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Aligned to strategy blueprint and strategic business plan
A KPI needs to be helping you to assess the performance around the goals and objectives set-up around the strategy blueprint and business plan. As you define a KPI, you will have to provide on how it links to the intermediate and the final objectives. The alignment does not stop with this linkage. One will also need to define on the 'importance' and 'weight' of KPI related to the objective it is linked to.
Balanced across the shareholders, customers and employees
This is not to do with individual KPI, but the overall KPI inventory. KPIs should be well distributed across financial, customer, processes, employee and learning objectives. (pretty much around the balanced scorecard).
Though all objectives finally lead to the financial and shareholder outcomes, the underlying objectives need to be met to achieve these end financial objectives. Therefore a balanced KPI repository will be appropriating an equal focus across the objectives.
Single point of ownership
Any KPI needs to have a single owner defined for performance on that KPI. For most of the KPIs, it’s possible, but there are KPIs, where there are multiple functions contribute to its success. For example- Let’s take a metric, 'average cost of processing each home loan application'. The success of this KPI is linked to operations functions (for having cheaper operations), risk & credit function (to have balanced underwriting policies to optimize rejection rates) and sales function (to get clean home loan applications, to get credit worthy home loan applications and also to get more home loan applications)
In this example, one needs to define the owner of this KPI. There are various ways in which you can get a single point**
A right mix of leading and lagging
You are aware that a leading KPI is that one, which tells 'what is expected to happen?' and a lagging KPI tells on 'what has happened?’ In a performance management framework, both the questions are equally important. By having less number of leading indicators, an organization tends to be reactive and less anticipative. By having less lagging indicators, an organization is not able to well analyze the current state, which impairs its capability to be future ready. While both lagging and leading indicators are not a challenge to measure, the leading indicators have a challenge of interpretation. Therefore, we always recommend documenting the rules of interpretations, to avoid confusion.
Analyzable
This is more to do with your analysis infrastructure behind the KPI than the KPI itself. A KPI once reported (what is happening?), needs to be ripped-analyzed to understand the underlying reasons ('why is it happening?'), and contributing entities ('which transactions, locations, products, people are the key contributors to the results?'). There are various analysis (basic and advanced) that should be able to be performed. There are two aspects of this analysis infrastructure. The first is the capability to analyze (BI infrastructure, analytics and querying tools, OLAP layer to enable navigation....) and secondly the business thinking on 'what to analyze?’ One needs to be more or less clear (with leaving some part of it to the ad-hoc judgment, on which areas you will look into if a KPI is not performing up to the expectations. For example, for a KPI related to sales productivity, one will look into the sales force tenure, sales strike-rate and geographical expansion.
Actionable
The previous point talks about the back-end piece of a KPI and this point refers to the front-end. A KPI after being analyzed should lead to the decisions and actions to improve or sustain the performance on the given KPI. After the analysis is done and the strong and weak points are identified (the locations which are underperforming, the sales managers who are contributing most to the performance, the products which are selling max or minimum....), one needs to decide on what actions to take which will provide maximum boost given the effort band-width available. A KPI being actionable means that you should be able to decide upon the top priority actions.
Optimized in number
It’s more or less self-explanatory. Too many KPIs to measure and analyze would become unmanageable from management point of view. Stay focused on top-priority KPIs, which make biggest of difference. When we say that one should be optimized in numbers, it is related to one level and not all the levels. Every top priority KPI in a top-management (say) level scorecard will have five (say) KPIs in the next (lower) level scorecard. The idea is not to put all the linked and supporting KPIs at the same level. As you identify a KPI set for a given scorecard, one will need to look at:
- No two KPIs should be linked to the same performance parameters (with little overlap acceptable)
- One KPI need to be supporting other, unless both are needed to complete a story
- A KPI should be linked to the top 5-7 business objectives, issues, opportunities.
Simplicity aligned to the level
There is a line of thought that KPIs should be simple. This is true but depends a lot on the level. The KPI simplicity depends upon the level. There is a field tip assigned to this point. In short, as the hierarchy level goes up the complexity of KPI does up. At higher levels KPIs will not only be talking about a singular result, but more of holistic achievements and also the quality & 'how' aspects.
Linked across levels, functions and processes
A larger KPI should be able to split-able into lower level KPIs. For example sales productivity should be able to split into sales revenue, sales strike rate, sales velocity KPIs. Similarly, when you look at the process, one should be able to have a set of KPIs which can holistically assess process performance. This means that KPIs for a process should be able to measure the process end-output, interim deliverables, quality of deliverables, process quality, process efficiency, process repeatability etc...
Standard
A KPI definition and its interpretation should be standard across all scorecards. That's why we recommend using KPI dictionary. This dictionary should be containing the details on the KPI in terms of its definition, its calculation, examples for clarity etc...
Change-Manageable
A KPI should be able to be fine-tuned depending upon the new changes. For example, if government introduces new service tax, which needs to be charged from the customer, by the service provider, one may need to go back and redefine sales revenue as paid invoice less service tax. |
