Before we dive into all the possible pitfalls regarding KPIs we'll explore the concept of KPIs some more. In essence a KPI is a way to measure how someone or something is doing. This performance measurement should always be relative to the goal you have set. Without a goal or objective a KPI is pointless. We’ll talk about setting goals and the relationship with KPIs in a later blog. For now we’ll look at the KPI itself. In order to measure performance, you need a thing to measure. Some piece of information that tells you something about performance.
Let's start with the "I" in KPI; the indicator. In essence an indicator is a "needle" that points to a certain state in the outside world . It's for example the pointer in the dashboard of your car. This needle however has to point towards something. Otherwise it would be pointless. In your car it is pointing to a number (e.g. 75) or a range. But even with a needle and a number you won't know anything. Only when the unit of measurement is added you will know what the indicator is telling you. In the car example this unit could be mph, RPM, ⁰F or E/F. The unit is telling you something about the area of performance (the “P” in KPI). The “K” for “Key” only refers to the relative ranking of this particular Performance Indicator compared to other Performance Indicators.
A KPI has to be used in context. In order to be of use you need to decide what the indicator is actually telling you about this context. In the car example that would be in the context of driving. Your dashboard is telling (indicating) you that your speed (performance) is 75 mph, but what is that telling you? Are you driving too fast or too slow? That, of course, depends on the context. If you are driving in a rural area with lots of people, 75 mph might be too fast. But if you happen to be driving in a Formula 1 car, keeping the speed at 75 mph might not get you to the winners stage. In other words, it completely depends on the goal you are trying to achieve. Not surprisingly we will see that the context in which the KPI is implemented is very important for usefulness of that same KPI.
Only if you add a threshold to the KPI, you will be able to make any reasonable decision or conclusion. The threshold is the "reference line" that can serve as a quality indication. The threshold is especially important because it tells you something about the possible direction you are heading. This, of course, depends on where you place this reference line. Only if you apply a threshold to the measurement, you will be able to adjust your behaviour accordingly. This threshold could be set by an external party (the government in case of speed limits) or you can apply one yourself (in case of the formula 1 race, one would be wise to set a speed limit as not to crash).
A little bit of history
Some people state that the concept of performance measurement kicked into existence as soon as we started competing with each other and with other animals (which was right from the start as it is one of the driving forces behind evolution). Later we started measuring things using units, like the length of our arm of our foot. But as soon as we invented the brilliant concept of numbers it was put to use to more accurately describe the world around us. When survival became sport we again used performance measurement to compare results.
In that sense we are using KPIs for a very long time. But those are not the kind of KPIs that I will be discussing in this blog. I will be talking about the KPIs currently being used in the corporate setting. The ones that are used by managers all over the world to do their business. The ones that are being used in management reports, dashboards, cockpits, traffic lights etc. In my opinion those kind of KPIs started to flourish only recently. In 1992 the book "The Balanced Scorecard" by Kaplan and Norton was a huge hit. I still remember buying it when I worked at SPSS. I was thrilled to learn about this new revolution in performance measurement. The book emphasized the importance of data and the usage of KPIs. Many copies bought into the concept of the Balanced Scorecard and it boosted the usage of KPIs. It was the beginning of the data mining decade and the expectations were high. The use of KPIs in the corporate setting has been rising ever since.
A KPI is (not) a KPI is (not) a KPI
Trying the categorize KPI's would be like trying to categorize all animal species in the world. There are just too many. Even within specific industry areas there will be separate categories. For example in banking, the business where I spent most of my professional live, it is not uncommon to have KPIs for different departments like Finance, Risk, HR, Compliance, Audit, Business Continuity, Commercial, and so forth. To make things even more complex you will have cross-department KPIs (like Data Quality KPIs) and on different levels (operational, tactical and strategic). Multiply that by the number of different industries and you will begin to see the impossible task of categorizing KPIs.
Let's look at an example. In most industries it is very common to measure the performance op people. Most HR consultants will tell you that you should establish measures that are SMART (Specific, Measurable, Acceptable, Realistic and Timely) and KPIs are typically used to achieve this goal. Some examples are:
- Execute 3 projects on time and within budget
- Net Promotion Score within your customer base of minimal 7
- Close all Audit issues by the end of the year
- a specific sales target (for example measured in $ or number of (new) customers)
- Follow all mandatory trainings within a specific area
- Earn at least 50 Permanent Education (PE) points
You can also have KPIs on KPIs. Let's say that the examples above are captured and maintained in a Personal Performance Plan (PPP). A manager can have a KPI that measures whether he/she has all the PPPs finalised on time. Have all your employees completed the mandatory Compliance training before the deadline and with a score above 90%. And these KPIs could again be part of the managers PPP.
Enough said about the definition of KPIs. To summarize in order to build KPIs you’ll need:
· A goal/objective
· A number and a unit of measurement
· A pointer or “needle”
· A threshold
· Context
Next time we'll discuss an even more interesting question: Why do we (really) use KPIs?
