Determine KPIs using your strategy
There are various approaches you can use when identifying, defining, loading, benchmarking, visualizing, and operationalizing Key Performance Indicators (KPIs). This article will discuss the strategy-driven approach, a top-down method where the mission, strategy, and goals of the organization are the starting point.
To start off, we’ll answer the question of how to derive a strategy from the organization’s mission, and how to derive indicators from goals.
Mission, strategy, and goals
The organization’s mission can be translated into one or more strategies. These, in turn, can be translated into short-term goals and long-term goals. Generally, a mission will hardly change over the years. The mission alone doesn’t describe how to achieve it or how to sustain it. The mission answers the question “why are we here, and for whom?” The strategy, then, answers the question of how an organization wants to achieve the mission. The goal, in turn, states what, exactly, the organization wants to achieve (Wijnen, 1999). It’s easy to find indicators on this level, for example the number of surgeons with international recognition in a hospital. See figure 1 for an example.
Figure 1: From mission to strategy and from goals to indicators.
The key success factors
The key success factors form the strategies that follow from the mission. They represent the business processes that are crucial in achieving a competitive edge. Making mistakes in one of these key processes directly impacts the functioning of the entire organization. These key success factors are different for every (intelligent) organization, even the same types of organizations. One wholesaler might depend on its strong procurement department, while another might achieve its margins thanks to a flawless logistical operation. The key success factors describe the processes that are crucial to success or failure (Kamermans and Van Leeuwen, 1993). See the example in figure 2.
Figure 2: A strategy map of a healthcare institute that shows how the strategy will function and what indicators to drive to achieve the mission.
Defining measuring points
Key processes need defined measuring points. The organization can use those to gain insight into its opportunities and risks and make them measurable. Processes with KPI requirements are often, in turn, dependent on other key processes. What’s required to make a plane take off and land on time? Pilots have to be on time, the plane needs to contain the right amount of fuel, and the luggage has to be stowed on time. All these key sub-processes have their own KPI requirements. These aren’t KPIs on an organization-wide level, but on department or team levels. By performing this thought experiment, you can quickly determine the core of your company. What’s the key? What do we have to excel at?
The strategy-driven approach is based on the fact that the most basic information needs and KPIs are revealed if we go down the “steps” from the strategic to the operational level. Of course, being able to define your needs is crucial.
The strategy map
A strategy map is an excellent tool to visualize the company strategy and the accompanying key processes in a way that appeals to employees. A strategy map consists of three parts:
- Firstly, the organization’s mission. What does the organization want to be, and for whom? This boils down to a strong statement about the organization’s purpose.
- Secondly, the blocks (like in figure 2) describing the key processes.
- Thirdly, the arrows (see figure 2) that describe the dependencies between the blocks.
All the blocks from the strategy map together form the organizational strategy. Visually balancing the different blocks from the strategy reveals the most key processes that contribute to the realization of the goals and their underlying relationships. The relationships between the blocks are visualized by the arrows. It’s important to make sure that the blocks are recognizable and meaningful to employees, so that they understand their contribution to the overall strategy. Making every block measurable and applying a Plan-Do-Check-Act cycle is the key to continuously improving performance. PDCA has proven to be crucial to the success of management information and data-driven working.
Making key success factors measurable
Making a key success factor (a block from the strategy map) measurable is usually not a big step (see table 1). For example, a mental health care institution might have the mission “become the most high-end care institution in helping children, youths, and adults with complex developmental disorders develop to their maximum capacity.” The company wants to achieve this mission by providing effective, high-quality care. In order to do this, the company has to meet certain contextual conditions. Without the right conditions, they can’t achieve their goals. To that end, the institution wants to organize the care around the child and support children and their parents with multi-disciplinary teams of specialists that can ensure warmth, safety, and a healing environment. This all has to be financed by the production margins. It’s crucial that the margin is in line with the healthcare that was purchased per DTC group (diagnosis-treatment combination). The planning process needs to be optimized. More examples can be found below.
Table 1: making the key success factors from the strategy map measurable.
- The strategy can change over time. A housing corporation could drive operationalizing real-estate value when prices are booming. When the housing market is stagnating, they could choose to focus on minimizing operating costs. When the price of real estate goes down, they could focus on strategic acquisitions.
- The strategy-driven approach will work most quickly in organizations where management is already working with a clear policy cycle of strategies and goals. However, “formulating a strategy takes a lot of time, but it’s a necessary process”, as Michael Porter said during a seminar at Nyenrode University. That goes for every company. In short: a clear strategy is an important success factor.
- Some companies can make a strategy last dozens of years. Consider Volkswagen, for example. The company had such a dominant market position and refined strategy that no-one could touch them. There was little reason to change things. Until “Dieselgate” threw a spanner in the works, and even this barely seems to have had a negative effect. Other companies are forced to set a new course a few years after their founding. They’ll have to start working differently, or start offering completely different services, such as Nokia, for example. This Finnish company, which once started as a wood mill company, primarily sold televisions, toilet paper, and rubber boots in the eighties. But in the early 2000s, they were the worldwide market leader in mobile phones. However, “large shifts” in strategy rarely occur” (Mintzberg, 2004). There’s at least one major exception: in times of economic crisis, many strategies no longer prove viable. During the last financial crisis, over 60% of all companies had to redefine their strategy or change course. This is part of the reason why the strategy-driven approach is preferable to the other ones discussed later. It will allow you to keep your strategy map and the accompanying KPIs up-to-date. Not just in times of crisis.
- Always be mindful. Especially when an organization is revising its strategy, is in trouble, or has seemingly boundless ambition to grow in every area. Rule of thumb: KPIs usually don’t outlive the strategy that they’re based on.
Visualize your strategy and define the right KPIs at the same time! Be aware that most KPIs don’t outlive the strategy they’re based on.