We hear a lot about KPIs (key performance indicators). We’re told they are fundamental to achieving business goals. The Internet is full of sites suggesting what makes a good KPI and what doesn’t: gross profit; customer retention ratio; number of new customers; web hits – the list goes on and on. And as in many cases you’ll get what you ask for.
But there’s a bigger picture; bigger than a few metrics that someone, somewhere, suggests are good to track.
Remember Alice in Wonderland? The Cat told her that since she didn’t care where she went, other than “somewhere”, it didn’t matter which way she chose to go. KPIs are very much the same. If you don’t know what you want to achieve then you can measure anything and probably feel good about the results.
This won’t, however, drive your business forward in the correct manner. If you don’t know where you’re headed as a manager, how on earth are your staff expected to know where they should be headed and what they should be doing day by day?
You’ll get what you ask for
Research shows that people will adjust their behaviour based on the metrics against which they are measured. In essence, you’ll get what you ask for.
This is good news, but it means that firms should put in place business metrics that are important to them. After all, a key performance indicator means just that – an indicator that is key to the firm.
So having determined the correct indicators to measure, for example sales per square metre within the retail industry, it is important that this is communicated to staff. Whilst you may think that they just need low-level metrics, they actually need a way of putting their contribution into context. That context is the big picture.
From the big picture, you can then focus on local activities and individual employees.
So, what might people metrics be? Well, as with Alice this will very much depend where you, as a firm, want to go.
Let’s assume your firm has a sales team responsible for acquiring new business. Let’s also assume that the firm has determined the current strategy is to grow new business by £500,000 over the next year. Let’s also assume that the firm has 10 sales people responsible for this growth. Assuming equal ability to gain new customers across the UK then each salesperson will be expected to deliver £50,000 in new business as one of their key performance indicators.
This objective directly links personal goals to the firm’s overall objective.
Research shows that the more personal and specific the goal, the more it is likely to be achieved. This means that the firm is more likely to meet its objective with specific, personal, monetary targets than if it were to give the sales team (as a group) the objective of bringing 10 new clients on board.
This idea of breaking down corporate goals to yield individual goals can be extended to all areas of the business.
Management of staff metrics
There are KPIs that can be implemented to help determine how effective the firm is in managing staff.
Where company turnover metrics are not met, it can be important to understand why. For example, effort is essential to corporate outcomes. Where staff are absent, that effort is missing. Absenteeism metrics such as the Bradford factor can help a firm understand whether it has an issue with long-term or short-term sickness absence. The key problems can then be addressed using the low-level metric, thereby securing the higher-level metrics.
Staff turnover and the length of time to recruit to new roles are also indicators that might be helpful to firms. Company-wide figures can be compared to similar firms in similar industries and even benchmarked to firms that management consider as excellent. Such metrics can be gathered by department or by role to feed data to other decision-making. Management may, for example, elect to award salary scarcity supplements to ease some recruitment problems – but only if the supporting KPI data is captured.
KPIs must ‘live’ in a hierarchy. High level KPIs like profit and turnover deconstruct to department KPIs. Department KPIs then deconstruct to give individual KPIs. If the lower levels are met, and the hierarchy is constructed well, the corporate KPIs will be achieved.
You’ll get what you ask for
Whatever indicators are used, it’s important that they are measuring relevant metrics. If a reduction in the length of time to recruit is the agreed metric then the objective is simply to make sure that the time to recruit is as short as possible. The KPI is likely to be easily achieved. You get what you measure!
But if the recruitment process isn’t robust and ultimately the people recruited do not meet the performance needed once in post, then the metric to reduce time to recruit may well be met while performance KPIs are not.
This shows that one KPI can work to oppose another. KPIs must be constructed to reinforce, not oppose.
So in conclusion, firms must determine what is important to them and then focus on measuring these metrics. Everyone in the firm must understand the metrics, and employees must understand how their role and their effort fits into the overall strategy.
Employees must have objectives that can be measured, and there are simple methods that can ensure that KPIs align and document how individual objectives align to company objectives.