How Healthy is Your Business? (Part 1)

Monday, September 30, 2013 by Rainer Stropek

Why Measuring KPIs Is Important

As a manager or entrepreneur, how do you assess the health of your team or company businesswise? If your team is small and you are in the middle of the action, it is likely that you can just rely on your gut feeling.

Things change if you have to manage a larger team or if you are not involved in every day operational business. It is dangerous to solely rely on your instincts in such a situation. Similar to a pilot steering a plane through nightly, cloudy sky, you will need measuring instruments evaluating your team’s performance. Such numbers are typically called Performance Indicators or Key Performance Indicators (KPI).

KPI Obstacles

Although it seems obvious that managers need KPIs, we regularly see many people struggling with them. The following obstacles are the ones we typically hear when working with customers:

  • Really important, strategic things are intangible and cannot be measured.
  • We drown in an endless number of potential performance indicators because we don’t know on which KPIs to focus.
  • Managers often hesitate to insist on getting the KPIs they are interested in because gathering the necessary base data would impose too much work on their teams.
  • Even if KPIs are carefully selected and defined, managers often turn away from actively working with them because of poor data quality.

Such obstacles have to be taken seriously – after all, studies report that up to 70% of performance measurement initiatives fail (e.g. Bourne, Neely, et al.: The success and failure of performance measurement initiatives, in International Journal of Operations & Production Management).

Our Top 10 Recommendations for KPI Systems

A poorly designed or executed KPI system can do more harm than good. In the last years we have worked with a number of clients on ways to measure a team’s performance. In our project we mostly focus on developer and IT service teams. For this blog article we have tried to boil our experience down to the 10 most important recommendations that can make the KPI system in your service company a success.

1. Keep KPIs Connected to Your Strategy

If you define KPIs for your team, you are indirectly telling your employees what is important for you. Naturally they will focus on things they can do to improve the KPIs that you are focusing on. Therefore, you better connect your KPIs to your strategy so they support and not contradict it. Study the cause-and-effect relationships in your business and take this as a starting point to work out your KPIs.

We recommend to consider the Balanced Scorecard approach for designing a KPI system. Recommended reading: Kaplan R., Norton D.: The Balanced Scorecard – Translating Strategy Into Action. Interested readers can learn more about different approaches to populate a KPI framework in Neely et al.: Performance measurement system design: developing and testing a process-based approach, in International Journal of Operations & Production Management.

2. Focus

Try to keep the numbers of your KPIs small. A large number of KPIs might be confusing. Additionally it might be too time consuming to gather the necessary base data.

You should regularly question the KPIs you are monitoring. Changes in your strategy should reflect in changes of your KPI system. Have the courage to replace KPIs if others become more important.

If your KPI system is mainly targeted to your company’s top level management board or to external investors, you could take a look at PricewaterhouseCoopers’ Guide to key performance indicators. Beside ideas on how to select proper KPIs, the publication also contains a lot of sample showing how to present KPIs visually.

3. Follow the SMART Criteria

If you are not sure if your KPI selection is suitable, we recommend to check it against the popular SMART criteria:

  1. Specific
  2. Measurable
  3. Attainable
  4. Relevant
  5. Time-bound

4. Measure what’s Important, Even if it is Difficult

Many companies follow a rather technology-driven approach when it comes to reporting or KPIs. They analyze the data that is available and put it into more-or-less well designed tables and charts. If someone asks for data that is not already stored in a database, the demand for information is quashed. Remember that measuring performance is not just about gathering data.

In our opinion the process should be exactly the opposite. The management team should derive the performance indicators from the company’s strategy and think about how to make it measurable. Measurement is all about reducing uncertainty. If reducing uncertainty is valuable because wrong decisions would have quite negative consequences, a certain amount of work and creativity for measuring KPIs should be accepted.

Example: Recently I visited a large, international customer in Germany. I recognized that nearly everybody was wearing the same digital device on their belts. People told me that it was a pedometer, a device counting the steps during the day. The management team of the company has decided to put a special emphasis on employees’ health. They figured out the importance of this leading indicator. It was stunning to see the involvement in this project. Over and over again people were comparing their number of steps. The company encouraged employees to get together in teams and transformed the whole campaign into an enjoyable competition. Have you ever thought of counting your employees’ steps to get an indication of their healthiness?

5. Do Not Only Focus On Financial KPIs

Managers often have a financial background. Therefore, they tend to concentrate on financial KPIs like revenue, gross margin, or costs. Without any doubts such numbers are important. They represent the market’s feedback on the performance of a company. However, their value is limited in terms of estimating the company’s future.

KPIs from which you can assess the future success of a company are often called leading indicators. In order to be able to create a valuable KPI system, a team should gather knowledge about how leading indicators influence lagging indicators.

Although, this sounds perfectly reasonable, it is hard to do in practice. One can easily say that e.g. raising customer satisfaction will lead to higher revenues. But what does that mean in detail? What factors influence customer satisfaction? Can you express the relationship in numbers? It will take some research and experience to answer such questions, but it will be worthwhile on the long run.

6. Data Quality is Important

The more a management team relies on KPI numbers, the more important data quality becomes. Poor data quality would otherwise lead to poor KPI outcomes and finally to wrong decisions (see also Masayna et al.: Data Quality and KPIs: A Link to be Established). If a company’s KPI system relies on data from untrusted sources, it will be a waste of time and money as managers will not use it.

As a manager responsible for introducing a performance management system, you have to actively manage data quality. There should be persons responsible for data quality in each relevant department (e.g. dedicated persons in larger organizations, project manager responsible for quality of time tracking data in her projects). In case of data quality problems they are in charge of setting up and implementing appropriate projects to raise data quality.

Avoid correcting or working around data quality issues in the KPI IT system (e.g. DWH, BI). Such systems can help finding quality issues and assessing data quality. However, the problems have to be solved at their roots.

7. Communicate the Rational Behind Your KPIs

If your KPI system is just a random collection of performance metrics, your team members will not understand it. As a manager you should clearly communicate why you are paying attention to the selected KPIs (i.e. how they are linked to the company’s strategy). If people understand the ideas behind the KPIs this might also help reducing data quality issues.

8. Be Transparent

The very purpose of KPIs is to make performance transparent. Many managers fear that some people might not feel comfortable with that. Some employees might ask themselves whether they will be able to meet the management’s expectations. People might start to solely focusing on optimizing the results in terms of KPIs. Reasonable things might be neglected, common sense might be given up.

Our experience is that transparency about KPI definitions (e.g. link to strategy, purpose, definition and calculation) is a key success factor for performance measurement projects. Openness, clear communication, and a channel for employees to ask questions and provide feedback is crucial. We have seen projects in which keeping the existence of monitored KPIs led to rumors and ruined the working climate.

9. Be Fair

Our customers who use our time tracking product time cockpit often base their benefit schemes on KPIs. The majority of teams using time cockpit are service companies (e.g. IT consulting, business consulting, software development, etc.). Therefore, for many time tracking is an important source for base data needed to calculate more abstract KPIs.

If a company bases parts of the salary it pays on KPIs, it is extremely important to make sure that the KPIs are fair for all employees. People must be able to influence the KPI results. The KPI system must not contain conflicting goals.

10. Celebrate Success

Last but not least it is important to celebrate success. If a team manages to reach its goals and improve KPIs, these achievements have to be made visible.

In part 2 of this article you can find examples for time tracking related KPIs.

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