How to set, measure and implement key performance indicators

Without setting out clear key performance indicators, making any strategy or transformation succeed can be a challenge. Consulthon co-founder Marieta Bencheva explains how to set, measure and implement goals.

Once the goals for a business transformation have been established, and a strategy decided upon, businesses need to consider how they measure success along the way. Of course, key performance indicators (KPIs) vary between firms, depending on their business objectives, but there are some general steps to take in different cases.

First, businesses should select their objectives. There should not be a lot of them – a maximum of three is recommended to be effective and efficient in measuring the results. Then, firms should prioritise these goals according to critical success factor or critical success strategy. Then, it is up to organisations to determine which criteria can help illustrate progress for that objective.

For example, if the objective was to reduce child mortality rate by 10% by 2018, under the supervision of the Health Minister, first they would consider Input Metric. This would include health budget size, the number of doctors and nurses, and amount of medicine like vaccines they had access to.

Then, they would consider a Process KPI; focusing on the cost of vaccines, vaccine utilisation rate, and cost of resources. They would then weigh up Outcome KPI; seeing what number of children had been vaccinated, and how widely the population of all ages had been involved in the vaccination programme – before calculating a final Outcome KPI. The percentage rate of mortality could then indicate how successful their efforts were.

For each KPI there should be a balancing indicator, i.e. when we get the outcome KPI we balance it with a counter one. For the above example, the percentage rate of mortality would be balanced with the cost of resources. In other cases, that might see something like the number of sales being balanced with the cost of sales.

Organisations can select one KPI for each objective and two to three KPIs for balancing. The objectives should have cause and effect relation. It is recommended to use a Strategy Map to illustrate this relation.

Cascade

Firms should not choose one and the same objective for all levels of management. What they should do instead is cascade their KPIs from CEO level to departmental and team level. Business unit objectives, however, can be cascaded at departmental level as they have the same or different KPIs.

Same objectives can be cascaded to different department but each of them will have different KPIs to measure it. Organisational objectives are usually high-level objectives and they should be subdivided to meet the role of the different departments in the company. They will also have specific KPIs different for the sales and marketing department for example. There should be certain objectives and KPIs on individual employee level. They can be taken out of the job description.

It is important to remember that for an effective and measurable strategy, leaders must set a small number of strategic objectives. When creating the strategy, they should use the Balanced Scoreboard methodology, which will help you set objectives under four different perspectives: Learning & Growth; Internal Business Process; Customer; Finances.

Organisations should put a maximum of three strategic objectives under each of these categories. Each of them needs a different set of skills and resources and will have one to three KPIs to measure it. In the end, there should be between 12 and 36 KPIs, which must be reviewed on a weekly or monthly basis. The moment a KPI becomes obsolete, it should be dropped. Meanwhile, as with the objectives, the indicators also need a constant update mirroring the changing of business needs.

The S.S.M.A.A.A.R.T approach

You have probably read about the S.M.A.R.T business-goals structure which helps your business becomes successful. It is also clear to you that this is an abbreviation. It stands for Specific Measurable Attainable Relevant Time-based.

These are the basic terms used in this structure for goal-setting. However, there are additional aspects that are often ignored or not well-developed which can help to set clear and well-defined strategic goals – making this more of a S.S.M.A.A.A.R.T approach.

On top of being ‘Specific,’ KPIs need to keep it ‘Simple.’ Employees need to understand what needs to be done, so being concise and to the point is vital. Remaining unchanged, ‘Measurable’ reflects the need to set the right KPIs to be able to measure progress, letting firms know they are going the right way.

KPIs must be ‘Achievable’ but also ‘Ambitious,’ meanwhile. All objectives should be set in such a way so that leaders and employees are confident they can be achieved. At the same time, they shouldn’t be too timid. To be clear, imagining a goal is achievable, but failing to change anything in the things are done is not ‘ambitious.’ At the same time, objectives must be ‘Actionable.’ Performance indicators should include the different types of actions you need to take in order to achieve an objective.

‘Relevant’ suggests that every objective and its respective KPIs should be relevant to the department/team/individual they are assigned to. They will not be the same for a business development team and for a marketing team. It is also very important that the achievement of the goal depends on the team it is ascribed it to. Finally, ‘Time-based’ reflects the fact all goals should have a deadline. Time is this indicator that will tell you if any of the actions performed to reach the objective is good, average or great.

Implementation

With the S.S.M.A.A.A.R.T approach, choosing and implementing KPIs should be clearer. With a well-defined vision of what you are trying to accomplish in place, identifying what data an organisation has in place, and what it needs to collect to measure KPIs is simplified in particular.

Taking time to collect statistics on industry trends, demographics and competitors will help. Using this information can inform key performance indicators. However, firms should avoid simply measuring the exact same KPIs as competitors. Every business is unique and what works for one company might not work for another. At the same time, determining how frequently to measure each KPI should be tailored in this way.

Then, organisations should set short and long-term goals for the performance indicator. If a long-term goal is to sell 2,400 memberships to a service over the course of a year, for example, firms will want to divide it into short-term goals to assess. In this scenario, try reaching at least 200 new memberships per month. Then, use this rate to determine whether or not to change expectations or strategies.

Meanwhile, sharing KPIs with the company and stakeholders is vital. Be transparent when discussing performance. Contribute to an organisation’s success by communicating strategies, progress and outcomes. It is essential all team members are aware the objectives so they can work towards them and provide feedback as necessary.