When you go to your doctor for a physical, he initially gathers information on the basic function of your body, usually checking your heart rate, blood pressure, weight, and body temperature. He will compare your current readings to normal baseline readings, or to your historical readings. If any of these measures are out of line, he will investigate further to attempt to determine the cause. Once a cause is identified, he will treat that cause with diet or exercise recommendations, or perhaps medication, with the goal of bringing your body back into an acceptable range. This illustrates how your doctor uses key performance indicators (KPIs) as a quick way to determine your current state of health; then once change is desired, to measure progress towards improvement.
You can use this same method to monitor and improve the health of your business.
Over time, the medical profession has determined the best measures that give a doctor a quick way to determine a person's current state of health. It may take some time to determine your company's KPIs, but the concept is the same. What are the simple, real-time, observable measures that indicate the current health of your company? A company can utilize these concepts to better focus their organization and employees on successful behavior.
The process of determining your company's best KPIs requires an investment. You get out of it what you put into it. The process of determining and monitoring KPIs can be very complex – Fortune 500 companies can have literally hundreds of KPIs that are monitored regularly. However for a small or medium company, the trick is to start slow and simple – to truly understand and design the best measures that get to the heart of what it means for your company to be successful.
Most measurements companies employ are historical – past indicators such as monthly financial statements or production reports. KPIs focus more on the present and future than the past. What can you do NOW to maximize efforts towards company goals?
A step to begin this process is to form a cross-functional team in your company to take on this project. Include your most creative, energetic, and ambitious managers and employees, pulling from all areas of the company. When employees are part of the process, the results can be much more effective and powerful – they are more likely to embrace the process; after all, they helped design it. Sometimes it makes sense to utilize an outside consultant that knows the company, or has experience in helping companies with these types of projects.
Success Factors
First, determine your company's success factors – necessary elements, characteristics, conditions, or variables that are required to ensure the strategic success of your company. Some success factor areas include product or service quality, customer satisfaction, employee attitudes, company flexibility, overall efficiency, etc. Some industries or companies define their success factors exclusively through the eyes of their customers.
How do you picture your company when everything is going well and "running on all cylinders"? Brainstorm and describe the elements that would be present when the company is at its most effective and efficient. Some examples:
Customers are satisfied and it is a pleasure to work with them
Owners/management/employees are excited, happy, and seeking more responsibility
Company is attracting new, exciting opportunities
Work environment is safe, under control and work is completed on schedule
Management and employees are pro-active in solving problems and are making good decisions
Efficiency is the name of the game in all areas of the business, and everyone is striving to improve it
Come up with a number of success factors, then prioritize and distill them down to the truly important ones - those that are most important to the future bottom-line success of your company. These are your Critical Success Factors. Be focused – these should be the two or three things your company will strive for that will make the most difference.
Once Critical Success Factors are determined, then KPIs are designed to measure progress. KPIs are quantifiable measurements that reflect the Critical Success Factors of an organization.
KPIs should be:
Developed with upper management participation and encouragement
Defined precisely
Measured frequently – hourly, daily or weekly is best
Directly related to customer satisfaction
Usually not measured in dollars
Simple and understandable
Posted for all to see, and celebrated
Can be designed for all areas of a company's operations: product development, customer service, human resources, accounting, sales and marketing, etc.
Supported by management with accountability
Revisited and refined regularly so they maintain relevance
Some industries have very straightforward KPIs – they appear to be easy to determine. For example, the airline industry has three simple KPIs: 1) on time performance; 2) # of lost bags; and 3) # of customer complaints – all of these are extremely customer oriented. Restaurants can also have simple ones: 1) # of first time customers; 2) # of return customers; 3) # of mis-orders; 4) % of customers ordering dessert, etc. For other industries, it may not be so easy or straightforward.
Obviously KPIs are easier to establish for repetitive, measurable work. However, with a little thought and effort, meaningful KPIs can be developed for almost any industry and department function.
Examples of some KPIs for different industries and departments:
Production:
# of safety incidents
# of days hitting targeted production
# of re-do incidents
Amount of overtime
# of equipment breakdowns
# of times/man hours work stopped waiting for supplies or coordination of work
Restaurant:
# of first time customers
# of return customers
# of mis-orders
% of customers ordering dessert
Revenue per payroll hour
Human Resources:
Employee turnover rate
% of time cards turned in on time and complete
Employee satisfaction survey scores
Sales and Marketing:
# of face-to-face visits with customers/targets
# of face-to-face visits with networking sources
# of referrals obtained
# of new contracts
Airline:
On time performance
# of lost bags
# of customer complaints
Good KPIs must be actionable and measurable and must truly mean something to your company. If you find you or your employees do not relate to a particular KPI and are ignoring it, scrap it and find a better one. Bottom line: an effective KPI must work for your company every day.
Once KPIs have been defined, establish goals and targets for each one, monitor them and use them to manage performance. KPIs give everyone in the organization a clear picture of what is important, and what they need to strive for, concentrate on and make happen every day. It can be a beginning of embedding the right behavior in all aspects of your business: your management team, employees, suppliers, and even your customers. Hold them out for all to see, make a big deal about them - and let the competitive nature of your people take over!
