KPI's - Powerful, Insightful, and Personalized to Your Business
What is a KPI?
Key Performance Indicators (KPI's) are metrics created to quantify the success of your business. KPI's must have a direct relationship to business goals and, therefore, each company will have different KPI's depending on industry, size, and company objectives. For example, a sales organization may select conversion rate as one of their primary KPI's while a customer support call center focuses instead on talk time or first call resolution percent. It is important to link each KPI to quantifiable business goals. Vague business goals such as "Improve Customer Happiness" need to be translated to quantifiable goals such as "Reduce Customer Call-in Rate by 10%" or "Increase repeat orders by 15%" before being linked to appropriate KPI's.
So now you've got your business goals ready - it's time to pick KPIs. Choosing how to measure success is an important decision for any business. KPI's will sharpen your employees' focus and impact the decisions they make; so you have to ensure the metrics chosen result in the behaviors you want to see.
Less is More: When making the shift to data-driven decision making, it is easy to be overwhelmed by the sheer volume of data out there. Each business is different so the total number of KPI's will vary, but to start off try pinpointing up to five KPI's to measure. Example: A company with a business goal of increasing sales by 10% in the next year could select conversion rate, price vs. competitors, total demos, deals in funnel, and daily sales as their KPI's.
Diversify Your Metrics: A common mistake when selecting KPI’s is to focus on one KPI that may hurt other areas of the business. For instance, a laser-focus on delivery time might cause quality to suffer. That's why it's important to select KPI's that together tell the full story of your business's health.
Leading and Lagging Indicators: Achieving business goals requires both looking to the past to see how the company has done and peeking into the future to see how it will do. Here's where the difference between leading and lagging indicators emerges. A lagging KPI focuses on past activity while a leading indicator shows details that can predict future performance. Example: A trucking company may have deliveries completed last month as a lagging KPI and number of quotes requested this month as a leading KPI. The quote volume helps predict future order volume and therefore is considered a leading KPI.
Gaming the Metric - A Cautionary Tale
Especially when working KPI's into contracts and pay for performance schemas, be careful what you incentivize! We discussed diversifying the metric earlier and here's why that's important. Let's say Securi-Team Inc is a company offering in-home security systems. They hire subcontractors to setup the equipment in a customer's home after an order is placed. They've identified installations per day as a KPI for their company. In fact, they've just launched a reward program with their subcontractors to provide bonuses to technicians who install the most systems per day. The numbers start coming in and they look great! The reward system really has the technicians motivated. More installations per day means more customers and more revenue. But the company starts noticing an increase in call volume. Customers are calling in much more because, in the interest of a quick install, technicians are not teaching them about their new system and are not cleaning up after they drill holes in the walls. Now Securi-Team is faced with a customer satisfaction issue. By incentivizing a quick install, the company took focus away from the quality of work and created new problems for itself. Remember, every time a metric is held up as the universal measure of success it will improve, sometimes to the detriment of other areas of the business.
Could this metric be saved? Absolutely! Instead of incentivizing volume or quality a hybrid metric could be created such as "Installs without follow-up calls per day". Under this metric, technicians who have high volumes and high quality will be rewarded while those with low volume and/or low quality are not.
If chosen with care, KPI's can be a powerful tool for measurable progress towards business goals. Select a handful of metrics as KPI's that tell your business's full story and look out for how these metrics can be manipulated.