Scott Morris A handful of numbers, tracked relentlessly over a period of time, can be instrumental in driving success in your company. The challenge is to identify the Key Performance Indicators (KPIs) that will give you insight into the most important components of your business. You may not identify the right KPIs the first time, but once you do, you will transform your organization.

Key Performance Indicators
– A Definition

Key Performance Indicators (KPIs) are quantifiable measurements that provide a pulse check on the strategic direction of your organization. They represent the main drivers of your business and provide a way to monitor and measure execution. An effective KPI is predictive – it will foretell the direction or future success of the strategic outcome it measures.

Often, the best KPIs are ratios, because they report the performance of one component relative to another (i.e., hours worked versus hours lost to injury). In order for KPIs to be effective, they must be measurable on a regular and recurring basis, preferably daily or weekly.

The predictive nature of KPIs and their frequent analysis allows an organization to be proactive in its strategic execution, rather than having to rely solely on financial data, which reflect only past performance.

Key Performance Indicators must echo the organization's strategic priorities and goals, represent true precursors of its success, and be readily and accurately quantifiable. These measures help clarify the expectations of individuals and teams, who ultimately drive behaviors. The three crucial ingredients of a KPI are:

• Key: KPIs should be fundamentally important to the success or failure of your enterprise. In order to correctly identify KPIs, your organization must know its critical, long-term strategic priorities and targets.
• Performance: KPIs must be clearly measured, wholly quantified, and easily influenced by the organization through specific actions and desired behaviors.
• Indicator: KPIs should provide leading information on future performance.

Discovering Key Performance Indicators

For a Key Performance Indicator to make an impact, you need to find a way to accurately define and calculate it. "Generate More Repeat Customers" is useless as a KPI without some way to distinguish between new and repeat customers. Similarly, "Be The Most Popular Company" probably won't be an effective KPI because there may be no way to measure your company's popularity or compare it to others.

It is also important to define a handful of core, long-term Key Performance Indicators and to retain the same definitions from year to year. This provides you with trend information, which tracks the effect of your organization’s actions on your KPIs, and therefore the success of your strategic execution. Michael Dell of Dell Computers tracked three KPIs for years.

You also need to set targets for each Key Performance Indicator. A company goal to become the employer of choice might include a KPI of “Employee Turnover Rate.” After you’ve defined your KPI as “the number of voluntary resignations and terminations for performance, divided by the total number of employees at the beginning of the period,” and once you’ve set up a way to measure it in a Human Resources Information System, you must establish your objective. “Reduce turnover by five percent per year” is a clear goal that everyone can understand and take specific action to accomplish.

A Key Performance Indicator cannot operate in a vacuum. You must establish a KPI with a clear understanding of what is possible – so you need to set upper and lower KPI limits in reference to your market and to how your competition is performing (or, in the absence of competition, create a comparable measurement from a number of similar organizations). An understanding of benchmarks is essential to making KPIs useful (and specific to your company), because benchmarks place your level of current performance in context. They also help you check what other successful organizations consider crucial in building and maintaining competitive advantage.

Some examples of KPIs, benchmarks, and targets are:

Define Acceptable Performance

In order for KPIs to drive action, it is important that KPI targets show a range of values reflecting acceptable and unacceptable performance. For example, a KPI of “Booked Appointments per Day” should have target thresholds indicating success or failure for the strategic priority it represents.

A useful way to approach thresholds is by utilizing grades, to indicate progress, and colors, which visually reinforce the data. Everyone understands the simple traffic light symbols of green, yellow, and red.

	Red: Results are significantly below acceptable levels
	Yellow: Results are below acceptable levels
	Green: Results are within range or exceed

The podium structure below is a common method for adding context and visual clues to the targets and actual results. These thresholds may change during the year to reflect seasonality associated with certain products or services. For each Key Performance Indicator, establish targets for each of the threshold levels.

Example:

Setting thresholds helps ensure appropriate actions stem from the reporting and review of your KPIs. Using color assists with the visualization, and promotes accountability for execution on strategic priorities.

Reporting

Effectively reporting KPI results is critical. Pictures and diagrams speak volumes, so use graphics whenever possible. Dashboards with simple dials to show the data will quickly communicate progress or problem areas. Show the target for each KPI, and show the progress toward that target. An effective KPI and dial will provide an obvious call to action when needed. Make these KPIs a significant part of your weekly execution meetings.

Simple scoreboards, placed in high traffic locations like employee lunch rooms, meeting rooms, or remote field facilities, can highlight KPIs and their status. Your company website and intranet can also be great platforms for KPI visibility. It will amaze you how often employees look at the KPIs and scoreboards, question the importance and validity of the metrics, and wonder what they can do to positively influence the results.

Using Key Performance Indicators

Once you have defined effective Key Performance Indicators, that is, measurable KPIs that reflect your organization's priorities, what do you do with them?

• Focus: Properly communicated KPIs will focus your people on, and align them with, your strategic priorities. KPIs give everyone in the organization a clear picture of what is important and what they must make happen. It’s important to ensure that everyone in your company is focused on meeting or exceeding those KPIs they can influence.
• Accountability: To be effective, KPIs must drive behavior. Employees must see KPIs as predicting a future they eagerly desire, or an outcome they passionately want to avoid. In order to drive accountability and underscore ownership of the numbers, assign one person to be responsible for KPI accuracy and communication. In this way, there should be no debate about the correctness of the indicator, but lots of discussion regarding the actions and accountability required.
• Cascade: Sometimes it will be necessary to translate corporate level KPIs into metrics that are more directly associated with specific business lines or teams (i.e., a corporate level KPI of “Employee Engagement” may become “Hours of Training Per Employee” when it reaches the field).

If you really want to be “best in class” in your industry segment, you must identify, track, and improve the chosen few Key Performance Indicators that will drive your success. As Tom Peters says, “The missing 98% is execution.” Without measurement, effective execution is just a pipe dream.