Confused by KPIs? You Are Not Alone.
KPIs are a vital part of any Performance Management or Strategy Execution system. Yet how many times have you struggled to understand or to explain what is meant by “KPI”? On the surface, it seems simple enough – Key Performance Indicator. What is so difficult to understand about those 3 little words? But when you think about it, what makes one metric versus another rise to that special class known as KPI? The answer lies in the deeper meaning behind each word in the “KPI” acronym.
K stands for Key – which implies the metric is important – one of a select few. We’ve seen too many companies fall into a common KPI trap in which they try to measure everything that moves. All things that “move” are good potential metrics, but the question is: Is it KEY? And how do you know? An easy way to think about this is to think about the definition of “key” when used as a noun. A key is an object that is used to unlock something. An analogous definition when considering if a metric is “key” or not, is to think about what you are trying to unlock – what door you are trying to open.
As a software vendor that helps our clients manage performance, we’ve been privy to LOTS of metrics. Consequently, we’ve had numerous consulting firms ask us what set of KPIs they should use for an industry. We always give the same answer: “the KEY performance indicator that you are looking for is dependent on the DOOR that you are trying to open.” For example, are you trying to find the key metric to assess if your client is fulfilling its chosen customer value proposition? Or are you looking for a key metric to assess if the throughput or quality of a process has improved?
What KPI to choose is predicated upon what question you are trying to answer – what mystery door you want to open. Typically, the metrics that rise to the level of KPIs are those that indicate whether an organization is executing its strategy or not.
Now, let’s take the other two letters.
P stands for Performance – which means we are trying to assess overall performance versus just gathering statistics, counting, and collecting all possible (and sometimes meaningless) data. To understand performance, the metric needs to answer a key question and be within some sort of context – a business context or, more typically, a strategic context.
I stands for Indicator – which means this metric is indicative of whether your performance is moving in the right direction or not. There is no such thing as a perfect metric that provides 100% truth. This is why the term “indicator” is used. And for an indicator to be meaningful, it needs to be placed into context of other related KPIs that tell the full story of performance or of strategy execution.
Next time you hear those three little letters, just remember to break it down and ensure your metric meets the criteria of the full definition of Key Performance Indicator. At Corporater, we are experts at developing KPIs – for more information about this topic, click here.