Tuesday, October 6, 2015

What’re the Real Purpose of Performance Indicators

The real purpose of performance indicators is to provide business insight and monitor the progress and performance.

The goal of Performance Indicators is to identify if the adopted strategy, operation, and process, etc are working toward the objective. KPIs should be periodically reviewed and revised depending on what the firm's strategy is and what they are targeting. Are they entering a new market? Is their goal to achieve 25% higher profits than the last 6 months? Have they recently re-engineered their organizational structure? All such questions need to be kept in mind when deciding and revising the KPIs. And you define KPIs to monitor the progress and performance. KPIs should be under constant review to determine if they actually provide the necessary insight into what is happening in order to make informed decisions. If the KPI is not providing the necessary insight, it needs to be refined. KPIs should change when business needs and environment changes.

The issue with many KPIs is that they are set against archaic business process models that are mostly manual. Every time something changes, resources, etc. The KPI measurements are off. How long a KPI should last heavily depends on whether it is measuring something fundamental to the mission or measuring something related to shorter-term strategic actions. As long as 1) It is insightful to the challenge the business is trying to address. And 2) It offers relevant information against aspects of the challenge that can be directly tackled. Another perspective on KPIs is that these measures or indicators are only as good as the processes that generated the raw data, the frequency the measures are collected, and the analysis performed. Otherwise, it’s garbage in and garbages out.

A true and meaningful KPI should last as long as the business strategy is set. It's hard to define a general lifespan of a KPI. The life of each KPI should be defined in dependency of its horizon. KPIs that are concerned with long-term activities clearly should have a longer lifetime than short-term oriented KPIs. Otherwise, inaccurate KPIs are the result. The other aspect of KPI lifetime is people related. People will adapt to the KPIs that are used for their performance evaluation and compensation determination. If the strategy changes, then the KPIs should be reviewed to see if they are still relevant. If they then keep them, if not then change them. Let's not forget the real purpose of a KPI, it is to act as an early warning signal such that the relevant job role deals with the relevant issue. This then prevents issues from occurring further down the line. You do not require loads of KPIs. With the right KPIs, the company will benefit.

Outcome-related KPIs are as relevant as, even more relevant than - process-related KPIs. A KPI must last while the process it is measuring lasts. It must be constantly reviewed and improved, of course, so is the process. Using process KPIs is necessary - however, it is not sufficient. At the time that processes are developed, of necessity, they cannot cater for every eventuality that may arise within or outside the business. In other words, well-designed processes will generally - but may not always - result in the desired business outcome. Everything in the management field needs to have a way to measure. Once the main goal of the managers is to guarantee and maximize the profit to the shareholders, every little thing is very important. People must therefore always have the ability and the freedom to respond in a different, more humanistic way to unforeseen events, so as to produce the desired outcomes that the business is actually driving towards. Because a process failure can make the company lose millions of dollars, it is not acceptable, especially for the top managers. Following this thought, KPI is most important to the managers than to the owners, and when the managers realize that, they will use them better. As long as it will drive the company to achieve above industry average profits, KPIs need to be carefully vetted and should represent natural outcomes, if they are to be insightful. That said, KPIs should reflect both well-performing activities as well as those that need to improve; as such, one must be careful not to revise the KPIs unnecessarily and risk losing the ability to evaluate performance over time. Trend data is important. KPIs that become outdated quickly usually result because they were selected from a laundry-list of easy to implement measurements, as opposed to developed strategically from goals.

The real purpose of Performance Indicators is to provide business insight and monitor progress and performance. However, it shouldn’t become another parameter which will diminish the creativity of the resource by training them to think in one particular direction. Being able to show those benefits in hard facts such as measurements helps greatly. More than the numbers, the entire KPI initiative is a candidate for a methodical and sensitive Change Management in the organization. Once this piece is set the rest is about maths and systems framework.


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