The Art of Setting KPI's
The mantra behind key performance indicators (KPI's) is imprinted on the brain of every executive in the world: If you can't measure it, you can't manage it.
The trouble is many companies don't know what to measure. The result: bad management, mixed messages, confusion and employees focusing on the wrong thing.
KPI's need to be handled with care. Some companies use many KPI's, others have a handful. But they all need to use the right ones.
Kevin Dwyer, founder of change management consultants firm Change Factory tells of one big financial services company that had three conflicting KPI's: containing bad debts, days that people hadn't paid and costs.
If they pushed hard on costs, it pushed bad debts up,'' Dwyer says. To keep bad debts down, you might have to spend more and put another 100 people on at the call centre. By pushing down on costs, bad debts might go up but to keep bad debt down, you might have to spend more.;
KPI's cover many areas and there are different measures for different roles. Typical KPI's include cost of sales, the mix of products sold, sales against target, sales conversion rates, delivery on time, employee turnover, number of new ideas generated, how many ideas become profitable, rate of conversion of web traffic, customer acquisition cost or inventory turnover, lost time due to injuries, error rate and customer complaints.
So many KPI's, but all held together by one principle: they are shaped by the company's strategy and operations. A retailer will have different KPI's to a warehousing company.
The KPI is the indicator of where the company is headed. But it is also the one area that many companies screw up because they are not thinking about how a KPI is helping the company meet its targets.