Key Performance Indicators : Identifying and Using KPI's
'KPI' stands for Key Performance Indicator. They are measurements used by a business to drive performance. There has been increasing interest from business owners and managers about how to set effective KPI's. Here are the 5 basic steps you need to take.
This article is based on the practical experience of the EWO Consulting team. We help businesses with 5 to 50 people implement strategic management systems so they can drive growth in their business.
1. Map Your Core Business Processes
Before you can drive the performance of your business you need to have a clear picture of the core processes. Draw a flow diagram that shows the major steps you go through to generate revenue. This may include steps like;
- Take enquiry
- Provide quote
- Order supplies
- Assemble order
- Deliver order
2. Establish Roles, Responsibilities & Critical Success Factors
You now need to allocate a role to each step in your core process. Who actually completes that step? For instance the Sales Manager might take the enquiry and provide the quote, the Operations Supervisor then orders supplies and so on.
You then need to look at what it is that person needs to do successfully in that role to ensure the business is able to achieve its goals.
For instance, the Sales Manager may need to;
- Be polite, courteous, efficient and professional on the phone
- Accurately complete enquiry forms
- Submit enquiry for Ops Supervisor within 1 hour
- Get quote back to Customer within 24 hours
- Win the order
- Follow-up and ask for repeat order
- Win repeat order
3. Choose the basis of your KPI
Once you have completed Step 2 you may have a list of 5 - 10 critical factors that need to be addressed to ensure that role is completed successfully. From that list you now need to select your KPI's. You should try to have only 1 or 2 KPI's per role. If there is a person already in the role we suggest you include them in discussions and the decision process. There are some vital factors that need to be taken into account when selecting KPI's.
a. The person in the role needs to have full control over achieving that KPI
For instance it is no good making the Sales Manager accountable for "Getting quote back to customer within 24 hours" if they have no way of driving the Ops Supervisor to give them the quote or compiling information is beyond their control.
b. You need to have hard, objective data
You need to be able to compile hard, objective data to measure the KPI. Looking through your list of options consider which ones you can truly measure. Without hard data it is difficult to get a clear picture of what's really going on in the business. Also hard data enables more fruitful and objective discussions during performance reviews with individual team members.
Following our example, it may be important to be polite and courteous on the phone and certainly you can give feedback by listening to someone when they are talking to customers. However, it may not be a very good KPI as it can be extremely difficult, subjective and potentially costly to measure.
4. Set the KPI
Having completed the analysis outlined above you should arrive at 1 or 2 options. Choose the ones that are most critical for business success. In our Sales Manager example winning an order and getting a repeat order are selected as the KPI's. Therefore the KPI's become:
KPI 1: Ratio of successful orders to enquiries
KPI 2: Number of customers submitting a repeat order in 12 months
You may notice that by addressing these KPI's a number of the other critical factors are addressed in part. For instance, if the enquiry is not handled professionally then initial and repeat orders are unlikely.
5. Set the target and review date
Your final step is to set the performance levels. These need to align with your business goals but also need to be considered achievable by you team members. Ideally you set the targets in consultation with those people who will need to achieve them.
KPI 1: Ratio of successful orders to enquiries, Target = 75%
KPI 2: Ratio of customers submitting a repeat order in 12 months, Target = 80%
Once you and your team members have established the targets you then need to set the review dates. The ideal frequency for review is highly contextual. For instance, it may make more sense to review repeat purchase rates annually rather than monthly depending on the buying habits of your customers.
You also might like to consider some form of reward or incentivisation for achieving goals. Sometimes this is as simple as a gift voucher or a dinner. Other options are profit sharing and bonus payments. Make sure you discuss any incentivisation options with your team before implementing them, don't assume to know what they want or what motivates them. Time and again making these assumptions has proven to be a very costly mistake. You may be suprised just how simple the reward may need to be.
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