We see it over and over again. Managers using a single KPI to assess performance and decide how to improve it. So why is this wrong and what should be done instead?
KPIs (Key Performance Indicators) are an essential tool to help managers make decisions to improve performance. But unfortunately some managers are using KPIs incorrectly, so let’s explore how KPIs work and how to use them.
A KPI should never, ever be used on its own, as it tells us very little
Avoid this number one mistake!
When using KPIs, always use a balanced range of measures that you believe relate to the end result you want. Then you will have information on the impact different activities have on your end result.
Always us a range of KPIs to understand the impact of different activities on results
KPIs have 3 main functions, they:
- Tell us about current performance
- Show the relationships between other activities and results
- Indicate ways in which to improve results.
1. KPIs tell us about performance
KPIs are useful as they tell the current level at which something is performing. But KPIs have a far more important function.
2. KPIs show the relationships between activities and results
KPIs show us the relationship between activities and results, so we can understand the impact of specific activities on the results we want. By understanding the relationship between activities and results, we are able to make informed decisions about which activities to do more of, change or stop.
For example, if you want to improve Net Profit, you need to understand the impact key activities are having on Net Profit. What is happening with your…
- Sales
- Sales Mix
- Gross Profit
- Gross Profit %
- Overhead Expenses
- etc
…in relation to Net Profit?
Or if you want to improve Gross Profit, what is happening with your…
- Sales
- Sales Mix
- Material costs
- Labour costs
- Waste/rework
- Manning
- Production volumes
- Training completed
- Gross Profit %
- etc
…in relation to Gross Profit?
Or if you want to improve Sales, what is happening with your:
- Inquiries/Hits
- Proposals submitted/Sales Calls
- Conversion rates
- Promotional activities
- etc
…in relation to Sales?
Apply this approach to all key result areas, like: safety, quality, repeat business, employee engagement and cash generated.
What gets measure gets done. It is essential to identify and measure the activities that make the biggest impact on results.
When we look at a KPI in isolation, we can’t see, or understand, the interrelationship of related activities and their impact on the KPI. It is the interrelationship that is important.
3. KPIs indicate specific ways to improve results
By using a range of related KPIs you will be able to spot key relationships and identify which activities to focus on to achieve improved results.
Use a simple Dashboard of KPIs to understand the relationship between activities and results
Use simple dashboards to view your KPIs together. This will enable you to see how they relate to each other and what to focus on to make a difference.
Dashboards don’t have to be complicated, we often use simple Excel spreadsheets. Contact us if you would like us to email you one of our dashboard templates.
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