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Are you finding your small business hard to manage? In this article I’ll show you how to use Key Performance Indicators (KPIs) to keep your staff focused on your top priorities. I’ll also show you how to create a reporting system that will trigger action and keep your business on track.
Here are some quick links to take you to the main sections of this article:
As small businesses grow, they become harder to manage
Small companies often encounter ‘growing pains’
As small businesses expand, they often hit execution challenges that make them harder to direct and control. If you run a small business, you may have bumped up against them yourself.
There are two common types of growing pains:
The day-to-day efforts of staff begin to diverge from the key priorities of the management team. In other words, a gap opens up between strategy and execution.
As an organisation grows larger and more complex and market conditions evolve, the data reported to the top executives proliferate and it becomes unclear which metrics play the key role in achieving success. Reporting slows down and becomes messy and harder to interpret. As a consequence, it becomes less effective in catalysing action to keep the business on track.
These trends highlight an important rule — strategy is only as good as its implementation
A great business strategy that is ineffectively executed will not produce the desired results. Learning good financial and operational management skills is a crucial part of how to run a successful small business.
Make running your company easy using Key Performance Indicators (KPIs) combined with better management reporting
You can overcome growing pains like these and keep your company on the path to success by implementing a strategic management and reporting system. In this article:
I’ll explain why KPIs are often the best way to drive execution of your business strategy. Business KPIs are intelligent targets that focus your employees’ attention on the handful of basic actions you need them to execute effectively every day. They help your staff align their efforts with your key objectives. You’ll learn how to select the right ones for your organisation.
I’ll set out how to design a really effective management reporting system that uncovers problems, such as missed KPIs, fast. I’ll cover what to report, in what format, to whom and how often.
Finally I’ll tackle how to ensure your management reports lead to action. I’ll cover how to diagnose the real causes when teams miss KPI targets and how to develop solutions if they do.
At the end of the article I’ll highlight some common pitfalls with business KPIs, so you can avoid them.
Let’s get started, beginning with how to select the right KPIs.
How to choose the right KPIs for your business and keep your staff on track
Even small businesses need a management system
Small companies often focus on a single family of closely related products or services. They often sell only in their home market and transact in just one currency. That should make them easier to control than diversified global enterprises.
Because of this, some small company bosses fall into the trap of thinking they don’t need a formal management system. If their business is simple, they assume that handing out instructions will suffice and execution will look after itself. That’s usually a mistake.
Companies often struggle with a gap that can open up between the organisation’s strategy and what its staff actually spend their time doing. To close that gap, you need a system that will guide and monitor your employees’ work.
Even small companies need some such system. It doesn’t need to be complicated. But checking your bank balance every week is not a management system. Without one, a business will usually drift off course and fail to reach its goals.
First, you need to identify your Critical Success Factors
The first step in implementing a management system based on KPIs is to identify your organisation’s Critical Success Factors (CSFs).
The concept of CSFs was first created by management consultant D. Ronald Daniel.
He set out his ideas in his article Management Information Crisis.[1] John F. Rockart of MIT's Sloan School of Management later developed the concept further and brought it to the attention of a wider audience.
Rockart defined CSFs as: ‘The limited number of areas in which results, if they are satisfactory, will ensure successful competitive performance for the organization. They are the few key areas where things must go right for the business to flourish.’ [2]
CSFs are usually expressed as initiatives that a business must progress effectively on a continuous, ongoing basis. You could think of them as stepping stones to reach your organisation’s highest level goals.
They’re usually expressed qualitatively rather than quantitatively, but they should be specific and not generalities. If a CSF is well defined, it should be perfectly clear whether you’re progressing it effectively or not.
How to identify your company’s CSFs? Start with your organisation’s high level, long-term goals. Then work backwards to those areas of your operations that have the greatest potential to move you towards those goals.
For example, a company might aim to increase its market share from 10% to 20% over the coming five years. Depending on the factors that drive customer buying decisions in its industry, its CSFs might include ‘improve order fulfilment time’, ‘build up our direct-to-customer sales using our own sales force’ or ‘reduce the time to convert new product ideas into sales launches’.
(As you go through this process, you should find that your CSFs are components of the strategies you have put in place to reach your goals. What you are effectively doing is identifying the elements of your strategies that are the most critical for reaching those goals. If you don’t recognise your business strategy in your CSFs, you should stop and revisit one or the other).
When looking for your CSFs, think about your business holistically rather than in narrow financial terms. For example, if one of your goals is to increase the profits from your business, you could achieve this very quickly by cutting the amount you spend on developing new products. Yet this could undermine your profitability in the long term and it’s this longer time horizon that you should bear in mind when searching for your CSFs.
If you’re struggling to identify your CSFs, here’s a useful tip. Consider the main stages of your company’s value chain and think about which elements contribute significantly to the success of the wider organisation. Let’s take some examples:
Customers: Which factors are most important for your customers? Are quick order fulfilment and on-time delivery crucial? Or are product performance or breadth of product range more important?
Employees: Is it important that your staff have high levels of technical skills? Or is it important to maintain a flexible workforce even if turnover is higher and skill levels are lower as a result?
Internal Processes: If your firm has complex workflows involving multiple teams, which factors determine whether the system works effectively to deliver on client expectations?
These traditional success factors are covered very well in The Balanced Scorecard[3] – one of the pioneering methodologies of performance measurement and management. Despite being published as long ago as 1996, many of its insights remain valid to this day.
However, new success factors have also emerged over the last three decades. If you’re a technology firm, you should consider how your R&D programme contributes to your success. If your operations are carbon-intensive, you could consider the steps you will need to take to adapt successfully to decarbonisation. And so on.
How many CSFs should you have? Most firms could reel off dozens of factors that drive the results of individual parts of their business. But CSFs are factors that are critical for the success of the whole organisation. So try to narrow your list down to a maximum of a dozen. You can’t focus on 50 factors — that equates to no focus at all.
Remember that your staff shouldn’t ignore a success factor just because you decide that it’s not crucial enough to be a CSF. If a success factor is important for an individual team to perform well, that team should continue to focus on it — just not at the expense of any CSFs they can impact.
Once you’ve identified your CSFs, you can move on to select and implement your business KPIs. Your KPIs are the actions you will carry out to bring your CSFs to a successful conclusion.
Before choosing your KPIs, it’s vital to define them correctly
KPIs are intelligent targets. They communicate to your front line staff how their work contributes to the success of the wider organisation. Well-designed business KPIs will thereby focus your employees’ attention on the handful of basic actions that you need them to execute effectively every day.
This helps your staff align their efforts with your strategic priorities without you needing to micro-manage them, which would be inefficient for you and demotivating for them.
Let’s define KPIs in detail:
A KPI is an operational (i.e., non-financial) measure of performance.
It’s a measure that drives the results of your business rather than recording them. In other words, a KPI is an input to performance, rather than an outcome of it.
Some examples should make these distinctions clearer:
Metrics like revenue growth, profit margin or inventory turnover aren’t KPIs because they’re financial measures and measures of outcomes rather drivers of performance.
Measures of staff job satisfaction (e.g., survey responses, rate of turnover), of customer satisfaction (e.g., rate of complaints, customer feedback) or of capacity utilisation (e.g., units produced as % of available capacity) are non-financial measures. However, they’re measures of outcomes rather than drivers of performance, so they’re not KPIs.
Some examples of operational measures that drive performance include the number of new sales leads generated, fault rate per 1,000 units produced and % of staff completing training in new skills. Any of these could potentially be KPIs.
It’s easy to confuse KPIs with measures of performance outcomes. Here’s a simple test to help you decide whether the measure you’re considering is a potential KPI:
KPIs are the responsibility of a single team, or of several teams working towards a shared objective. For example, responsibility for the level of unscheduled downtime suffered by a firm’s IT systems (a potential business KPI) would lie with the IT Infrastructure team. In each case, it should be clear to a CEO which manager(s) to speak to about a KPI.
By contrast, measures of outcomes usually result from the work of many teams across a business. For example, responsibility for a slow rate of inventory turnover or a high rate of workplace accidents (which are not business KPIs) could rest with a number of teams. It would not be possible to tell where responsibility lies without an in-depth investigation.
By the way, the focus of this article on KPIs doesn’t imply that outcomes are not important – they clearly are. In fact, the whole purpose of KPIs is to generate better outcomes, notably to increase the profits from your business. I’m going to call your most important measures of outcomes (whichever you decide they are) your Key Outcome Measures (KOMs).
Now you can identify the right KPIs for your business
Now that we’ve clarified what KPIs are and aren’t, it’s time to decide on the right KPIs for your company. Once you’ve chosen your CSFs and correctly understood how KPIs are defined, it becomes quite straightforward to identify your business KPIs.
For each of your CSFs in turn, identify the one or two performance indicators that you believe could contribute most to their achievement. These will be your KPIs.
Let’s clarify the point using examples:
A wealth management firm with a high share of recurring revenue decides that one of its CSFs is strong retention of its existing clients. It believes the best way to build client loyalty is to interact with them regularly in a live setting. The firm could create a corresponding KPI — the number of its clients that have gone more than, say, three months without a face to face meeting or live phone call with their account manager. The target value for this KPI could be set at zero.
A manufacturing firm decides that one of its CSFs is to minimise manufacturing defects, which increase costs and threatens on-time delivery to customers. The directors could create as a KPI the rate of products found with defects on final inspection before shipping to customers. The target value could be, say, less than 0.1%.
Both of these measures meet our KPI tests. Both are performance drivers, not outcome measures. It would be clear which manager(s) would have responsibility for each one.
And both are tied to a CSF (i.e., they would impact the performance of the whole organisation in a significant way).
Make sure that most of your business KPIs are current or forward-looking
When selecting your KPIs, remember that their purpose is to improve performance. The aim is to trigger action, not to record data for posterity. Bearing this in mind, time horizon is crucial when selecting KPIs:
Some business KPIs should relate to current operations (i.e., today or at the latest yesterday) and be reported in near real time. For example, the KPI above on manufacturing defects could be measured at the end of each day and reported by 9am the next morning.
Some KPIs should relate to future operations. For example, a company might set up a KPI related to the number of calls or meetings that its sales team has set up with potential new customers. The number could be measured at the end of every Friday, covering the following four weeks, and be reported by 9am the next Monday morning.
Few business KPIs should relate to the past. A performance indicator that is reported too late to be acted on is of limited use. For example, if a high rate of manufacturing defects were reported a month after the event, the damage would have been done before anyone could take corrective action.
Identifying the right KPIs can definitely be challenging. If you are unsure about the choices you’re making, a good business financial consultant should be able to help you find the right answers.
How to design an effective management reporting system that uncovers problems fast
The key features of an effective management reporting system: relevance, clarity and speed
By now, we’ve covered how to put in place a set of business KPIs that should guide your employees to work on your strategic priorities effectively. Now you need to create a system that will communicate the performance data from your business to your top executives.
Without such a system, you won’t know whether your staff are responding to your KPIs in the way you expect. Nor will you know whether good operating performance is converting into the good outcomes you’re aiming for.
Here are the key priorities for the management reporting system you should create:
- Right data. Your reporting system should capture all material, relevant performance data while excluding any immaterial or irrelevant data points.
User-friendly format. Management reports should be quick and easy to digest. Salient points should jump out from the page. It should be obvious if any performance metric is unsatisfactory.
Timely. Reports should arrive quickly enough to be acted on.
Let’s look first at what you should report.
How to make sure your management reports are complete and relevant
Some management reports contain too much of the wrong data and not enough of the right data. Over time, as circumstances change, companies collect and analyse more data points but fail to clear space by deleting ones that are no longer crucial. Meanwhile, some newly important metrics are not picked up and reported at all, creating management blind spots.
If your management reports feel clogged up yet somehow lacking in relevant metrics, it might be time for a spring clean. What data should you include going forward?
Your main management reporting packs should comprise a mixture of performance measures and outcome measures:
If you were to report only outcome measures with no performance measures, your reporting would not explain how the outcomes were achieved. For example, an increase in the profits from your business could result from a sustainable improvement in its operating performance or from short-term, one-off factors. Outcome measures on their own would not tell you which.
Conversely if you were to report performance measures alone, your reporting would fail to communicate whether better operational performance was translating into improved outcomes — notably an increase in the profits from your business. And KPIs are not an end in themselves, they’re a means to better long-term financial results.
Exactly what performance and outcome metrics should you report to the senior executive team?
Your regular reporting of performance metrics should be centred on your KPIs. If you’ve selected the right ones, these should be all you need. Each KPI should also, of course, be reported to the team(s) responsible for the performance indicator.
Regarding outcome measures, there are no hard and fast rules about which ones you should elevate to KOMs and report to the directors. The right answer will depend on the unique circumstances of your company. However, it’s worth bearing a couple of things in mind.
First, you may wish to include a mixture of financial and non-financial outcomes in your KOMs:
You’ll surely want to include some key financial metrics. For example, it’s hard to imagine that the senior executive team doesn’t need to know the trend in your profit margins.
You may also want to report some key non-financial metrics. These may convey valuable insight into whether your organisation is on track to reach its long-term goals. For example, an increase in turnover of your skilled staff might not immediately harm your financial results but it could be an early warning sign of staff dissatisfaction that you need to investigate and address.
In addition, you may want to include some outcome measures linked your company’s goals and others that relate to relevant business risks:
Your KOMs should definitely cover your company’s main long-term goals. For example, if your firm aims to double its turnover over the coming five years, you should report your rate of revenue growth and whether it is tracking in line with this goal.
It may also be sensible to include in your KOMs some measures related to key threats that could knock you off course. For example, if you have a long receivables collection cycle, consider reporting on receivables collection and ageing. Many companies will wisely choose to include a debt or liquidity metric among their KOMs.
For a comprehensive list of the most important financial and non-financial ratios you can use to manage your business, together with how to calculate and apply them, see our ultimate guide to key ratio analysis.
How to make your management reports easy to digest
The purpose of reporting is to facilitate action when there’s a problem and corrective steps are needed to address it. You can’t fix a problem if you don’t realise it exists. If your reporting system is doing its job, it should be obvious immediately if a metric is unsatisfactory.
Regrettably it’s not always clear from company reporting packs whether the reported data are good or bad. That’s sometimes down to poor layout — metrics are displayed in a messy and jumbled fashion, reflecting the data proliferation I mentioned above. On other occasions, reports are long on facts but short on insightful analysis. It becomes hard to make out which data are most important.
With a little thought, these weaknesses should be easily fixed:
Less is usually more. It’s easier to make a report clear if it’s short. And limiting management reports to one or two pages of A4 also enforces focus. It’s better for top executives to take decisive action on one or two key issues than to dilute their efforts trying to solve numerous smaller problems.
Give thought to your comparison basis in order to provide useful context. For example, you should compare KPIs to their target. You could compare other performance or outcome measures to history, to the trend implied by your 3-5 year goals or to a budgeted figure. You could compare debt and liquidity metrics to your bank covenants. Choose what would be the most relevant and insightful comparison for your organisation.
Make good use of graphics (charts, tables, colours etc). Don’t make the executives do the analysis themselves — have good graphics do it for them. An insightful chart can prompt action in ways that a dense table of numbers may not.
Make sure your reporting is timely
Some management reporting arrives too slowly. This is another common consequence of the rapid growth of a small business. Insightful analysis is of little value if it arrives too late to be acted on.
I already highlighted that business KPIs should generally be reported daily or weekly. Plenty of data points can be reported far less frequently than this, such as your consolidated financials or the size of your new product pipeline. But these are not usually the data points that demand immediate management action.
If you have to wait a long time for your management reports, there are numerous steps your finance and accounting team could take to speed things up. This is a big topic in its own right and I’m not going to dig into it here. But if you’d like to read a great book on the subject, check out The Financial Controller and CFO's Toolkit by David Parmenter. [4] It’s brimming with ideas to accelerate your financial reporting and it’s hands down the best book I’ve read on this topic.
A business financial consultant should be able to work with you to evaluate which ideas would have the greatest pay back for your business.
Converting your reporting into action – how to move from problems via diagnosis to solutions
Missed KPIs demand immediate follow up by the CEO
You’ve now put in place a reporting system that communicates your KPIs and KOMs to the directors. When a KPI diverges from its target and performance is clearly deficient, what action should you take?
First of all, the CEO should take the lead by personally following up on any missed KPIs with the responsible team head(s). And s/he should do it immediately. That means within hours, not days or weeks. By always following up immediately on missed KPI targets, the CEO will send a strong signal to the whole organisation about the high priority attached to its KPIs.
This should, of its own accord, drastically reduce the need for the CEO to make follow up calls. Teams will usually do all they can to avoid receiving a call from the CEO about a missed target. Of course, that’s the point of the system.
However, a team will sometimes struggle with a KPI and be unable to devise a solution by itself. The result will be a missed KPI. At this point, the senior executive team needs to step in. The first step in the intervention process is to diagnose the cause of the problem. That’s what we’ll cover next.
How to diagnose the true cause of missed KPIs
It might sound obvious that you need to correctly diagnose what’s causing a team to miss a KPI before you can decide on the right remedy. Yet too many problems are mis-diagnosed. That’s because the most obvious factor — the one that springs to mind immediately — is often not the real cause of the problem.
Let’s take the above-mentioned example of the KPI related to the % of manufactured products found to be faulty on final inspection. If the defect rate were to overshoot the target, it would be easy to conclude that the fault must lie with the workers on the production line.
But this might not be true — the performance of other departments contributes to the fault rate as well. For example:
Has the R&D team designed the product poorly in ways that make it easy for production workers to make mistakes? Or have they designed it with an unnecessarily large number of moving parts, such that the device is prone to fail easily?
Has the purchasing team prioritised cost over quality and bought cheap components for the product that have turned out to be unreliable?
Have logistics staff damaged the products as they move them from the production line to the goods despatch area?
Even if the fault is found to lie with the workers on the production line, this is far from the end of the story. At first sight, mistakes usually appear to result from human error. But the human error is often just a symptom of an underlying problem related to a faulty system.
Let’s explore that with a couple of examples:
Perhaps a production worker used the wrong tool to assemble the product. But why did they do that? Were the various tools not clearly labelled? Was the storage area for tools cluttered and untidy? Had the right tool broken or gone missing and not been replaced promptly?
Perhaps the production worker followed an incorrect procedure to manufacture the product. Was the correct procedure documented clearly in the production line manual? Had the worker received all the right training before starting work on the line?
In these cases, you can see that a mistake by a person would have masked an underlying system weakness. To fix a problem and get the team’s KPI score back on target, you need to dig down to the underlying cause and remedy that first.
So treat a missed KPI as an opportunity for learning. Be alert to opportunities for improvement, both by the team that ‘owns’ the KPI and by the executive team that put it in place.
If you’re interested to read more about how to correctly diagnose business process problems like these, I highly recommend Lean [5] by Andy Brophy. It provides a comprehensive introduction to lean techniques, including problem diagnosis. These were originally developed in the post-War era by world-beating Japanese manufacturing enterprises such as Toyota but they have since spread around the world.
Learning simple but effective techniques such as The Five Whys can really help when you are investigating missed KPIs. The techniques were originally developed in a manufacturing context but are equally applicable to service businesses. Some business financial consultants have experience of implementing lean concepts in small company environments.
As you diagnose the causes of missed KPIs, you’ll find they fall into two broad categories: those that can be fixed with operational level solutions and those that require strategic level solutions. Let’s deal with operational level problems first.
How to bring KPIs back on track with operational level solutions
An operational level problem is one that turns out to be fixable simply by improving the way the existing process works. Let’s consider the example of a sales team that’s missing a KPI linked to generating new sales leads.
As you investigate what’s causing the team to miss its KPI target, don’t dwell on mistakes and weaknesses — focus instead on opportunities for improvement. The team has presumably tried to come up with its own ideas for improving performance and not been successful, so be prepared to propose ideas of your own.
For example, can you advise the team which of your products or services are usually the most effective door openers with new clients? Are they following best practice on how to pitch your product’s USP to win initial meetings? Would an extra team member enable them hunt down more leads? Would they benefit from any additional technology tools or sources of market data?
If the ideas you come up with are effective and enable the team to get its KPI performance back on track, you can conclude that the issue was merely an operational level problem that you’ve been able to fix.
If operational level solutions don’t work, you may need to make strategic level changes
If one or more of your teams are consistently struggling to hit their KPI targets and your efforts to improve their performance with operational level improvements (extra coaching and resources etc) have not borne fruit, it may be time to consider things from a higher level perspective.
In the first case, ask yourself whether you may have you picked the right KPIs but put in place targets for them that are too ambitious? If you conclude that the current KPI targets are unachievable, don’t simply reduce them. Ask yourself first: would lower targets be capable of delivering acceptable long-term financial outcomes for your company (revenue growth, profit margins, return on capital etc)?
If they would, you may be right to simply reduce a KPI target. But if they wouldn’t, you need to undertake a deeper review of your business strategy. You may be operating in a market where you’re not competitive enough. For example, your product might lack a sufficiently compelling USP or your product range might be too narrow for the customer segment you’re targeting.
If you diagnose fundamental challenges like these, you may need to consider a pivot in your strategy. That could mean asking questions like:
Could we sell our existing product more successfully into a different segment of the market? Would it appeal more to customers if we added new features? Is our pricing just too expensive?
If we shift our business strategy, what extra costs would it involve? Would we need new staff with different skills? Would the revised business plan be financially attractive and what would be the risks?
To sum it up, a well-designed set of business KPIs and an effective system of management reporting can play a vital role in keeping your strategy relevant as your company grows and circumstances in your market evolve. Your KPIs and reporting system should:
Link your operational performance with your evaluation of your firm’s competitive strengths.
Deepen your understanding of your company and your industry by providing thoughtful analysis and thereby enable you to plan for the future more insightfully.
Help you identify when you may need to adapt your strategy or even adopt completely new goals.
Here’s a great quote from Max McKeown, one of today’s foremost writers on business strategy, that encapsulates the ideal of a dynamic feedback loop between your management reporting of your KPIs and KOMs and your ongoing process of strategy refinement and development:
[Clever strategy tries] to plan deliberate actions to shape the future, but also tries to stay close to local events and to react to them. In this way, strategy is transformed into a learning process that becomes – at its best – smarter through experimentation. [6]
If you find you need to look to strategic level solutions for performance issues, it can make sense to bring in a small business advisor to work with you in devising and implementing changes.
What about making sure that KOMs encourage corrective action?
I have focused above on how to make sure your KPI reporting leads to action. You may ask: what about traditional outcome measures, both financial and non-financial? Shouldn’t reporting of those lead to action as well?
That’s a complex issue which merits a separate article on its own, but here are some brief thoughts.
First, you may sometimes find that your teams are hitting their KPI targets but some of your KOMs are not improving as you had expected they would. This should prompt you to ask whether you have selected the right KPIs. You should go back to your CSFs and consider whether other performance indicators exist that play a bigger role in driving results than the ones you have chosen as KPIs.
More generally:
If you follow the reporting best practices set out above (completeness, relevance, clarity and timeliness), you should find it easier to identify any problem trends in your KOMs and take action.
Be alert to shifts in non-financial outcome measures, which can provide early warning signs of problems (e.g. the above-mentioned example of rising staff turnover).
Financial outcome metrics (e.g. revenue growth, profit margins) present an analytical challenge because they can be impacted by one-off issues (e.g., a large bad debt recovery), exogenous events (e.g. an unexpected fluctuation in materials costs) or judgment issues (e.g. movements in provisions for receivables, inventory etc). There is no substitute for expertise and a critical mind when seeking to interpret these measures and understand what may lie behind them.
Beware of relying on variance analysis against budget. Your budget was only ever an estimate and it eventually falls out of date. Budgets are not always perfectly objective (low balling, etc). Variances against budget can be explained away too easily.
Never be caught out by financial metrics that show fast-rising debt or a dangerous drop in liquidity. These rarely lie and can be terminal.
If you find you’re unsure how to interpret and act on financial metrics that appear to be following a negative trend, a good business financial consultant would be able to advise you about your best options.
Common pitfalls with business KPIs and management reporting systems – and how to avoid them
Creating and implementing well-designed KPIs and an effective system of management reporting looks easier than it is. Here is a list of common pitfalls you’ll want avoid.
Don’t rush it — follow the process one step at a time
It can be tempting to rush into setting up your KPIs. They feel like the action points, so you want to put them in place as soon as you can. That’s fine — but make sure you have thoroughly researched your success factors first and identified which ones should be your CSFs.
Correctly identifying your CSFs actually takes you a long way to identifying your KPIs — many KPIs almost suggest themselves from your CSFs. Whereas if you jump straight into choosing KPIs, you may plump for performance indicators that turn out not to be the critical ones.
Additionally, searching for your CSFs should guide you to think about your business holistically. If you speed through the CSF exercise, you might find yourself focusing too much on performance indicators that relate to short-term financial results. You could miss KPIs that relate to the long-term prosperity of your business (staff skills training, new product development etc).
Be careful not to confuse KPIs with KOMs
As I highlighted above, it’s very easy to mistake KOMs for KPIs — especially when the outcome measures are non-financial. Metrics of customer and staff satisfaction are good examples. Remember that a KPI is a measure that drives performance, not one that records it.
Beware of the law of unintended consequences
Targets of any kind are notorious for generating unintended consequences. Before you roll out a KPI, it’s vital to test whether it will lead to the behaviour you’re seeking. The easiest approach is to ask your staff how they would change the way they do their job in response to the proposed KPI.
Remember that we all respond to the incentives we’re given. Your staff will look for a way to hit the KPI targets you give them. They won’t try to read your mind to understand if they are following the approach you intended. You can’t blame them for this. It’s up to you to research the effects your KPI will have before you put it into action.
In any case, involving staff in the KPI development process is basic good practice. People buy into objectives much more readily if they’re involved in setting them. The best way to do this is to involve them in the design of KPIs that relate to their team, but at least be sure to consult with your staff before you roll them out.
Limit yourself to at most a dozen KPIs
In your enthusiasm to improve your control of your business, it can be tempting to expand your list of KPIs to more than a maximum of a dozen. If it’s 14, that’s not going to derail your project. But make sure you don’t allow the list to grow materially longer.
Remember that focus is your friend. You don’t need to excel in 100 areas for your business to be successful — you just need to nail the 5-10 factors that are crucial. If you spread your efforts too widely, you will risk ending up with mediocre results everywhere rather than excellence in the handful of things that really matter.
Use business KPIs to guide and empower your staff, not to blame them or penalise them
KPIs may look like a centralising mechanism that takes power from staff and puts it into the hands of the directors. In fact, business KPIs should work as tools to devolve more authority from the senior executives to front line staff.
That’s because the more clarity you can give your staff about their objectives, the less you’ll need to micro-manage them. The better staff understand their objectives, the more you can give them autonomy to pursue those objectives in the way they find most effective.
Resist the temptation to take missed KPIs as evidence of failure — don’t make the process of investigation a blame exercise. If your staff conclude that the directors see KPIs as a tool for disciplining under-performers, this will undermine their enthusiasm for using them.
Instead, work with your staff to identify the causes of problems and develop effective solutions to them. If you’ve hired good people, your teams will seldom miss KPI targets for lack of effort. Good employees normally want to achieve excellent results because it gives them professional satisfaction and improves their prospects for career progression and salary enhancement.
Regrettably, a few staff will repeatedly miss KPI targets for fundamental lack of aptitude or work ethic. You will have to part company with such employees. But KPIs are usually missed for reasons that are fixable.
Do you want to implement KPIs in your business?
Could your company benefit from a well-designed system of KPIs? Could they help to increase the profits from your business?
If you think it could, bear in mind that the process of designing and rolling out a KPI system across an entire business can be time-consuming. It often pays to engage an external expert to guide and moderate the process. A good business financial consultant can free up the senior executives’ attention to focus on identifying an organisation’s CSFs and KPIs rather than being absorbed in running the mechanics of the process.
Perhaps you’d like to do some more research on KPIs first? By far the best book on the subject is Key Performance Indicators by David Parmenter [7]. In his book, the author runs you through the theory of KPIs in detail and then provides practical guidance on how to implement a KPI project from start to finish, including the personnel required and suggested timelines.
[1] Daniel, D.R. (1961) Management Information Crisis. Harvard Business Review, 39, 111-121. [2] Rockart, J.F. (1979). Chief Executives Define Their Own Data Needs. Harvard Business Review, 57, 81-93. See https://hbr.org/1979/03/chief-executives-define-their-own-data-needs. [3] Kaplan, R. S., Norton, D. P. (1996) The Balanced Scorecard: Translating Strategy into Action. Boston, Harvard Business Review Press. For profiles of the authors and more information about their ideas and other publications, see https://www.hbs.edu/faculty/Pages/profile.aspx?facId=6487 and https://en.wikipedia.org/wiki/David_P._Norton . The Balanced Scorecard is available from all good book shops. [4] Parmenter, D. (2016) The Financial Controller and CFO's Toolkit: Lean Practices to Transform Your Finance Team. Hoboken, John Wiley & Sons, Inc. For more about David Parmenter’s work and for access to his other books and extensive training materials, see https://davidparmenter.com/. [5] Brophy, A. (2013) Lean. Harlow, Pearson Education Limited. For Andy Brophy’s profile and for more of his publications and services, see https://www.lean2innovativethinking.com/. [6] McKeown, M. (2012) The Strategy Book. 3rd Ed. Harlow, Pearson Education Limited. For more about Max McKeown’s profile and work, see https://uk.linkedin.com/in/maxmckeown. [7] Parmenter, D. (2019) Key Performance Indicators: Developing, Implementing, and Using Winning KPIs. Hoboken, John Wiley & Sons, Inc. For more about David Parmenter’s work and for access to his other books and extensive training materials, see https://davidparmenter.com/.