“Efficiency is doing things right; effectiveness is doing the right things,” as Peter Drucker, the famed author, educator and management consultant, once said. Whether individually or organizationally, the key to short- and long-term success is to focus on the most important issues.
The problems that confront many organizations are determining just what to focus their efforts toward—and how to measure progress. Without a clear focus, organizations generally become bogged down with too many performance indicators, which confuse their organizations and result in significant waste.
The role of key performance indicators (KPIs) is to provide the required information and motivation to assist in the achievement of desired results. KPIs should be clearly recognized throughout the organization. Their results should facilitate communication and decision-making initiatives across all levels of the organization.
The following guidelines are offered as fundamental considerations which can be used to narrow a focus on the most important issues confronting organizations.
- KPIs should focus on the vital few. The late Dr. Joseph M. Juran, considered by many to be the foremost quality and process improvement guru of the 20th century, popularized the Pareto principle. If focused on the trivial many, too many things will consume valuable resources with less-than-significant results to the bottom line. Managers have a habit of wanting to measure everything, whereas KPIs should be laser-focused and process-based.
- KPIs should be strategic. They should be linked to the organization’s strategies, goals and objectives. They should measure performance toward the strategic intent that’s been determined by senior management. It is critical that the KPIs measure the most important issues in order to achieve meaningful success.
- KPIs should be relatable. KPIs are both financial and nonfinancial. While it is fairly easy to measure performance in terms of financial factors, it’s important to have KPIs which can be related to all levels of the organization. For instance, return on investment or return on equity would not typically be effective measures for production personnel. However, they can certainly relate to defect rates or units shipped (for a specified time base). If KPIs are not relatable, most of the organization will be confused and left out of the effort to help drive operational improvements.
- KPIs should be achievable. KPIs set at higher levels can adversely impact employee morale and subsequently, organizational performance. After Philip B. Crosby, author and management consultant, developed his zero-defect program in the 1960s, many organizations adopted it as a KPI. These managers misinterpreted Crosby’s focus and encumbered their personnel with an impossible challenge. KPIs may be set with regard to benchmark levels. They can certainly be a stretch, yet they must be achievable.
- KPIs must have valid data. Organizations must ensure their measuring system is valid. As Niels Bohr, the Danish physicist who received the 1922 Nobel Prize in Physics, once said, “Accuracy and clarity of statement are mutually exclusive.” Striving to obtain any KPI data is a challenge in itself for many organizations, and data accuracy can be an even greater task. As an example, to determine the amount of variation of the measurement system, repeatability and reproducibility of measurement equipment should be performed to determine validity. In other words, will the KPI measurement system yield data that are meaningful, timely and reliable for effective decision-making?
- KPIs should be controllable. As Drucker said, “What gets measured, gets managed.” More importantly, what is measured must be controllable to obtain the desired strategic objectives. Individuals within the organization must be empowered to make necessary adjustments in order to generate positive performance outcomes. On its own, the simple act of empowering all levels of the organization leads to powerful results. The simple act of paying attention to something will cause the organization to make connections they never made before, and these areas will improve, almost without extra effort.
- KPIs should be embedded. KPIs should be embedded in everyday use as part of the working experience. All staff members should be exposed and trained to work in a KPI-driven environment. Sadly, many organizations fail to realize the importance of this step and are confused when they fall short of the desired results. All too often, organizations determine their latest and greatest KPIs without a concerted plan to educate their workforce as to what it takes to achieve success.
Many organizations realize the power of KPIs, but some still wrestle with how to use them effectively. They need to remind themselves, however, that while Drucker’s quote, “What gets measured, gets managed,” is true, the challenge is to have the right measures—because the wrong ones can lead to disastrous results! iBi