much debate within senior management; this is actually very healthy and is vital if organisational efforts are to be focused.
Tip: Pull KPIs together into a scorecard or dashboard
The well-known Balanced Scorecard, developed by Robert S. Kaplan and David P. Norton in the 1990s, popularised the idea that performance results could be summarised on a page of KPIs; in this way, performance across multiple areas could be seen at a glance. (Kaplan and Norton’s other main idea was that these scorecards should show performance under the four headings of Financial, Customer, Internal, and Learning and Growth.)
Many performance dashboards also have traffic light indicators of red, amber, green to show whether performance is within certain ranges of acceptability or desirability. Some organisations have invested in software packages that automatically pull together performance data and produce summaries.
You certainly don’t have to have these to produce a set of performance results: a manual process that produces a summary spreadsheet or document will do the trick. But if a software package helps the process, then so much the better.
Tip: Report performance results regularly and candidly
You’ve clarified the areas of organisational focus and the KPIs that track progress, and assimilated them into an intuitive, easily understood dashboard. Now what?
The next segment of the performance-management loop is to report performance against those feedbacks to the decision makers who can understand and interpret what the results are saying, and take action. This may result in corrective or bolstering action depending on the results. The beauty of having concise performance summaries is that management attention can be focused immediately on areas that need it. The scorecard KPIs act as a flag for areas that require investigation and action.
Trap: KPI results get fudged
To have value, the KPI summary has to be a true and accurate reflection of the known data. Any fudging of results, for whatever reason, will undermine efforts to improve performance. Candour, a notion given airplay by one of the most successful managers to improve results, Jack Welch, is vital.
Trap: A performance-reporting bureaucracy is born
There’s a very real risk that performance scorecards and dashboards can take on a life of their own as bureaucratic inputs, and their impact as tools for driving improvements to performance gets mired in a welter of process concerns or office politics.
In a cruel irony, the devices that are supposed to lead to improved outputs, greater focus on increased revenue, faster customer response, and so on, can become burdensome inputs; fiddling over the choice of KPIs or definitions and the weight of compiling data and reports overshadows the very real benefits offered by systematically monitoring performance. This needs to be avoided. The next tip shows how.
Tip: Ensure each KPI has an owner
Ensuring that each KPI has an owner who is accountable for providing an explanation of performance to management at regular intervals (or when there is a marked improvement or deterioration in performance) forces someone to engage with what’s going on operationally.
Even if more than one organisational unit’s activities impact on performance, as will most likely be the case, if one party has responsibility for ‘telling the story’ of performance shown by a KPI, then someone in the organisation is forced to think through performance and keep the performance- management effort fresh and alive.