How Important are Key Performance Indicators?

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Key Performance Indicators

If You Don’t Measure It, You Can’t Manage It. How true is this statement? If feedback is not provided, unmanaged issues can accumulate into major problems. 

I can remember how not knowing unmanaged issues became a major problem.

What happens when you don’t measure

I was sitting at the year-end company event when the ownership group did not pay bonuses that year. Why not? Because the company did not make a profit for the first time in ten years.

The company did not make a profit for the year. Furthermore, everyone was clueless. So, what was the answer? 

The past is the past. The ownership group defined meaningful KPIs and could measure progress routinely. The company adjusted as needed. The company returned as a profitable company in the next year.

How do I get started developing KPIs?

First, define Key Performance Indicators as useful tools for each department. Ask the department personnel, “What defines a good day or bad? What defines a good week or bad?” There are your department measurements.

The data is summarized and become measurements. The measurements are compared and become metrics. The metrics (called an Indicator) are organized on paper and passed out; this is a scorecard. An electronic scorecard is called a dashboard. 

If the Indicators are important to performance, they are Key Performance Indicators. So many terms!

“Key Performance Indicators are the critical indicators of an intended result. KPIs are used to improve performance and achieve goals, focus attention on what matters, and supply evidence to inform decision making.”[2] As you can see, KPI.org supplies a more intense purpose of KPIs.  Your Strategic Management System should include KPIs.

How many times have you come to discover, five days after the end of the month, that your company had lost or did not earn enough profit? What if you had received a daily dashboard that defined Sales and Gross Profit? You would have seen daily how it was moving during the month. Likewise, you and your team could have shifted by developing a new game plan. Key Performance Indicators are more than numbers, graphs, and symbols. They are indicators that help you and your team to manage the business.

How is this accomplished?

First, you need to define indicators that will matter. Indicators must have meaning. Do not try to measure everything. Focus on performance drivers. What measurements of this department (or company) illustrate success? This will be different for each department. 

It has been said that the Founder, Chairman of the Board, and CEO of Holiday Inn (1952 – 1979) would receive two numbers every day; Cash On Hand and Accounts Payable Trade. Amazing how someone can run a multi-billion worldwide company with those two figures daily.

The Customer Service Department may review:

• Customer Satisfaction Scores, 
• Customers Repeat Percent, 
• Net Promoter Score (NPS), and 
• The Number of New Customers. 

Human Resources may review:

• Employee Turnover Rate (ETR), 
• Percentage of Responses to Open Positions, and 
• Employee Satisfaction. 

Financial Measurements may include:

• Gross Profit Margin by Department or Sales Category, 
• Cash Flow, 
• Return on Investment (ROI), 
• Average Annual Expenses to Serve One Customer, and 
• Actual vs. Budget Performance.

The process necessary to calculate the measurement has a personnel cost. You do not want one person spending half a day calculating the Key Performance Indicators. You need the platform to do this for you.

Second, you need to define the Standard for each indicator. The Standard should have a solid basis. For example, a piece of machinery in your operation has an ideal working speed per the manufacturer. If the machinery manufacturer, says the best rate is 85 units per hour. In turn, the Standard should be 85. The agreement of the Standard is important. If we disagree, the KPI will not have substance.

Third, the KPIs must have a measurement related to a decision-making process. From this KPI, can I say we are heading in the right direction? From this KPI, can I say we need to make a change? Does this KPI define the change needed? 

Sometimes it is not one KPI that will tell the entire story. As an example, you look at Profit Percent every week. This week the Profit Percent dropped. What decision can you make from this KPI? Were Expenses high? Was Gross Profit low? What was the Gross Product Margin based on the Product Mix? You need to look at a combination of KPIs to uncover the answers.

The timing of the KPI publication is important. With today’s technology, the reporting can be real-time. But you do not want your staff looking at reports all day. Reporting on Tuesday at 8:00 am on what happened on Monday is usually acceptable. Additionally, you should discuss time limits on reviewing dashboards. I know it sounds like we are babysitting, but the review of dashboards should be for 15 – 30 minutes unless there is a problem. 

Story Time of the past…

Years ago, I worked in a manufacturing company. The production operation was 24 hours a day, five days a week. The 1st shift would start at 7:00m. The production secretary would arrive at 7:00 am. The production secretary would review the paperwork and send it to the office by 7:30 am.

The office staff would arrive at 8:00 am. The analyst would summarize the information and publish the reports at 8:30 am.

The Company President would arrive at 8:30 am. Around 8:45 am the Operations Manager would come to the Company President’s Office. Whether the Scorecard was Good, Bad, or Neutral, it was routine. Constant communication, and engagement, from top to bottom.

KPIs are not published on the same basis. I report Sales and Gross Profit KPIs daily to the related salespeople and managers. Weekly I report Financial KPIs to senior management. Managers and Senior Management receive different measurements every month. Different measurements are sent to different people at different times.

Your company size may define the different levels of KPIs. For example, the Production Manager receives a set of KPIs; the Warehouse Manager receives a set of KPIs, and the Supply Chain Manager receives a set of KPIs.

The Operation Manager that oversees these three areas would not receive all of these areas; they would receive a summary from each area. The Operation Manager Scorecard would include KPIs as a speedometer for each function. Below the speedometer would be brief comments from the manager. In turn, the President/CEO would not receive hundreds of KPIs but a summary from each C Level (COO, CFO, CHRO, CTO, CMO, etc…).

KPI reporting should fit the measurement. You want to make sure the presentation is acceptable. Here are a few formats to consider:

• Numbers
• Visual (Thermometer, Speedometer, Graphs)
• 1 – 10 (define the lowest and highest)
• School Grading (A, B, C, D, F)
• Arrow Up / Arrow Down
• Color Coded (Green positive, Red negative)

According to marketing influencer Krista Neher, the human brain can process images up to 60,000 times faster than words. 

LinkedIn Article, 5 Reasons Why Images Speak Louder than Words, [3 ]published on September 29, 2005, by Gabe Arnold

Visual KPIs are good, but you should use KPI formats to inspire the end user.

You are asking, “Which measurements and what visuals?”  It is your decision. From company to company, the measurements will be different. What measurements define a positive or negative impact on your business? Let us look at the different measurements that can show a positive or negative impact on your business:

Customers:

• Customer Churn Rate – What percentage of customers who bought in Year 1 did not buy in Year 2?
• Customer Lifetime Value – The Net Profit a company expects from a customer for the customer’s lifetime.
• Customer Lifetime Value / Customer Acquisition Cost – If this ratio falls below 1.0, you spend acquisition funds.
• Customer Satisfaction Index – Measures a company’s success at meeting customers’ needs.
• Net Promoter Score – Determines how likely customers are to recommend a brand to others, generally represented on a 1 – 10 scale.

Human Resources:

• Percentage of Cost of Workforce – The cost of the workforce divided into all costs. This measurement should be time-tested and then reviewed for analysis.
• Employee Productivity Rate – Helps to measure workforce efficiency over time. The total company revenue is divided by the total number of employees.
• Employee Satisfaction Index – This is a key metric underlying talent retention. Using a company-wide survey can help gauge employee happiness.

Production:

• Units Per Hour – This is a KPI for many manufacturing facilities. This metric is compared to the standard.
• Man Hours Per Hour – This measurement defines whether if you are over or understaffed.
• Units Per Man Hour – Units Per Hour / Man Hours Per Hour – This metric is compared to the standard. If the result exceeds the standard, your labor cost could be lower. If lower than the standard, your labor cost could be higher.

Financial:

• Days in Accounts Receivable – This defines the collection rate.
• Days in Inventory – This defines, on average, how many days the inventory will be in stock.
• Cash Rotation – The number of times the cash returns to the organization for one year.
• Quick Ratio – This shows the ability of an organization to meet short-term financial liabilities, such as upcoming bills.
• Current Ratio – Measures the ability of an organization to pay all its debts over a given period.

What are Leading KPIs?

Leading KPIs will have one or more of these characteristics:

• Predictive Nature
• Actionable
• Future-Oriented
• Influential Factors
• Early Warning Signs

To uncover and discover more about Leading KPIs, check out our blog post: Unlock Your Future Success with Leading KPIs.

What are Lagging Key Performance Indicators?

Lagging Key Performance Indicators are essential for understanding historical performance, identifying areas for improvement, and making data-driven decisions based on past outcomes. With Leading KPIs, businesses can create a balanced and comprehensive performance measurement system to guide their strategic planning and future actions. The key characteristics of Lagging KPIs include:

• Historical Perspective
• Outcome-Focused
• Performance Assessment
• Reflective Metrics
• Limited in Influencing Outcomes

To uncover and discover more about Leading KPIs, check out our blog post: Lagging Key Performance Indicators.

In the blog post “The next chapter in analytics: data storytelling” by @BethStackpole published on LinkedIn on May 20, 2020, Beth starts with:

“As with any good story, a data tale needs a beginning, a middle, an end, and some actionable insights. Data scientists aren’t always up to the job.”

The next chapter in analytics: data storytelling by @BethStackpole published on LinkedIn on May 20, 2020

“If you want people to make the right decisions with data, you have to get in their head in a way they understand.”[4] When in Spain, speak Spanish. When in Portugal, speak Portuguese. In other words, speak the language of the end user. The message will be lost If you do not speak the end-user language. 

The skill of data storytelling is removing the fluff and focusing on key insights. Your data set has unlimited lines. You will organize, translate, and present into actions for business outcomes. In a January 1, 2009, interview with Google Chief Economist, Hal Varian, Varian states:

The ability to take data—to be able to understand it, to process it, to extract value from it, to visualize it, to communicate it—that’s going to be a hugely important skill in the next decades…[5]

January 1, 2009, interview with Google Chief Economist, Hal Varian

This article from thirteen years ago has the foresight of today. There are many jobs available, from Data Analyst to Data Engineer. Many software applications (paid and free) aid you with your data.

Two years ago, I searched “data storytelling books” on Amazon. Amazon returned 852 listings. When I search today, Amazon returns over 1,000 results. For “data storytelling,” Google returns “About 129,000,000 results”.

If you are not measuring data and publishing KPIs daily, start now. Huddle with your team. Figure out what is important, when, and how often it is important. Your team plays a critical role in the total process. Allow your team to develop ideas to carry out the process. Then let your team manage the process.

If you are measuring data and publishing KPIs daily, congratulations! Review your KPIs with your team regularly to decide if they are effective. One question is, “How effective are the KPIs? Which KPIs were used during the year to change an activity?” If a KPI did not change your thinking process, it was not worth your time.

Our goal is to provide data that will drive better decision-making.

Remember: If you don’t measure it, you can’t manage it!

We would like to hear from you. Please leave your comments below. Did you find this blog post helpful? Why do you feel Key Performance Indicators are Important? What do you measure, and how often?

Thank you, Have a great day and be safe!