“Measurement is the first step that leads to control and eventually to improvement. If you can’t measure something, you can’t understand it. If you can’t understand it, you can’t control it. If you can’t control it, you can’t improve it.”
H. James Harrington
One of the things successful companies (big or small) do better than the rest is to constantly monitor their business performance, and use it as an integral tool to define and correct their course. There are many other not so successful decision makers and business owners who recognise the importance of measurement but need guidance in setting up the right framework for performance measurement. Use these 5 tips to avoid common traps, and setup a framework that will put you on the right course for business success
Tip 1: Less is More
I know of many businesses that have setup dozens of measures that are often a random collection, setup without a great deal of thought. KPI stands for Key Performance Indicators. KPI’s are measures that directly link to the company’s critical outcomes. They should be insightful and actionable, at the same time simple to understand and measure. It’s like a lab report that helps a skilled doctor diagnose and cure. Most successful companies track 20 or less KPI’s. It is important to see what other successful businesses in your industry category are measuring.
Distinguish between measures and KPI’s. First ask yourself if the measure is aligned to your business strategy. There can be many performance measures for optimising or improving operations, but not all are critical to your business strategy. Don’t mix them both
Tip 2: The KPI Litmus test
Use this litmus test before adding new KPI:
1) Will this KPI incentivize undesirable behaviour?
For example, if you have a KPI called ‘Number of Customers added during this period’, ponder if your employees might chase quantity over quality or deal value. Make sure you have carefully evaluated the negative consequences before rolling out your KPI’s.
2) What question will this KPI help answer for my business?
A KPI should help you answer one of these questions really well: What am I doing poorly (alert), what am I doing well (outcomes), how am I likely to perform (predict) and where are my opportunities (comparison).
Tip 3: Starts at the top, but cannot be imposed
KPI’s should reflect the larger picture of what the business is trying to accomplish, and therefore should be defined top-down. But if the KPI has to be actionable, it has to be measured bottom-up. For a Performance management program to be successful and effective, it undoubtedly needs senior leadership commitment, but it also needs to trickle down through the layers through a focussed organizational change management and communication exercise. People should take ownership for the KPI’s, and it will only happen if they also feel that they are part of the KPI creation process. Make it a collaborative exercise. It doesn’t end there. Nothing speaks louder than results. If your performance measurement program starts yielding favourable results (as it should), make sure everybody knows about it; the buy-in will happen automatically
Tip 4: Your output is as good as your input
There is no use replacing your tap, if your drain is clogged. Every performance measurement program has to start from the source. Audit the quality of your input data (both financial and non-financial). Does it capture all the elements that are required for you to accurately compute your KPI’s? If not, do not start investing in expensive data reporting and BI tools. If you do not have in-house expertise, get a good consultant to fix, clean and restructure your source data. A good accounting firm can quickly restructure and clean your accounting data. Similarly, a good business analyst can fix your operational data.
Tip 5: If you can’t measure, you can’t fix
Performance management measures are fairly useless if you have no way to measure and report them. It is also important to determine the correct frequency for reporting. A KPI has to be an invaluable aid in timely decision making. If you are not monitoring it frequently enough, you are not acting soon enough. While I am a great fan of Microsoft Excel, it is not a measurement tool. The process of report preparation in Excel is highly manual, so it can’t be frequent enough, and it is also prone to errors. A good measurement and reporting tool is invaluable in your performance management efforts. With the advent of cloud computing, technology has become ubiquitous. High quality tools are now available at a fraction of the cost. Affordable reporting and BI tools are accessible to businesses of all sizes. Choose a tool that can be easily configured to meet your local requirements.
Most important of all, if you don’t want your performance management initiative to die within months of its birth, keep it simple.