The concept of KPIs, or key performance indicators, has been around for many years. I was first exposed to them in the late 1980s while working in a strategic planning team to create an EIS (executive information system) for my company’s CEO and senior management team.
This basically involved identifying the key metrics or KPIs the executives wanted to see on their computer screens when they logged on each day. Once these were determined, we then started developing the reports and charts that would be displayed. This included metrics related to Sales, Expenses, Employees, and Customers.
The EIS concept was attractive, but the technology back in the late 1980s didn’t lend itself to easily gathering this data and automatically delivering it to the executives’ desktops. The data had to be manually gathered, entered into static reports and charts, linked to graphic icons in the EIS user interface, and staged on a server for executive access. And since it was so time-consuming to gather and present this data, the EIS systems back then didn’t get rolled out broadly across the enterprise. Many of them died a rapid death.
Fast forward to 2016. Today, the notion of collecting and displaying metrics and KPIs on a dashboard is commonplace. It’s easily accomplished with today’s data warehouses and BI tools, or with EPM applications directly pulling data from ERP systems and other sources, then rendering the data via reports, dashboards, scorecards, and data visualization tools. The challenge now is selecting the right KPIs for the company, various departments, and functions – and getting managers to pay attention to them.
These challenges were the focus of a recent panel discussion I moderated for the NYC chapter of the CFO Leadership Council titled “What! They Want KPIs Too?” The panelists included Ian Charles, CFO of Host Analytics, Michael Facendola, CFO of Truveris, and Adam Millsom, Director at Silicon Valley Bank.
During the event, the panelists discussed how to select KPIs, how to manage and communicate them, and how to adjust them if needed. Here are the highlights of the discussion.
Best Practices in Selecting KPIs
The panelists agreed that KPI selection should be a combination of a top-down and bottom-up processes that meets the needs of the company and its managers. The critical point is to ensure the KPIs map to and support corporate goals and objectives. This could include market share, revenue growth, customer acquisition, operating margins, or other objectives. The board of directors and investors can play a key role in KPI selection as they determine and shape the strategic direction of the organization.
KPIs can vary by industry and stage of maturity of the company, and within the organization, they can, and should, vary by department or function. For example, Sales should have very different goals from Customer Support or Marketing. The panel also recommended using a mix of leading and lagging indicators. Lagging indicators focus on measuring the past, while leading indicators focus on the future. An example would be using the results from a customer satisfaction survey (leading) to predict and manage potential churn in your customer base (lagging).
Communication and Management of KPIs
In terms of communicating and managing KPIs, the number of KPIs in focus varied across the panel. This ranged from 5 per department and 30 for the company – to 130 KPIs that are reviewed weekly. While that high number might sound extreme, in this case, the panelist’s CEO is very metrics-driven and the executive team has developed a repeatable method of reviewing and discussing these KPIs on a regular basis, and taking action when a metric is not tracking to its targets.
When asked what the best method is for getting managers to buy into and take ownership of their KPIs, the unanimous answer was tying KPIs to compensation. This can include quarterly or annual bonuses, that are based on a combination of business and departmental or personal results.
In terms of frequency of KPI reporting, this can, and should, vary based on the nature of the business and the specific KPIs. For example, the sales pipeline may be tracked and discussed on a weekly basis, while revenue and operating margins are tracked monthly or quarterly. But in all cases, the panelists recommended including KPIs in regular business reviews so that results can be discussed and action can be taken where needed.
Regarding the tools used to communicate KPI results to managers, the panelists use a variety of tools. This ranges from various reports generated by CRM and ERP systems, to a more centralized approach where all KPI data is collected in a cloud-based EPM (enterprise performance management) platform, which creates a single version of the truth for all management reporting. From there, KPIs and metrics can be rendered and delivered via standard reports, dashboards, or graphical scorecards.
The last topic the panel discussed was how and how often KPIs should be updated or revised. The consensus here was that consistency is critical to evaluating and managing performance over time. Based on this, the panelists recommended that KPIs should not be changed regularly, but given a series of months or quarters to be evaluated before they are revised.
In some cases, a specific KPI may put a spotlight on a particular department or function that they are uncomfortable with. But if the goal is to impact or incent certain behaviors, the measurement and review of KPIs must be allowed time to run and the results evaluated before being revisited or replaced.
KPIs are a critical component of an overall enterprise or corporate performance management process. If selected and managed correctly, they can be powerful in ensuring the individual and departmental plans and initiatives are aligned to corporate goals and objectives, as well as to the strategy of the business.
To learn more about the role KPIs and analytics play in enterprise performance management, check out this recent white paper by Ventana Research.
And best of luck in your KPI selection and management!