The 7 principles of genuine KPIs
Not all indicators are pure KPIs. Finding the right KPIs for your business is sometimes like searching for a needle in a haystack. To make this search easier, we have described the 7 characteristics of truly unadulterated KPIs. So that you know faster where and how to find them and can then build on them. Who doesn’t want to steer based on a reliable dashboard and KPIs that you can trust blindly, have predictive value and don’t cause side effects like perverse incentives?
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Genuine KPIs are a needle in a haystack
The 7 characteristics of genuine KPIs
Lay measurable KPIs along each characteristic and the further down the list you get, the greater the chance that you have a genuine unadulterated KPI up your sleeve.
- Domino effect: a bad score on a KPI can cause a domino effect of problems. Think of things like rescheduling, rework, waste, complaints, fines, image damage, extra costs, et cetera. Find out in your organization where most of the misery occurs or can occur. Then look at what the root cause of that misery is.
- Direct impact on your profits: a bad score on a key performance indicator always has a direct impact on the profitability of your organization. The words “always” and “directly” indicate a 1:1 relationship. For example, your turnover can increase or decrease, but this does not necessarily mean that your profitability will improve or deteriorate immediately. Therefore, what we popularly call the revenue KPI is not a true KPI.
- Direct impact on customers and employees: a KPI always has a direct impact on your profitability as well as on your employee or customer satisfaction and in some cases even both. Then you really have a very important KPI up your sleeve.
- Starting point for continuous improvement: key performance indicators are primarily aimed at improving the total (existing) process. With them your results will improve and you can optimize the process. They are less suitable for finding and implementing product innovations.
- Key success factors: KPIs make the key success factors of your organization clearly visible and easily measurable. So that the strategy and business model can be on everyone’s mind. This is relevant and important because in 78% of organizations the majority of employees do not know what their contribution to the strategy is.
- KPIs are by definition not financial: the moment you can express the score of an indicator in euros, one thing is certain: it is not a genuine KPI. Of course, a KPI does always have a financial impact. Many traditional CFOs and controllers can find themselves in a difficult position because of this.
- Directly influenceable: the score on the key performance indicators can be directly influenced by employees who work in the processes every day. For example by adjusting their behavior, by rearranging their work or by adapting systems.
KPI development is a process
Years ago, I facilitated developing KPIs for the first time. I was standing in front of a blank flip chart and I asked my client to brainstorm about possible KPIs. I was a novice consultant and my colleague, the project manager, had just left the room to answer an urgent phone call.
Although I had a basic understanding of what good KPIs were about, I got no further with helping my client than naming project milestones (“the web design will be complete in August”), improvement initiatives (“we have to redesign the CRM process“) or vague ideals (“customer loyalty”). What I did not realize is that you can use a lean approach when developing KPIs. This process is based on the results you want to achieve with the strategy, so you filter out all the superfluous information and reach less = more knowledge. Just as in any other process, when developing KPIs you need the experience and discipline that are vital to continuously improve the process.
Agreement on the strategy is often an illusion
When organizations develop their strategies they have a habit of writing down that strategy in ambiguous and abstract ideals. And if you plan to convert strategy into indicators, it is essential to write down that strategy in plain language. Language that deals with sight, hearing, taste, touch, or smell. An ambiguously written strategic objective, such as improving customer experience, can be translated into faster payment processing or fresh and clean hospital facilities.
I’ve seen teams working on strategies switch from 100% agreement on vague ideas to opposing ideas about possible desired results. This means that their agreement on the strategy was actually an illusion. To describe the results you want to achieve, use a language that an 8th grade student could understand. If you do your best together to get specific results in that way, you will then easily come up with clear KPIs.
It’s not about the Dashboard
Dashboard software like Board or Qlik is excellent when used to support a well-developed strategic and operational management system. However, in many cases, there’s more interest in advanced business intelligence tools than knowing what’s behind the process. KPIs are not about the management dashboard at all. KPIs serve to get a clear picture of what you’re trying to achieve and monitor progress towards the goal. A dashboard is the supporting instrument; too strong an emphasis on technology leads to distraction.
It’s not about the KPIs
In terms of distractions, we notice a lot of clients who think that the process starts and ends with the KPIs themselves. Unfortunately, they are often only concerned about complying with reporting requirements. Or preparing for an important meeting. Such an approach completely ignores the power of the KPI development. Namely, the fact that KPIs provide decision-making insight and allow for continuous improvement on a daily basis.
Written by drs. Louis Brackel RC
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