Are your KPIs really fit-for-purpose?

How good is your knowledge of how well your business is performing? Does the answer come in the form of a list of KPI statistics? And if so, how confident are you that these are indeed an accurate reflection on what really matters?

KPIs are heavily relied upon to gain insight into a company’s “health” and as the basis for making (often) crucial decisions. Yet many managers, aware of inaccuracies and shortfalls within their KPIs, still feel the need to resort to experience and know-how as a substitute for hard facts. This often results in scrabbling through daily business challenges, wondering why things aren’t turning out as intended, instead of riding the wave of data-driven leadership.

So where does it all go wrong with KPIs? Something we often see is that they are not fit-for-purpose. Many businesses appear to just be blindly measuring KPIs because that’s an expected thing to do, without understanding why they are doing it, or taking the trouble to choose and define them properly. The “K” in KPI is often ignored. A the-more-the-better principle is often adopted. And then, after all this effort, because there is no tangible link between the data and how improvements can be made, it’s often just stored and forgotten about.

If, after going to the effort of collecting KPI data, you still find yourself needing to discuss what to do or even whether to do it, you probably have the wrong KPIs in place. To help you assess this, here are three tips for creating fit-for-purpose KPIs:

1. The Outside-In ® principle – measure as your customer does

A company’s success is ultimately dependent on how well it serves its customers. Getting this right requires accurate insights into both what customers want and how well their wishes are actually being met.

You should therefore strive to have KPIs which are aligned with customers’ points of view. Simply settling for what is already possible to measure (based on existing IT or organisational structures) won’t necessarily help you succeed. You need to establish KPIs that reflect your customers’ outside-in perspective, even if this calls for additional effort and investment.

KPIs are there for a reason. If you can’t make a commitment to measuring what really matters, how committed are you to achieving business success?

2. Average isn’t good enough

How many of your KPIs are averages which reflect aggregated performance over a week, a month or otherwise? What does a statistic of 95% on-time delivery really tell you? What does an OEE of 85% effectively mean? What actions for improvement can you derive from these figures? In our experience, very little to nothing.

Your customers do not experience your service in terms of averages or percentages. They only know what actually happened as far as they, as individuals, are concerned. So if you are to get a true, transparent view of what your performance translates into by the time it reaches each customer, you need to measure it in the same terms. You need to look at individual details, not smoothed out averages, which might appear positive on paper but don’t provide any clues for bringing about improvement through defined corrective action.

3. Don’t leave room for misinterpretation

KPIs are only of value if they are accurately measured and recorded. If you are entrusting this task to operators, you need to be sure that all those involved properly understand what to measure and how they should be going about it. So you get meaningful measurements, not subjective interpretations.

OEE, which is a widely used (and trusted) KPI, is particularly susceptible to this as it is both aggregated and open to interpretation (for example, how to set the standard for planned down-time). Loosely defined KPIs such as this will not provide the necessary insight into what is really happening, and thereby fail to enable pin-pointing of actions for improvement.

To ensure your KPIs are of tangible value, they need to be set up according to clear definitions and/or standards. The easier it is for your operators to understand these, the less room there is for your KPI measurements to become corrupted through (mis)interpretation.

Sven Legler is Senior Business Process Excellence Consultant at R&G Global Consultants.