KPIs Should Actually Reflect Business Reality

KPIs are an important tool to help us explain progress towards our stated goals and strategic priorities. Despite their usefulness in helping us understand where we are coming from and where we are going, KPIs are not well understood in many business settings. The key part is the one that is a significant problem. One of the first challenges faced by management and executives is determining what makes a performance indicator key.

Not every performance indicator is key. For a measure to be considered key, it must focus on what really matters to the decision makers, prompt action when things have gone wrong, alert when performance is fading, and motivate when everything is going well. The fact that you have a list of measures that you are tracking on periodic basis does not necessarily mean all of them matter. For me, KPIs are those critical few measures that drive the achievement of strategic objectives.

In other words, KPIs represent the measures that an organization relies on to monitor and drive business performance. Since these key metrics are relevant to a particular company, management should not feel compelled to create KPIs with the sole intention of replicating those reported by their peers. Although there are standard measures for each industry or sector, not all companies have the same strategy, objectives, initiatives, priorities, capabilities, data sources etc.

As a result of these differences, companies prioritize metrics differently and assign different weights to their objectives. Thus, the key to unlocking performance measurement potential is linking the process to your organization’s strategy and objectives. Considering the fact that your value proposition and business drivers are unique to you, your KPIs should also be unique to your organization.

Linking KPIs to strategy enables you to assess whether the strategies adopted by the company have the potential to succeed or not and this allows you to proactively take corrective action where and when necessary.

In current times of increasing economic uncertainty, digital disruption, changing business models, constantly shifting customer habits, rising regulatory pressures and increased competition and complexity; new strategies and objectives emerge questioning the relevance of KPIs used to monitor performance in previous periods.

The KPIs chosen to track performance and provide decision support must continue to be relevant over time and help executives develop a deeper understanding of the business. Thanks to developments in new technologies, organizations now have access to new and more critical information which in turn is facilitating reporting of new KPIs that accurately represent the organization’s strategy, the performance against which determines success.

Since KPIs helps us identify, explain and resolve critical performance issues that are instrumental for the overall success of the business, functional managers should regularly question the significance of the current set of KPIs and determine if they are actually supporting executives in making effective strategic decisions. Performance indicators that are useful cover all business areas and activities, and empower decision makers to conduct an impartial review of the business.

They also allow collaboration between functional teams and support synergies by underlying the impact of decisions taken by others on the overall performance of the company.

It is no secret that today we are living and working in an information age where information overload has become the norm. There is so much information out there to the extent that decision makers are also experiencing this information overload and don’t know what to do. In some organizations, functional teams are obsessed with measurement and have now forgotten the true meaning and objectives of metrics. The temptation to measure everything that can be measured is significantly high.

We cannot measure everything just for the sake of measuring. We need to measure only that which is critical and are able to actually do something about it. Managers or those individuals tasked with creating and monitoring performance metrics should regularly ask themselves one of these two questions – (1) Are our KPIs presented in isolation from the organization’s strategy or objectives? (2) Are our KPIs adapted to their target audience?

You don’t want to waste ample time and resources measuring those metrics that lack any insights for strategic decision making. In most cases, when KPIs are developed in isolation that is when companies end up watching a long list of measures. What you need instead is to focus on only a few metrics that are actionable, bearing in mind that the number of KPIs to measure depends on your target audience.

Executive and operational scorecards normally have a different number of KPIs to focus on. However, understanding how executive metrics and operational metrics align and support each other is crucial. This helps address the problems arising from redundant or contradictory metrics.

Defining the right KPIs and linking them across all levels of the organization to drive consistent execution is key to achieving breakthrough performance.

Remember, not everything that is measured is managed.