What’s the point of Key Performance Indicators (KPIs)? Well if you are using them to measure overall performance of your business, then surely the answer is “to drive action”. Knowing something (eg. “we are behind on target”) is only useful if something can be done (action taken) in response to that knowledge.
In my experience of working with law firms (which is what we concentrate on), the top two KPIs for most are some measure of billing (income) and some measure of time recording (movement of WIP). Are these the right KPIs? Will they drive the right action? Maybe, and maybe not. To answer that question we first need to take a step back from the KPIs themselves and be clear about what the overall objectives are that we are trying to achieve.
Performance is not an absolute concept – measurements of performance are only valid when compared to a target or objective. If a firm’s high level objectives are clear then the key performance indicators should flow from those. Commons sense? Yes, but it is surprising how many organisations fail to adequately quantify their objectives. Without quantifying what you want to achieve, how do you know when you have achieved it?
It is also important to understand the interrelationship of different measures and to remember the old adage “you get what you measure”. Too narrow a focus on one measure of performance (eg. revenue) may well result in achievement of that target, but at the expense of what? If client satisfaction, gross margin, net profit or staff turnover alter negatively, is that a good overall outcome? This is where the key performance indicators need to be carefully selected as a set of measures, which reflect a very clear definition of all the business objectives.
To provide a complete rounded view of the performance of an organisation, a good set of KPIs will measure at least four different aspects of business:
How many KPIs should a business have?” The first answer I would always give is to focus on the word “Key”. Not all performance indicators are key, but as outlined above there needs to be a broad coverage of all aspects of a firm’s operation.
It is also important to recognise that different KPIs may well apply to different areas of a business, and all areas of a business need KPIs. It is tempting to focus on things that are easily measured (sales and financial measures), but neglect the fact that overall business performance is also highly dependent on successful delivery of Marketing, IT, HR and other objectives.
The final attribute of good KPIs is that they should be future focussed. It is all well and good knowing that the profitability last month end was behind target, but that is, as some wise sage put it, “like driving a car whilst looking in the rear-view mirror”. If you can identify leading (as opposed to lagging) indicators for your business you should be able to take action before those lagging financial indicators are affected. This is a whole new topic, but if you’re interested, a good starting point is always Bernard Marr (https://www.linkedin.com/pulse/2-types-performance-metrics-everyone-must-bernard-marr)
So how to define the right KPIs for your business? Firstly, start with clearly articulated objectives – if these use the SMART formula (Specific, Measurable, Agreed, Realistic and Time Related) then you are halfway there with the measures and timescales already defined. Next, review those objectives to determine the adverse outcomes you want to avoid (eg. unhappy clients), as well as the positive outcomes you are striving for (eg. more income). Finally add in the future focussed indicators that help predict achievement of your goals, and this should complete the set of performance indicators you need.
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