How Selecting Meaningful KPIs Will Improve Performance Management
by Aaron Nelson on December 22, 2014
Data collection and integration is an important part of the continuous improvement process. It helps form a feedback loop so that processes can be improved and that improvement can be tracked and measured. This is done through the utilization of key performance indicators (KPIs) with the aim that companies can improve efficiency (aka “the art of doing things right) and effectiveness (“doing the right things”). By developing meaningful Key Performance Indicators, you will be able to directly correlate actions and results, while measuring, managing, and growing your business.
In the initial stages of developing KPIs for your business process, it is important to think about your company’s goals, identify ways in which those goals can be measured within each department, capture data from each business process, summarize it in a scorecard, and share with your staff. Measured KPIs will identify areas of weakness and highlight opportunities for growth; this will keep your business moving in the right direction, and support strategy campaigns that provide visibility into each department’s strengths and successes.
Start by analyzing affinity within your company. Corporate goals and strategy will not always align with individual goals and strategy. Take for example a manufacturing company. An individual shift worker may be incentivized for how many pieces he produces, but if he is rushing through the process too quickly and quality suffers, the company loses money. In this case, the manufacturer would be better off giving incentives for how many pieces pass quality inspection, instead of focusing on volume alone.
Once any misalignments are clear, you can work on aligning goals throughout the company and its supply chain. This is what IKEA did when the company wanted to increase the use of renewable materials and reduce waste throughout its production process. The company identified its goals for IKEA Way program for “Purchasing Home Furnishing Products” (IWAY) by specifying environmental expectations for its suppliers and provided preference to those companies who can commit to the sort of large volumes IKEA needs while agreeing to contribute to the company’s overall goals. One way this happens is that IKEA’s suppliers deliver directly to its stores rather than a warehouse. This reduces management costs, handling costs, and the company’s carbon footprint. This small step exemplifies how aligning goals across the supply chain makes a difference.
That’s not to say that each store or location has to have the same exact goals. In fact, as long as all roads ultimately lead to supporting the corporate goal, it may be better to individualize KPIs by location or outlet. Tesco is a major supermarket chain in the UK. When the company analyzed its data, it realized that each of its stores have completely different buyer trends, and they kept that in mind. Rather than set a company-wide standard for performance, the company individualized the appropriate performance standards for each store and gave each one its own target KPIs. Not only did this set a standard within each store for how business should run, but it allowed the corporation to develop growth and improvement plans tailored to each location.
Keep It Simple
While ratios may make profitability more visible at a management level, it is generally best to keep KPIs simple. The easier they are to understand, the easier they are to improve. For instance, when Leyland Trucks wanted to improve transport quality, the company went straight to the meat of the matter and set a goal to reduce the number of breakdowns and mechanical failures. The simplicity of this metric made it easy for everyone involved to see how the company was doing and the outcome of improvement processes were clear. Expectations and progress were clear and simple.
Tie Metrics to Actions
Another reason Leyland Trucks had a good KPIs is that they were actionable. By measuring how many breakdowns and mechanical failures the company trucks experienced in a certain period of time, the actions necessary for improve the measurement and management of these trucks became clear. While some breakdowns are natural, regular fleet maintenance and taking steps to ensure the quality of any repairs would greatly reduce the number of breakdowns.
Avoid Vanity Measurements
As ineffective as an overly complex measurement may be, vanity measurements can be even worse. Vanity measurements are numbers that make your company look good but lack substance. A great example here is website pageviews. It is an important metric to keep an eye on, but ultimately the number of people visiting key pages, filling out contact forms, and returning to your site as a resource — will far outweigh the value of a pageview metric.
Adobe found this when they looked for ways to develop their enterprise strategy. Rather than look at vanity measurements, the company analyzed each individual product’s growth and trends. Adobe found that their Flash software was very popular with larger organizations, but Flash did not fit into the suite of products that the sales team was pushing. This knowledge led the company to take steps to identify and reach out to the niche that uses Flash most. Adobe found that this niche had completely different decision makers and was able to add a dedicated team to give that niche the attention it deserves, driving sales and increasing adoption rates.
Know Your Industry’s (And Your Department’s) KPIs
While it may be tempting to rely on universal business metrics, it’s important to use the unique KPIs that matter most in your industry. Asking “why does this matter?” will aid in putting any metric or performance indicator in its proper context and will help you see whether that measurement is actually relevant to your current goals. For example, accounts receivable departments often refer to DSO (Days Sales Outstanding) as a metric for efficiency. DSO shows the average number of days it takes a business to collect revenue after the completion of a sale. This performance indicator is particularly useful to AR departments as it provides discernment into delinquencies.
At D&S, we’re experts in identifying metrics that help us improve efficiency, performance, and ultimately guide us to obtaining the best results for our clients. Based on insight from our KPIs, we constantly reevaluate and, when necessary, evolve our processes and strategies. Contact us to learn about the customized solutions we create for our clients.