KPIs are business performance management metrics that are critical to the success of the business. The difference between KPIs and any other metrics is that not each of your metrics will be your key performance indicator. However all KPIs are indeed metrics which are numerical values measured over time. The important thing for KPIs is that they represent your critical success factors. They directly show the relationship (cause and effect) between your business performance and your strategic goals and objectives.
Table of Contents
Why are KPIs crucial for business success?
Every manager needs to monitor the important KPIs for the business. Without continuous monitoring and reporting of metrics and key performance indicators it is really hard to make the right decisions which will improve performance.
What are the right KPIs for my business?
One of the most crucial questions each manager should ask is where should I focus my efforts, time and resources? KPI tracking allows management to continuously adjust, change and improve the activities in order to achieve high performance and deliver or exceed the targets.
How to define my KPIs?
Every business organization is unique in the two primary ways:
1. The way your business operates is unique
Every organization has its own unique business model, processes, structure and core competencies. Defining the KPIs which will support its unqie way of doing business is key to success.
2. Your strategic goals and objectives are unique
Even very similar business organizations within the same industry and market have different goals. Therefore each company needs to measure the appropriate KPIs for its success. For example, two identical in structure and business model companies might have completely different goals and objectives – the first one focused on growth and market expansion while the second one focused on diversifying its products and services and customer retention. While both companies will definitely need to achieve profitability their means of achieving this will vary drastically which calls for a completely different and unique set of KPIs for management.
Note: While every manager must monitor profitability and expenditures – metrics like gross profit, net profit, operating expenses, COGS… are results of each and every metric performance in your performance management system. Identifying the critical for success metrics is key to boost profits and productivity.
KPIs vs. Metrics
What is the difference between KPI and metric? This is a frequently asked question. The answer is simple. Every KPI is a metric however not every business metric will represent a KPI for your organization. Only those metrics that are absolutely critical for success of the business are considered critical success factors or KPIs.
How should I track and monitor my KPIs?
In order to monitor your defined set of KPIs you need some kind of reporting system. KPI reports are mostly called dashboards and scorecards. The dashboard or scorecard that you will use may vary drastically based on technology used and the complexity and number of metrics and KPIs you need to monitor. If you are just starting with KPI reporting the best advice is to start small. Focus on the business logic and needs instead of the technology. You can always switch from one dashboard application to another or scale your reporting system but the key to success is the business logic behind your dashboard.
Scorecards and dashboards for KPI reporting
The two available alternatives which are continuously used by most companies for reporting KPIs are (1) using online dashboards and (2) using excel dashboards.
Both of these types of dashboards have their own advantages – for example online dashboards offer the convenience and accessibility to see your business metrics dashboard from anywhere on any device at antyime. While excel dashboards have the advantage of being flexible for the users to make changes and update their metrics and KPIs.
Quick Overview and History of KPI performance measurement, scorecards and dashboards in business
More than a century ago
Charles Schwab (the American steel executive) noticed drop in productivity and variations in his production process. He talked to his mill manager who tried various strategies and tactics to increase the production output and boost the productivity. Unfortunately none of these alternatives worked.
One day, as they talked before the night shift started, Charles Schwab took a piece of chalk and asked the first man he saw around – how many heats they made in their shift. The answer was 6 so Schwab wrote the number 6 on the floor and left.
When the next shift came to work (the night shift) they saw the number on the floor and asked about it so they learned that the previous shift manufactured 6 units. When Schwab came in the morning he saw the number 7 on the floor – the workers from the night shift erased the number 6 and wrote the number 7. The next shift made even more – when they saw the number 7 they thought that if the night shift was able to produce 7 they should outperform them and that is what they did – they made 10…
The point is that metrics and KPIs motivate and drive improvements!
The first organized and documented management systems started in the 1950s.
1950s GE corporate performance management group
Focused on identifying the right set of KPIs for GE decentralized business units. They identified one financial and seven non-financial areas for performance monitoring:
1. Profit metrics
2. Market share
3. Productivity metrics
4. Product performance metrics
5. Public responsibility measures
6. Personnel development metrics
7. Employee behavior measures
8. Using set of both short term and long term targets
1950s Carnegie-Mellon University Research
The research focused on formulating simple steps or set of questions to guide performance management and decision making in business organizations.
1. Using Scorecards to answer the question: “Am I doing well or badly?”
2. Making sure management is focused on the right initiatives: “What problems should I look into?”
3. Continuous improvement and solving ongoing issues: “Of the several ways of doing the job, which is the best?
1950s Peter Drucker Management by Objectives
Peter Drucker introduced MBO or management by objectives. He advocated that each and every employee in the organization needs to have individual goals and objectives which are aligned with the overall organizational strategy and contribute to the overall organizational success.
“Every employee must know and understand the ultimate business goals, what is expected of him and why, what he will be measured against and how.” – Peter Drucker
1960s Robert Anthony
Robert Anthony introduced a methodology for strategy planning and execution by concentrating on three main areas in business:
1. Strategic planning (defining the strategic business objectives and resources needed to accomplish those objectives)
2. Management control (managers need to make sure they use the resources in efficient and effective way to achieve the strategic goals)
3. Operational control (managing the daily projects, activities and tasks)
According to the work of Robert Anthony managers should view the strategy development and strategy implementation as a cause and effect relationship which calls for identifying the right measurement and control system as well as continuous change and improvement.
1970s Japanese Quality Movement
Japanese companies introduced the quality management systems and just-in-time management systems. This data driven approach to management could have only be implemented by utilizing scorecards, KPIs and metrics as a basis for making informed decisions. The quality management movement demanded data driven managmeent and organizational culture. Later on even more disciplined approaches followed like six sigma in GE and Motorola.
1990s Balanced Scorecard
Balanced scorecard methodology for performance measurement and performance management system focused on balanced set of financial and non-financial measures for business success and strategy maps as a tools and framework for strategy development and strategy visualization. The four perspectives: financial, customer, operational and learning and growth perspectives are the main components of the balanced scorecard.