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Lesson 3: The Business Case for Conducting OD Evaluation and Appraisal
Developing KPIs
Development Steps
Developing KPIs can be accomplished using the following five-step process:
Step 1: Confirm the outcomes required.
Given that “what you measure is what you get,” it is critical that the selected KPIs support the outcomes you want to achieve. If you get these wrong, everything that follows will be out of alignment.
Step 2: Establish goals and test.
The requirements identified in Step 1 are used to create a suite of specific goals. The general test for the comprehensiveness of these goals is “If these goals are achieved, will we be seen as completely successful by customers and all our major stakeholders?”
Step 3: Develop KPIs and test.
Ask how the goals (Step 2) will be measured. The KPI system used is based on:
- Establishing KPIs as outcomes and drivers of these outcomes. This enables managers to act on relevant performance drivers when performance outcomes are not satisfactory.
- Establishing a balance between lead and lag indicators of performance.
- Measuring the “big” elements of each goal, not all elements, thus keeping KPIs to a reasonable number.
- Modifying KPIs to suit the existing management information system, and deciding where this system needs to be improved to generate better KPIs in the future.
- The outcome is tested through a “gaps and gluts” analysis. That is, when all KPIs are assembled, the management team judges where there are too many or too few measures.
Step 4: Establish KPI accountability framework.
Each KPI should be allocated single point accountability. This requires special attention, especially if the outcome is the result of cooperative effort between different people, teams or organizational divisions.
Step 5: Launch of the KPI system
This step has three major phases:
- Goals down/plans up
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This requires the high level KPIs to be cascaded down to each operational team. As its name implies, the process presents the high level KPIs as “goals” and allows teams to develop their relevant KPIs through the “plans” they create to achieve these goals.
- Develop individual performance plans
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On the basis of the new suite of plans, the CEO, divisional, section, and team leaders create their personal performance plans by selecting the most critical KPIs from the relevant organizational plan. Once developed, they are signed off at the appropriate level.
- Training in hard and soft skills
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To support all staff in their effort to achieve the KPIs for which they are accountable, it is essential that comprehensive training options be made available. These should be broken into group training (where corporate-wide development is needed) and individual training (from which individuals can select as required). Training should cover technical/functional performance (hard issues) as well as behavioral performance (soft issues).
Resources requirements
The resources required for the task of developing a comprehensive KPI framework will vary according to the magnitude of the task: is the system is to apply to the whole organization or a team? For most KPI efforts, an internal project leader will be required, and could be either full- or part-time. This person will plan the process, and coordinate internal and consulting resources. In selecting this individual, a key objective is to blend expertise with ownership.
What are the potential problems?
Despite their value, problems do exist. The most common is “data overload.” Once organizations realize the value and importance of KPIs, it is not uncommon for them to begin measuring and tracking absolutely everything that can be measured. Although this effort will provide some very important data, it will also produce a lot of noise—excessive and irrelevant data. The organization must therefore carefully consider which indicators they choose to measure.
Another common problem is the lack of monitoring. As previously stated, an organization can’t simply identify KPIs and measure them once. Doing so will not provide useful data. Instead, KPI monitoring is an ongoing process meant to provide important longitudinal data. If an organization is measuring average revenue per customer, it should be recording this on a weekly or monthly basis. This will help identify trends —and determine whether or not sales are on track to achieve the stated objectives.
Examples
An organization that has a goal of “providing the best customer service in the industry” will have key performance indicators that measure customer satisfaction, wait time, problem resolution, and other factors that measure customer service performance. However, financial measures such as pre-tax profits and shareholder equity will probably not be used as KPIs and will be viewed as irrelevant to the goal. Every industry, and for that matter, every organization, business unit, department (and maybe employee) will have its own KPIs.
KPIs for retailers could include same-store sales, inventory turns or the percentage of its income that comes from return customers. For manufacturing, KPIs could include inventory levels, production cycle times, and quality. For universities, important KPI applications, predicted GPAs of incoming students, diversity of the student body or faculty, and retention and graduation. For customer service departments includes percentage of customer calls answered in the first minute. A key performance indicator for a social service organization might be number of clients assisted during the year.
Video: Best Practice Tips for Creating Key Performance Indicators
This video explains what the benefits of using KPIs are and how you can create effective KPIs.
SPEAKER 1: Best practice tips for creating key performance indicators-- what are key performance indicators? Key performance indicators, KPIs, are critical success indicators. In other words, they are the proof that your strategies are on the right path and goals are achieved. However, this alone would be a rather oversimplified definition.
Key performance indicators are quantifiable measurements used to analyze organizational performance. The KPIs are aligned with organizational goals and strategies and are used to measure wide range of factors, from business performance to employee effectiveness, customer satisfaction, health and safety, security, et cetera.
Here at www.winningkpi.com, we have an extensive record of KPIs, covering diverse business types and business factors. Just take a minute or two to browse through our list. And in case you do not find what you're looking for, feel free to post a quick request. One of our KPIs experts will respond to you in no time. You may also get some help from our community of business experts.
What are the benefits of using key performance indicators? Moving on, let's identify why KPIs are a useful tool for your business.
First and foremost, your KPIs will be aligned with your strategic goals. And the results will show you the progress and success of your business strategies. Based on your KPIs, you can carry out business analysis and gain knowledge and understanding of your current position. This is a priceless asset for your business.
KPIs are used for competitive analysis. And if used strategically, it can give you the competitive advantage. KPIs also help you focus your business actions on strategic goals. Through these indicators, you can measure success rather than results. Let us take the following example.
You build a strategy to expand your business next year. You make the calculations and set the goals. The business growth can only take place if you increase your customer base by 20%, which is likely to help achieve sales growth of 40%. Along with other factors, which you may influence in order to get this growth, these two factors together-- and real business will have a lot more factors-- will help achieve your critical goal, business expansion.
Now, at the end of the year, you only increase sales by 10% and sales growth by 18%. You may celebrate the success. But your KPIs are showing you that you may not have met your success targets. However, you do not need to wait till the end of the year. You can monitor them monthly or quarterly. If you do not see the growth going up to your desired number, you can take action then.
This is the beauty of KPIs. They give you knowledge and understanding of your business processes. Knowing if something is going wrong helps you take action and fix it. In addition, knowing that helps your business grow and help you make better decision and become more successful. How do you create effective KPI performance indicators?
Now, let's move on to the basics of setting and measuring KPIs. Creating KPIs is very important. Do not rush through the process. Take your time and make those indicators your own. If you get inspired from the web, such as our wide range of KPIs here at www.winningkpi.com, that's fine. However, do not just copy and paste. Read and understand the KPI, and then adapt it to your business needs. Make sure it's relevant to your strategies, it answers your questions, and it brings overall benefit to your business. It may only bring knowledge and understanding. But do not underestimate that. Knowing where you are and understanding what makes your business work can set you way ahead of your competitors.
Here are some important steps to define when you create your KPIs. One, strategic goals, success indicators. Two, measurement period. Three, measurement unit. Four, result interpretation.
Number one, strategic goals, success indicators. The first step in setting your KPIs is to make a list of your strategic goals. You probably already have that. Now, sit down with that list and your strategies and ask yourself a few questions, such as if my goal is to increase employee motivation or any other goal you may have, how do I know when I got there? What are the critical success factors of my business and strategy? What critical actions do I want my employees to take? What results do I want to achieve?
Feel free to add as many questions to this list as your business needs. The more the better, as it will help you create KPIs tailored to your exact business needs.
Two, measurement period. Choose a period that is representative of what you are measuring. If there is a period in your business strongly affected by other factors, consider those or avoid measuring during that period. For example, if you want to measure employee performance or work-per-hour ratios, measuring around the Christmas period may not be a good idea. The working month is smaller, and you're probably not going to have such engaged employees as during the rest of the year.
Three, measurement unit. It is imperative to choose carefully the unit of measurement. The unit you use will depend on the measurement you're making. It will also depend on whether or not you're measuring against other factors. For instance, if you measure the amount of your sales increase, that will be a matter of recording the figure in your currency, e.g. $2.5 million. However, if you want to see how much your sales increased from last period, that will be a percentage of your previous sales figure, e.g. 20% increase.
Four, result interpretation. Pay attention to what your KPIs are showing you. A good tip is to trial and error with hypothetical results before implementing your KPIs. In other words, when setting up your KPIs, take scenarios and work with them. If you set a KPI for sales growth, look what a 20% sales growth will show you.
Join in your strategy team or even share it with the organization and get inputs in this. The better you define your KPIs, the most benefit you are going to get out of them. In order to be able to make the most of your KPIs for your business, you need to make sure that the results are readable and easy-to-understand. Make sure that the results are not just pure numbers, but they bring meaning to your organization.
Also, consider who is doing the KPI analysis and whether the results are simple enough. Best practice tip-- make them great and simple and share them with your entire organization. This is one huge step in getting the organization engaged into working towards the vision and strategic goals. Train and motivate your employees to use KPIs in their day-to-day business.
Standardized-- you need to make them standardized so that you can easily relate them to each other and obtain more in-depth analysis. Note that here at www.winningkpi.com, we often give indication to what KPIs can be joined together.
Relevant-- if you set your KPIs at the beginning of the year for your two-year strategy, it is not usual that you may have to review, change, remove some of them in the process. Your KPIs need to be relevant to your current business position, as they are a measure to show you current progress and success. Refer back to the time frame and adapt it is needed in order to keep your indicators relevant.
Do's and don'ts of KPI performance indicators.
Do-- align KPIs with your strategic goals. Measure strategy success through KPIs. Make your KPIs transparent across the organization. Monitor, manage, and update your KPIs. Keep them as a live document rather than a historic report. Make your KPIs measurable, relevant, and easy-to-interpret. Create employee objectives based on organizational KPIs. Make your employees' work part of a bigger picture.
Don't-- set KPIs that are not relevant to your business goals. Set too many KPIs which may lead to confusion and inaccurate analysis. Keep KPIs secret to yourself-- share them with your team and organization. Copy KPIs from another company or from the web-- get inspired and adapt them to your business needs. Be too brief or too descriptive with your KPIs-- keep the detail relevant to your need, measure as much as you need to know. Choose any time frame for your KPIs, regardless of external factors. Be too narrow about your measurement spectrum. Create KPIs which will give you the bigger picture for your organization's progress and success.
KPIs at winningkpi.com-- browse our broad records of KPIs here at www.winningkpi.com. Under each KPI category, we have comments and examples. Also, if you do not find what you're looking for, just post a new request here at www.winningkpi.com/post-kpi.htm. One of our KPI experts will offer you support, and you could get some help from fellow business users as well. To offer you even more support, under each category, you can find an article to help you make the most of our KPIs and use them to benefit your business.
Remember, do not just copy and paste. Adapt the KPIs to your business needs. If the KPIs are exactly what you're looking for, that's great. Use our exact formulas. However, if you need to amend them, do so, as the more tailored the KPIs are to your business the more indicative the results will be. If you feel unsure how to go about doing this, post a request or a comment under a specific KPI, and we'll happily offer our support.
Good luck with using KPIs.