If you have been struggling with coming up with valid key performance indicators (KPIs) for your business or department, you are not alone. What seems like a relatively simple task is quite difficult for most managers. After more than 30 years of helping various types and sizes of organizations with this task, a few simple guidelines have emerged that might make your struggle a little easier. While it is tempting to adopt the trendy metrics being used by others, most are later disillusioned when they find out that these metrics fail to provide useful information or are gamed by employees.
In this article we will look at some of the common mistakes to avoid that should simplify your efforts to develop good KPIs.
Mistake #1: Too many lagging metrics
Outcomes like revenue, loyal customers, and profits are no doubt important to all organizations and are a valuable part of your suite of KPIs. In fact, these output and outcome metrics tell you if you have accomplished your mission and met the needs of your key stakeholders. The problem with these outcomes or lagging measures is that they are all measures of the past. Yes, it is important to look at how many employees quit last month, how many new customers we’ve acquired, or how many milestones were missed on important projects. But nothing can be done about these things after they occur.
A good set of KPIs should be about 50% leading metrics (inputs and processes) and about 50% lagging (outputs and outcomes) metrics. Leading KPIs are not forecasts or predictions on lagging metrics. For example, projected revenue for next month is not a leading indicator. A leading financial indicator might be $ and aging of accounts receivable, or $ in proposals/bids submitted.
The best example of a leading indicator linked to many health outcomes is C-Reactive Protein that measures inflammation. Inflation has been linked to a host of negative health outcomes and conditions like arthritis, and heart disease.
Leading indicators are often tough to come up with and only later do you realize that they do not correlate to outcomes. For example, many organizations track customer satisfaction via surveys and believe that satisfaction levels (leading) correlate to loyalty (lagging). Several of my clients have found this not to be the case. Customers may provide you with stellar feedback and still never return. Or, they may provide low ratings and stay loyal because they believe that your competitors are even worse.
Good leading KPIs are developed with a hypothesis that one factor correlates to another. Logic is not as sufficient as a test of a good leading indicator. Check to see if any research has been done to prove the correlation. If not, it’s best to shy away from this KPI and keep looking. You may have to do your own research to find if there is a correlation between the leading and lagging KPIs. Don’t give up. The beauty of monitoring leading KPIs is that you can manage these variables to help ensure positive outcomes. With lagging metrics, we can only learn from our past successes and failures.
Mistake #2: Mistaking control for influence
I’ve had a lot of cities, state, and county clients over the years and one topic that is always tough for them is being held accountable for outcome KPIs that they feel they can’t control. For this reason, they always resist KPIs that focus on key outcomes like public safety, crime, homelessness, health, and economic factors. While it’s true that no single government department usually has control over key outcomes, neither do CEOs have control over profits and share price.
The test of a good outcome metric/KPI is that your organization can influence performance on the metric, not control it. There is very little that you can completely control. We have a lot of influence over our health, for example, but you can’t control your family genetic history. If your organization can “make the needle move” on the KPI and it is one of your responsibilities, it makes sense to put this on your dashboard/scorecard.
For example, Riverside County is one of the largest counties in California, and the Public Health Department is concerned with obesity. While obesity is certainly influenced by many factors over which the health department has no ability to change, it can influence some factors and thus obesity rates are a valid KPI for them. What works best is to assign responsibilities to other organizations that also have an influence on the KPI.
For example, a group in the City of Los Angeles I worked with had # of youth gang members are one of their metrics, as well as gang-related crime. This department helped young people get job skills and jobs which reduced the likelihood they would be in a gang or get into trouble. Other city departments also had # of gang members as one of their KPIs: LA Unified School District, LAPD, and others all had this KPI on their dashboard.
Bottom line: Make sure when you are selecting outcome KPIs that they are variables that your organization can influence through your processes, products, and programs.
Mistake #3: Adopting trendy customer metrics
A customer-related KPI that has been in favor for a while is called Net Promoter Score or NPS. The idea is to give customers a one question survey and ask them to rate your product/service on a 1-10 scale. Those that rate you 8 or higher are likely to promote your organization to others. Sounds easy and tempting as a good customer KPI. However, even though it is only one question, most customers don’t fill out the survey. Those that do, tend to be the extremes – happy or unhappy ones. This provides a false reading and leads organizations to assume that the survey respondents represent all their customers. The other problem with NPS is that if you get low scores, you have no idea why nor know what to do to improve.
A second and newer trendy customer KPI is called Customer Lifetime Value (CLV). This metric is a way of calculating the lifetime value of each customer based on their past and present buying behavior. The problem with this metric is that it is tough to predict future customer behavior.
My lifetime value to a car company like Lexus might be half a million dollars based on the fact that I have leased three of their cars in the last ten years and am only 35 years old. What CLV does not take into consideration are lifestyle factors and competitors. In two years, I might get married and have a child, and need a less expensive and more parent-oriented car. I also might decide to no longer lease or buy any car and just use ride services to get around. CLV is based on too many assumptions and too little data about what is going on with each customer to be a good predictive KPI.
Mistake #4: KPIs measured too infrequently
Financial metrics are tracked every day, week, and month and looked at with great scrutiny by even non-profit organizations. Yet, non-financial metrics that address customers, staff/employees, suppliers/partners, and other factors are often measured once a year. Employee surveys are done once a year, as are supplier assessments. Other non-financial KPIs may be tracked every quarter. The test of a good KPI is can it be measured frequently (i.e., daily, weekly, monthly) so that you can detect changes and problems when they first surface and implement corrective actions.
Many consumer-focused businesses track customer satisfaction data daily by looking at ratings on sites like Yelp and are then able to supplement that with social media data. Several clients measure employee engagement weekly by having employees drop a red, yellow, or green marble in a vase depending on how good or bad their week was. The only concern with frequent measurement is not to overreact to a single data point or day. You can’t make everyone happy all the time and it’s important to look at overall trends over time as well as data on a single point in time.
Overcoming the struggle
The best KPIs are the simplest ones. Sure, it’s tempting to create complicated analytics and my clients that employ a lot of scientists and engineers are always creating these sophisticated complex KPIs that never get implemented, or they do get tracked and no one understands them. A good rule of thumb is to try to come up with one KPI that looks at the past, one that looks at the present, and one that looks at the future for each dimension/perspective. For example, in the financial area, your KPIs might consist of:
- Revenue (past)
- Accounts receivable (present)
- Proposal/Bid $ (future)
In the employee/staff area the KPIs might consist of:
- Turnover/attrition (past)
- Employee satisfaction/engagement (present)
- Employee training and development (future)
Yes, KPIs are tough to come up with, but try to keep them simple, and just start tracking some to see if they tell you something you would not have known without quantifiable data. You can learn a lot about how an organization is functioning by just keeping your eyes and ears open and being at work every day. Supplementing this soft data with some good KPIs can help you get a better picture of how your organization is performing. Trust your experience, instinct, and opinions of people you think highly of, but add some good levels and trends from solid KPIs, and you will always be on top of issues and make better decisions about keeping your organization a top performer.
