Performance Metrics also called Key Performance Indicators (“KPIs”) provide objective measures for a business to monitor itself. Metrics are a critical addition to any organization that wants to improve itself. Below are several criteria to consider as you set KPIs for your organization.
Strategic in nature. When considering performance metrics, it is critical to have the organization goals in mind. Focusing on the organizations goals and objectives will help ensure your metrics are aligned with the strategy of the organization. Metrics should be selected that help the organization monitor performance towards its goals. For example, an organization that wants to grow should select metrics that track that growth in customers, units produced or staff productivity.
Simple. Performance metrics must be understandable. Users must know what is being measured, how it is calculated, what the targets are, how they impact incentives. It is also important that they understand how to affect the outcome. Complex KPIs that consist of indexes, ratios, or multiple calculations are difficult to understand and can often be hard to act upon.
Accurate. KPIs must be based on clear, consistent information. That information should be visible to the organization so the users are confident in the KPIs. Examples include sales dollars, units produced, calls made and net profits. Stay away from metrics where the data is questionable. And don’t modify computations over time unless prior period metrics are restated. Consistent measurement of KPIs over time is an essential part of their value.
Responsible Party. Each KPI should be “owned by a specific person or a group. The KPI “owners” should have the most control over its outcome. Of course, it is important that the KPI owners agree its calculation and buy into its business management value.
Time Sensitive. Metrics need to be distributed in time for your organization to react to them. The quicker the items can be completed and disturbed, the sooner actions can be taken to address issues and exploit opportunities. A good target would be a weekly KPI report reviewed early in the following week.
Objective. Individual agendas are a major reason why KPIs must be objective. When an organization selects subjective metrics their accuracy and the reliance on them come into question. Things like customer opinion and employee sentiment can lead to interpretation. Be sure you select KPIs that are based on clear consistent empirical evidence.
Appropriate. Organizations evolve over time. As goals and operations shift it is critical, KPIs should shift as well. New segments / products should receive more focus than mature components. Periodically review your KPIs to ensure they clearly signal the degree of progress in attaining organizational goals.
Follow through. If an organization is going to take the time and resources to compute KPIs, it is critical that the information be utilized. Let’s face it, entrepreneurs have a lot on their plate so any additional demands must add value. KPI management clearly passes that test. By tracking KPIs regularly, an organization can quickly check if it is on track with its goals.
The Company CFO should be an integral part of identifying KPIs, designing the system to capture, calculate and report KPIs frequently, determine acceptable and targeted KPI performance, and assist
executives at interpreting trends and taking appropriate actions based on these conclusions. If you need help with this process, please call the Florida CFO Group.
This is Part 2 of a 2-part blog. To read Part 1 CLICK HERE.