Friday, September 12, 2014

The Principles to Define KPIs

Defining the KPIs to measuring corporate performance is both art and science.

The well-defined measures and KPIs are important factors to map strategy & execution, and manage performance effectively. However, selecting KPIs is the main challenge in establishing a performance management framework, what are the main principles to define KPIs?
Consistency: It is vital that there is a shared consistent understanding of what is meant by the KPI; how the performance rating thresholds are assigned etc. It is too easy for simple terms to have different meanings to different users. And if your KPIs are not organized into a logical framework that clearly shows how they are contributing to your objectives, then how valuable and relevant are they?
‘KISS’ Principle: Certainly the KISS principle (Keep it simple stupid!) is one to follow wherever possible. KPI should be simple and easily understandable. Metrics is the obvious method for measuring quantitative objectives. However, it is important to have criteria for rating qualitative objectives as well to answer the question: what does it mean to achieve the KPI? Indicators should be very flexible. Every relevant indicator should be synchronized and arranged logically.

SMART principle: Simplicity is surely important, but at times there is a need for complexity in the right place to incorporate the right elements in the calculation, to make the KPI a true indicator of performance. Fortunately, that's what computers are for - to take the grind out of complex calculations. If you follow the SMART principle then you won't go far wrong - Specific, Measurable, Achievable, Relevant and Time-based.

RDB’ Criteria: Irrespective of whether the KPI is simple or complex, the selection of KPIs should be done regarding these three criteria: relevant, clearly defined, balanced, according to the KPI Institute good practices, KPIs need to be specific and measurable and, therefore, logical. It very much depends on how much data you already have. KPIs are normally set based on historical data, benchmarking with other companies either internally or externally or through time and motion studies to determine a baseline.

The KPIs are the “what,” the action plans are the “how.” KPIs are only as good as the action plans to support them. Unless the action plans are meaningful, the KPI may not be realistic. Effective execution of well-developed action plans translates to the achievement of KPIs. What is important is transparency and that all concerned understand how you arrive at the ratings.

Quantitative KPIs & Qualitative KPIs: Do not be afraid of developing KPIs which are qualitative and leading indicators. In the same way, qualitative KPIs have an important part to play. Regarding quantitative KPIs, sometimes it is difficult to measure because employees are reluctant to provide true data, particularly in areas such as customer satisfaction and sentiment, the emotional or 'gut feel' can be powerful determinants of behavior. In the world where product proliferation and range extension is widespread, the choice a customer makes may be down to feel rather than hard logic. Customer satisfaction can be done through a regular questionnaire to your customers with scores ranging from 1 to 5 or poor through to excellent. Beware of your employees giving you data on customer satisfaction. Perception is vital in any customer satisfaction rating and that can only come from the customer.

Defining the KPIs to measuring corporate performance is both art and science, by following the principles discussed above, the well-selected KPIs can provide the rational view of strategy execution & performance management, and make continuous improvement both in the qualitative and quantitative way.


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