Develop and define your KPIs

When developing a KPI system, you have to identify search fields and translate them into one or several yardsticks. After that the targets are defined, possibly with gradations or tolerances. Connect this to a measuring system and you’re in business.

Clear measuring agreements are essential

Develop a KPI measurement systemIn practice, that means making clear agreements about how and when to measure, the design, and the starting date of an indicator. These are all important factors. But keep in mind our division of the Measuring Plan (yardstick, target, measuring system, and reporting).

Think SMART when setting targets

Of course, the above-mentioned activities can’t always neatly be separated, nor will they always be performed in that order. For example, when setting targets, people often look at the possibilities to measure these factors in practice. In short: make your goals SMART. In order to gain a thorough understanding, it’s essential to treat the three activities separately.

Which techniques are available?

A measuring system can be very simple. To give an example: a simple, commonly-used technique is “determining unambiguously”. In layman’s terms: look. We can unambiguously determine how frequently an event happens within a certain period of time, and note the outcome.

Observing the KPIs

By looking and registering, we’re applying an observation and registration technique. There are also situations where the measuring and registration technique has to be more accurate. Then we can use a quality index or a control chart, for example.

Supporting techniques for a KPI system

The wide array of KPI system techniques makes a quick and practical choice difficult. We can illustrate this by using the implementation of a measuring system at a restaurant as an example. The benchmark is: guest reviews on a five-point scale.

Example: the restaurant

KPI restaurant exampleThe target is to get a positive score for each KPI: the reviews of the dishes, the staff, and the environment. Then, management chooses a method of measuring and registering, respectively a survey and a bar chart. How did they arrive at those decisions?

PMI method

To make a definitive decision, management wants to structurally compare the pros and cons of the various methods. Using the PMI method, alternative options can be compared quickly.

Filling in the PMI matrix

P, M, and I stands for Pluses, Minuses, and Interesting points (arguments raised in the discussion that don’t clearly fit into the plus or minus categories). Management gave itself roughly 3 minutes per category to fill in this matrix.

Choosing a reporting method

Based on this information, it was an easy choice for the direction to make. They chose the survey, because they could use it to collect a lot of customer opinions at a low cost. The bar chart was chosen because the other two methods would lead to too many diagrams.

Increasing the response

The column “Interesting points” encouraged the participants to come up with creative ideas. One of the directors suggested asking for the business card of the respondents so that they could send out a bottle of champagne to a random respondent every year. Also, they could build a database using the cards.

Future-proof your measurements

It’s important to consider the future when developing a KPI measurement and reporting system. We’ll provide an example of an indicator focused on the future, courtesy of Grove (1997).

Trending upwards with KPIs

The example concerns the linearity indicator. The key performance indicator we’re taking as an example is: the number of graduated academics who accepted jobs offered by a multinational, offset against the month of the year. The target is a linear line upwards.

Course-correct based on the KPI when necessary

Ideally, we’re moving up through a straight line. It’s clear that the multinational can only achieve its goal by greatly increasing the amount of jobs they accept in the remaining two months. The multinational has to continue recruiting and making job offers at a rapid rate. Thanks to the linear indicator, they know that they can course-correct before it’s too late.

The linearity indicator is broadly applicable

The example is broadly applicable. Imagine that we’re looking at a production unit: people could conclude that everything is going according to plan if the monthly targets are being reached. But we can offset the production output against the days of the month, and compare it to the ideal linear output.

Perform consistently with KPIs

We could conclude that the output isn’t evenly spread over the month, but is concentrated in the last week of the month. In this last case, the manager is using their machines and people inefficiently.

Make the trend a KPI result

One way to focus on the future is following the trend. Working with indicators is often more about how the numbers develop than the outliers.

Link trend indicators to output

KPI trendsTrend indicators can usually be linked to the output. The output is displayed over time by plotting the performance of the past months (produced units, billable hours, processed invoices, delivered projects, and so on) on a graph.

Compare the indicator to the target

The performance then has to be compared to the target. Such a graph forces you to look at the future, because people automatically extrapolate the past. This can be made visible with a dotted line. This extrapolation then works as a second window in the black box. Trend and target together ensure that we think about why the results are what they are.

Adjust KPI targets monthly

Finally, there’s another way to anticipate the future: by making a monthly prognosis and comparing it to the actual results. To do that you can use a “sliding table”. This table is adjusted monthly.

Relative result is a valuable indicator

The improvement or worsening of the predicted forecasts per month is a valuable indicator to drive. At a glance, people can see the difference between two predictions, allowing you to anticipate the change. At the same time, the serious use of such an indicator forces those who make the prognoses to set realistic expectation.

Develop your own KPIs with the SMART KPI Toolbox

Do you want to develop your own KPIs and drive the most meaningful indicators? Our SMART KPI Toolbox was developed to help businesses in every industry define the right KPIs and manage based on them. Order it directly through our website and learn how to efficiently work with KPIs.

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