Tuesday, February 18, 2014

The Principles to Define KPIs

KPIs need to have both High Impact and High Information Context. 

Key Performance Indicators are set based on how the company goal/objective, business units or project defines success. Each of these entities has the different experience, strengths, skills, people and resources available to them and would deploy their blueprint differently to achieve their strategic mission. It’s almost impossible to measure performance effectively unless the organization has a clearly defined business focus and narrow, specific target goal. What are the principles to define KPIs?

  • Frame the Right Questions: To measure performance, you must ask some key questions such as. 1) What are you trying to achieve? 2) How are you going to measure it? To put it another way: what are the performance goals? How will you know when you've achieved them?
  • KPIs shall focus on stakeholders (external and internal): You have to align and close the gap between what the key stakeholders want or need and what is happening today. (Gap Analysis). It needs to be easily understood by its stakeholders, or can be clearly and simply explained to them.
  • KPIs need to be aligned with strategic and operational priorities: It cannot create ambiguity or conflict in the mind of the accountable party. It has a clear and direct ‘line of sight’ to a strategic goal or objective  Don't forget to drill down the priorities into all of the business units so they can be aligned to business purpose through workflow, technology/systems, people, measurement as well 
  • KPIs need to provide a 360-degree perspective: It may include the themes of  a. Service Delivery; b. Promotion of Services. c. Revenue / Cost Management. d. The quality of Service delivered. e. Staff Performance and  f. Stakeholder RM.  
  • Collect indicators based on triangulation, alignment, and comprehension:‘Key’ means to seek out the "correct" indicators for a given need “WHY.” The WHY is critical because the indicators will differ based on the reason/underlying purpose for measuring performance:  (1) Triangulation - use varying (at least three) sources, measures, and methods of collection/analysis for each. (2) Alignment - ensure the indicators help to answer the WHY you've identified. It's not enough that they help describe the performance. Make sure you don't have extraneous indicators that don't align with your question.3) Comprehension - do the indicators, when put together,  tell the complete story? Do they fully answer your WHY?
  • KPIs need two things: High impact and high information context/content. The high impact is the predictive power -- a high impact on the results you're trying to understand or control. KPIs with high information content tend to be specific to a strategy and speculative -so one must test them to be sure they have the impact on results you think you have. For example, requirements (necessary conditions) have a high impact on results but low information content -- and as a consequence they don't tell you what to do and they have low predictive power. 
  • More Principles to define KPIs:
a: It is simple – not an abstract index of multiple measures
b: It has an owner – someone that has taken on the responsibility of watching the measure, interpreting it & initiating any required actions in response to its trends
c. It has at least one strong link to at least one other measure in the organizational measurement system, such as a causal relationship or companion relationship
d. It is objective evidence of the degree to which an important result or outcome is occurring
e. It provides regular feedback over time, it is not an action or event or milestone to be reached
f. It is cost effective to measure – the potential value from using it (savings) will likely be greater than the cost to report it
g. It drives ‘performance improving’ behavior, as opposed to behaviors geared towards fudging the figures or shifting the goal posts.
h. It is used and valued in decision making, and it isn’t just padding for the KPI column in the business plan.
i. It is manageable. It has no known and unmanageable unintended consequences, if the result or outcome it is measuring improves, it doesn’t cause another result or outcome to get worse.
j. It is fully defined – has a functional specification detailing its meaning, intent, relationships to other measures, calculation, data requirements, reporting requirements and ownership.
k: It needs to be accompanied by an agreed standard, defining tolerances (upper and lower) for variation.

By following these fundamental principles, KPIs can really become a performance improvement tool, rather than a bureaucratic construct, and it should be well defined, simple and objective focusing on ultimate business goals and shareholder’s concerns.


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