How to create the right KPI – How to determine whether the performance is good or not?
Key performance indicators, or KPIs (Key Performance Indicators) allow decision-makers and teams to assess the effectiveness of their actions. They provide a clear guideline that promotes alignment between strategy and operations. Start by defining a strategy create the right KPI is necessarily associated with a specific objective.
But how to proceed? To define good KPIs, it is necessary to determine the common strategic objectives of the company, while keeping in sight the operational objectives to be achieved. In order to choose the relevant measures, a single watchword: consistency.
1. Start create the right KPI by defining a strategy is necessarily associated with a specific objective
Developing a clear strategy is the first step towards creating appropriate KPIs. This roadmap contains the general objectives that set the company’s strategic directions. The person in charge of drafting the plan must keep only the points that he considers relevant, avoiding documents that are too long and/or too complex.
Tips: Quickly create a first draft of a page by setting specific and realistic goals. This will help the company or department to clearly define the means to be put in place to achieve them.
2. Ask questions to identify needs
To be able to identify the strategic data subsets needed to define good indicators, ask the right questions that will help determine the data you need to collect. The KPIs must be adapted to the strategy, and the questions well constructed.
- What are the objectives of the current strategy?
- What metrics should be used to assess the success of the business?
- What are the variables that could influence the success of the action plan?
The answers to these questions help guide strategy and inform decision-making. For example, if the company wants to increase its sales by 20% in the next quarter, the commercial performance measurement indicators must provide action plans and help identify the success factors of the strategy.
Thus, each indicator designed accordingly will be relevant not only for the overall strategy, but also for planning.
Assess existing data
KPIs come from integrated data from IT services and systems. Determine precisely their measuring elements and their source.
Often, some departments already have this data, and KPIs are collected for different reasons. It is therefore necessary to audit the existing system before proceeding with any data collection. Then make sure that the data collection is completely aligned with the strategy and fully answers the questions posed later.
3. Determine the right measurement method
Once the data has been collected, it will be necessary to find the right measurement methodology to develop new KPIs or modify existing ones. The decision maker must know how to use actionable data to produce value from an effective business intelligence system.
Employees should be involved in the selection process to discuss the relevance of KPIs and evaluate them. The decision-maker can rely on brainstorming techniques or the affinity diagram (KJ Method) to boost the production of ideas and structure the proposals.
It is always best to set the measurement frequency to how data is used in the business. These metrics will yield action points to drive quarterly and annual goals. They will also make your conversations and meetings more actionable.
A good indicator (KPI) delivers real-time information
Companies mainly use financial and productivity indicators from analytical or legal accounting published at fixed deadlines. This rate of publication is out of step with the evolution of the system. It only authorizes observation. Too late to act. To steer, the essential information must be available when the decision is possible. This is called real time.
Note: This radical statement deserves to be qualified. In fact, everything depends on the use of the indicator. A lagging indicator is useful if it is operated knowingly. The mistake is to build dashboards only with lagging indicators.
A good KPI is something simple and easy to understand
The complexity of the calculation and the difficulty of collecting the data are not the criteria of value to qualify the relevance of a KPI. The correlation scale is moreover rather inverse. A good indicator should be easy to construct, without requiring inaccessible data or hard-to-understand calculations. Complication is the enemy of efficiency. And it always costs much more than expected!
The indicators will be built using “technologically” accessible information. On the other hand, it is useless to integrate dubious information that we will never be able to consolidate. The question of the cost of obtaining information comes into play here. It is sometimes interesting to compare the cost of the infrastructure necessary to obtain the information with the contribution to the decision-making process.
The indicator must be able to be presented simply on the workstation. The choice of presentation owes nothing to chance. The presentation mode (figures, table, color, scale, bar-graph, report, curve, etc.) will be selected taking into account the nature of the information and user preferences.
4. Cross-check additional data with KPIs
The company has access to vast amounts of complementary data that is just as relevant and useful as traditional KPIs. These data may come from national statistical institutes, polling and economic studies institutes, consortia or government agencies. Consider triangulating information to fully understand the complexity of a market.
Economic intelligence enables monitoring of the environment according to defined objectives. By cross-referencing this collected data with existing KPIs, the company can transform it into real strategic and operational information.
5. Find the best way to communicate your KPIs
The decision-maker must think about the best way to communicate his performance indicators. The pooling of knowledge must be engaging and accessible so that all employees benefit from it.
The indicators provide a good understanding of the strategic actions. This is why they are an essential component of the company’s overall performance management dashboard.
As a decision-maker, you must translate this communication into visuals that clearly illustrate the trends and variations detected in the data. IT and the Business Intelligence (BI) department can provide simple means of communication and make data clear, accessible and, above all, actionable.
6. KPIs must be accessible to everyone
KPIs should be part of every employee’s decision-making process.
Therefore, make sure everyone understands the metrics collected, as they are intrinsically linked to strategic priorities.
This mode of management will encourage personal involvement and enthusiasm with regard to the objectives. Indeed, identifying what drives each employee is a first step towards motivation and commitment. According to a study by the Harvard Business Review, “long-term working relationships are the key to good performance and lasting employee motivation”.
7. Test the performance of the indicators and retest again
Used correctly, KPIs are an indispensable tool for improving performance, making business decisions, and gaining competitive advantages. However, it is not uncommon for certain indicators to cease to fulfill their roles, which, in turn, harms the performance of the company.
A KPI that is not actionable will turn out to be useless. Delete an indicator if it is no longer of interest! KPIs quickly become sterile if they are drowned in a host of other metrics. And it is indeed complicated to monitor so many indicators so regularly. A manager should spend less time measuring and more time improving.
It is not uncommon for a decision-maker to hear his teams complain about the abundance of KPIs and question the usefulness of some. He is then led to examine the indicators to ensure that they are really useful. He will have to choose the most coherent ones, to optimize them, while avoiding “Vanity Metrics”, these misleading indicators which are certainly pleasant to look at, but not at all effective for the strategy.
By creating relevant KPIs, the company can control the development of its activity by monitoring the gaps between forecast and reality. Finally, by transforming data into meaningful information, the company gains in competitiveness.
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