If you can’t answer that question with a clear “yes” or “no,” you’re probably not measuring your company’s performance, or at least not in a meaningful way. It’s not uncommon for businesses to rely on financials to tell them how they’re doing, and if your financials are strong, great! But do you know why? Do you know which of your practices are tied to good results and which aren’t? That knowledge is the crux of realizing your strategic business plan and getting the results you want.
That’s where key performance indicators, or KPIs, come in. These powerful – but underutilized – metrics gauge where you are relative to where you want to be. You can think of them as signposts that indicate how near or far you are to your destination or if you’ve made a wrong turn somewhere and need to get back on the right route.
On a road trip, though, the signposts are already there. With KPIs, you need to construct them yourself. It’s a process that takes time, commitment, and refinement, but when done right, it’s an investment with a very high yield. And to do it right, you need to start out with a clear understanding of a few fundamentals.
Your secret sauce and effective KPIs.
There’s a universe of possible KPIs, and what’s right for other companies, even competitors, might not be right for you. In fact, assume it isn’t. KPIs measure how well you’re executing your strategic plan, and your plan should embody your secret sauce, what sets you apart from the competition.
Sorting out KPIs from goals and results.
Increasing sales by some percentage is a goal, an objective. The amount of sales actually increase is a result, an outcome. While sales are measurable, they are not KPIs: The numbers don’t contain any information about how the results were achieved.
KPIs need to be as specific as possible.
Let’s say your secret sauce is excellent customer service, and from the customer’s point of view, a big part of excellent service is on-time delivery. So, it makes sense to track delivery. But to be an effective KPI, this needs to be more specific. First, are you tracking delivery for all customers or key customers? Your key customers have the greatest impact on your business, so tracking delivery for them makes the KPI more powerful.
Next, how will you track delivery? The short answer is with foresight, not hindsight. In other words, the KPI has to be woven into the expectations and practices of all the departments that play a part in whether delivery is on time. And everyone in those departments must hold each other accountable for their part. For example:
- Sales must communicate the expected delivery date to the key customer.
- Fulfillment/warehouse needs to make sure all products are in stock and the order is fulfilled.
- Shipping must ship the order on time and through the right channel.
- Accounting needs to make sure that the delivered order is invoiced.
Something could go wrong at any of these four points. But tracking them as a KPI also presents the opportunity to set things right as soon as possible.
Transparency and accountability.
By continuously measuring and posting departmental KPIs, teams always know how they’re doing and if they’re focusing their efforts on the right things. It also enables managers to easily spot trends. Say one team member consistently falls short on a particular KPI. This could signal a knowledge gap that is easily correctable. Likewise with team members who consistently excel. Finding out what they are doing informs best practices that benefit the entire team and ultimately keep your company moving in the right direction.
Amanda Harley, CEO of Black Label Strategies, contributed to this post. After nearly 15 years working in operations finance for Fortune 100 companies, Amanda founded Black Label Strategies to help small to medium businesses identify their profit generators and profit drains at the product, customer, and supplier levels.