According to the old adage, “If you are not keeping score, you are not in the game.”
Key Performance Indicators (KPIs) are the leading metrics that measure progress towards achievement of a desired result. Properly utilized, they provide the data that drives business decisions and keeps a focus on what matters most. They are also the earliest predictors of profit and loss performance.
Optimizing the use of KPIs requires an understanding of the foundation upon which they are built. Many organizations can point to scorecards with a bevy of KPIs, but unless they are targeted, thoroughly understood and then put in the hands of the people who can be coached on their use, all you have is a bunch of interesting data.
Building that foundation requires application of the following concepts:
Key Performance Indicators that Matter
Profit matters, but profit is an outcome, not a leading indicator. You want to look for the key indicators that drive profit: Units Sold, Average Selling Price, Cost per Unit, Productivity and Efficiency Rates (expressed as a rate per unit) to name a few. Classic examples of productivity and efficiency rates include Tons per Manhour, Cubic Yards per Manhour and On Time Delivery. Start by identifying the key indicators that drive profitability and that you control. Do it in a collaborative manner, involving team members to build a sense of ownership.
Optimal Number of KPIs
KPIs can be identified for every functional area, whether it be Sales, Operations, Maintenance, Finance and Administration, Customer Service, Quality Control or Credit. What is critical is knowing that most people can only manage a handful of specific KPIs with frequency. Any more than 6 to 8 specific to each functional area will likely result in confusion and a feeling of being overwhelmed.
Targeted and Understood
Ensure that the KPI gets to the specific individual or group of individuals that can influence the desired outcome. Those individuals need to have a solid understanding of the indicator, including the source of the data, the basis of the calculation and the “why-behind-the-what.” Management’s role is to coach down through the chain of command regarding what levers can be pulled to influence the KPI. A shotgun blast of every KPI throughout the whole organization diffuses focus and dilutes accountability.
Timely Performance Measurement
Daily and weekly. Anything less frequent is mostly useless. And it should not take an Enigma machine to perform the calculation. Almost all organizations today have some technology capability to extract readily available data that can be presented in a simple, easily understood format that measures the indicator’s performance, identifies trends and facilitates bench-marking.
Optimizing KPIs is a never-ending journey, not an event. You are building a culture of Continuous Improvement, continually striving to improve performance.
Applying these concepts and building a solid foundation will optimize your organization’s capability to utilize Key Performance Indicators in driving profitability. Contact the experts at The Roebuck Group to learn more about how we increase a company’s earnings by optimizing KPIs.