Key performance indicators are so critical to managing performance that they've generated enormous and ongoing discussion about what constitutes a KPI and which ones you should monitor.
Part of the discussion concerns the merits of "off-the-shelf" vs. homegrown KPIs. But it shouldn't be an either/or proposition – to manage performance, you need both KPIs that address universal key measures, and KPIs linked to your unique economic engine. And you need to understand the difference between the two and to choose accordingly.
Performance management starts with monitoring certain universally recognized indicators. I believe there are only a few of these, typically financial ratios, such as Quick Ratio (current assets – inventories/current liabilities), P/E Ratio (market value per share/earnings per share), and Debt Equity Ratio (total liabilities/shareholders' equity).
Beyond those few, the KPIs that really matter should link directly to your economic engine. And they should be specific to your organization.
In his book "Good to Great," in which he looks at what makes some companies great and others not, Jim Collins addresses the need to truly understand your economic engine. What is the KPI that you, your team, and your company should rally around? Whatever it is, it will be critical to your performance. And I can tell you, it's not going to be "off the shelf."Beyond the few universal indicators, a KPI's numerator should always be profit, and the denominator a unique aspect of your business.
Take, for example, profit per employee, per customer, per transaction, per store, and per brand. Each of these is different. Each will cause sales, marketing, the call center and other parts of the business to focus their energies in different ways. Knowing this first and foremost lays the groundwork for each person, team, and department to craft their own KPIs that align to the activities they contribute to keeping the company's economic engine humming.
If your economic engine is profit per employee, then meaningful departmental KPIs become clear. HR focuses on employee costs, retention, and performance. Marketing and sales teams are rewarded for efficiencies in self-service and process automation.
If, on the other hand, your economic engine is profit per SKU (stock keeping unit), marketing and sales wouldn't focus on HR and process efficiencies, but on a deep understanding of market demand, strategic exclusivities, and the supply chain.
Is there a danger to picking off the shelf KPIs? Yes, beyond the few that are truly universal, off-the-shelf KPIs can create a fragmented set of priorities across the enterprise.
While an off-the-shelf KPI, such as Average Production Cost per Line Item, might sound great, what does it really mean if it's not related to your goals? It will generate heated meetings in which the KPI is discussed and dissected. Is it higher than last month? Is it outside of industry norms? If the KPI isn't linked to your economic engine, then not only does it not matter, it's also wasting precious time and resources.
If you're communicating with the bank or your shareholders, certain universal measures will always be key for understanding and driving performance. Beyond that, though, many KPIs that sound useful can actually do more harm than good.
So choose off-the-shelf KPIs sparingly and carefully. And beyond that, when defining your KPIs, start at the top. Understand what drives your business, and then work from there, tying each KPI to your economic engine and to the part that every department and role in your organization plays in keeping that engine running. For more about defining specific KPIs, read a 2004 blog in BusinessIntelligence.com, and Chapter 5 of Jim Collins's "Good to Great".
KPIs, Dashboards and Operational Metrics: The 10 Guidelines.
