As we all start working toward our
goals and
targets for the year, what defines a good KPI? Guest blogger
Hanne Sorteberg returns to share her experience and advice on how to get these priority
metrics right. She also helpfully shares nine pitfalls to avoid.
Whether you are an
analytics leader setting KPIs for your team, or influencing other
teams, this is for you.
Over to Hanne…
A new business year often brings new strategies and plans. KPIs, key performance indicators, are metrics that provide information on how a business is performing. KPIs ensure that a
strategy is achieved, by giving direction to the employees who can realize it.
Best case, KPIs are the compass that makes sure we are headed in the right direction. Worst case, they may drive
behavior we do not want.
Best case, they motivate for increased and improved effort; worst case, they discourage and
demotivate. Oftentimes, they are a theoretical exercise put in a drawer without value.
Avoiding worst-case KPIs
How can we build KPIs that contribute to the growth and development of our business?
KPIs should follow the checklist for SMART goals:
- S = Specific, it is evident and clear what the goal is
- M = Measurable, it is possible to measure the goal unambiguously
- A = Ambitious, it’s a stretch to achieve, and at the same time realistic
- R = Relevant, it contributes to the business’ strategy
- T= Timed, the timeframe for when the goal is to be achieved is clearly defined
There are many pitfalls to avoid to succeed with KPIs and
goal management. Here are nine to consider:
Pitfall #1: Too many KPIs
The most common mistake is to be too ambitious and clever, vigorously defining KPIs for the entire business with fancy
graphs and Excel macros. The work requires a lot of time to set up, and even more to maintain. Important deviations drown in information overload.
A hospital went from one report of over 150 measurements, that no one paid attention to, to a lamp on the manager's desk. It had a green, yellow or red light depending on the waiting time in the emergency room. The lamp caused a significant improvement.
A few, important KPIs can be enough to model the most important business processes. First ensure these are established, communicated and anchored in the organization. Then you can consider adding or adjusting the KPI process.
See also: Insurtech Starts With ‘I’ but Needs ‘We’
Pitfall #2: Overly fancy KPIs
Some KPIs can measure performance well but still be a bad choice. It can be too difficult to obtain the data. It can be difficult to explain what the KPI is, or there may be disagreement on how the KPI should be defined or calculated.
Pitfall #3: KPIs that are impossible to measure
Some KPIs that are important can be difficult to measure. In such cases, you either have to drop them or find an alternative way to measure them. For instance, customer satisfaction can be measured by an
index based on surveys.
It is important that the KPI is a numerical value, so that you can define thresholds and measure historical development. Make sure the KPI has the same meaning over time.
Pitfall #4: Vanity KPIs
Eric Ries, author of “
The Lean Startup,“ uses the term “vanity metrics“ for measures that are celebrated as achievements but don’t contribute to the growth and development of the business.
The number of page views, clicks, downloads and the like are examples of metrics you can boast about, but they don’t necessarily contribute to increased sales, customers or loyalty. Vanity metrics can take your attention away from
the important stuff to follow up on.
Pitfall #5: Not defining “good”
What are satisfactory results?
KPIs should drive the right behavior. It is important to define the thresholds of what is a
good result, or green, making clear when there is a deviation that requires actions, to improve a yellow or red/critical situation.
Pitfall #6: Not following up on KPIs
Many businesses define KPIs as a part of their yearly strategy
planning. The KPIs should be followed up so frequently that you have a chance to adjust course in time.
Some KPIs may be measured daily or weekly, others more seldom. If something is measured less frequently than quarterly, it is probably not a good KPI.
Pitfall #7: Not distinguishing between result and effort KPIs
Most KPIs show results a business has achieved. Sales, the number of customers and contracts, waiting time, etc. You cannot influence these metrics directly; they result from what you do.
An
effort KPI measures the activities you do to affect the results. The number of sales calls, marketing campaigns, number of service calls and hours used for improvements are examples of such KPIs.
It is useful to link result and effort KPIs. When a measurement hits yellow or red – which actions are taken? And how much effort does it take to correct?
See also: The Dark Side of Product KPI
Pitfall #8: KPIs that drive unwanted behavior
Some KPIs can have consequences you did not foresee, or even lead to behavior that is unwanted. If you, as a software vendor, introduce a KPI on the number of bugs, the development time may increase significantly.
Measurements comparing when features are delivered to an estimate may lead to estimates that are way too high.
A KPI to shorten the length of a telephone call at a service desk to decrease waiting time may cause fewer issues to be handled at the first call. But it may also actually increase the total waiting time.
Some of these KPIs may be kept if they are balanced by an additional KPI. The number of bugs measured at
the same time as development effort. The length of service calls
in addition to the number of issues solved at the first call,
in addition to customer satisfaction.
It is critical to reflect on whether the KPI will introduce negative and unexpected consequences. If you can imagine any, set up monitoring to evaluate how effective the KPI is over time.
Pitfall #9: KPIs aren’t communicated and anchored in the organization
KPIs are meant to change the way you act. To measure without doing something different based on the results is wasted time.
If you are to introduce a
system of goals and measurements, it is important that the KPIs are communicated. This needs to be done in a clear way, and the organization needs to agree to them. Stakeholders should perceive that their effort can affect the KPIs. They need to believe that the goals are realistically achievable.
Something should happen when a KPI turns yellow or red, either corrective action or an adjustment of the KPI to make it reflect reality.
How are your KPIs?
Thanks to Hanne for that practical post, which I’m sure is relevant to many
managers at this
time of year.
What are you going to
do differently as a result? Are you confident that you have the right KPIs for 2019? If not, how could they be improved?
If you do make changes that work, after reading
Hanne’s advice, I’d love to hear your story.
