Key Performance Indicators For Dummies Cheat Sheet
Key Performance Indicators (KPIs) help organisations understand how well they are performing against their strategic goals. KPIs measure financial performance, operational and internal processes, sales and marketing, customer satisfaction and more. This Cheat Sheet gives you some handy resources and advice to help you get the most from KPIs.
Developing Great Key Performance Questions
The nature of KPIs (Key Performance Indicators) is to provide answers. But answers to what? You don’t want to waste time and energy sourcing answers to questions you didn’t ask or couldn’t care less about. To ensure that you don’t , check out a concept called Key Performance Questions (KPQs).
There is a right and wrong way to go about creating your KPQs. For a start you need to get comfortable with asking questions! Children ask questions constantly, irritating parents with endless curiosity and ‘But why’s’. Then children grow up and stop because people don’t want to look like they don’t know the answer. After a few years in business professionals can almost be afraid of questions because the pressure to have all the answers is so acute. And yet businesses that facilitate a very open, questioning culture always out-perform those that don’t.
Follow these ten steps to ensure that you create good KPQs:
Identify one to three high-level KPQs for each strategic objective on your strategy map.
Make sure that your KPQs are performance related.
Engage your colleagues in the creation of the KPQs.
Make your KPQs clear, short and punchy.
Phrase your KPQs as open questions.
Make sure your KPQs focus on the present and future.
Seek to refine and improve your KPQs over time.
Use your KPQs to guide your KPIs so they deliver relevant and meaningful information that answers your KPQs.
Use your KPQs to challenge and where necessary refine your existing performance indicators.
Include your KPQs in the reports you communicate within the business to review performance.
The Basics of KPI Template Design
The first four elements of the KPI (Key Performance Indicator) design template address the basics of each KPI and help to put it in context. You need to get a handle on these elements before you do any detailed development work on your KPI.
It’s always best to clearly specify to which strategic objective the KPI relates, so that everyone looking at the KPI immediately appreciates its relevance.
If appropriate you can also identify the persons or functions responsible for the management and delivery of the strategic objective that the KPI is assessing. This may be an individual executive or employee, or a team of people. Clarifying ownership in this way allows you to know who to call in the future should you need to discuss performance, or fine-tune the KPI.
Audience and access rights
Here you define the primary audience for this KPI – basically, who will see the data and who will have access to it.
Sometimes it is possible to define a primary and a number of secondary audiences. For example, the primary audience for financial information might be the senior leadership team, and secondary audiences might include shareholders, analysts and other functional managers within the business.
Key Performance Question (KPQ)
For each KPI, state the KPQ that the indicator is helping you to answer.
Again this helps to provide context around why this particular indicator is being introduced and on which specific issue it is going to shed more light. It puts the KPI in context and helps keep people engaged in its on-going measurement.
How will and won’t the data be used?
Specify how the KPI will be used; for example, share the decisions the KPI is helping you make. This provides even greater context, so that everyone who uses the KPI or comes across the KPI is clear about how you plan to use the information and evidence it provides.
This is especially important if you are introducing a suite of new KPIs, because it helps to reassure everyone involved that every one of the KPIs has a very specific purpose and is not just added to make the initiator look good!
Another part of this section is to define how the KPI will not be used. Sometimes, people are scared to report on measures because they fear negative results could be used against them. Here, you can say that the KPI won’t be used to determine the performance of individuals and won’t be linked to bonus payments.
Focusing the Decision Maker’s Attention On Your KPIs
It can sometimes be difficult to get the attention of a decision maker to take a look at your KPIs (Key Performance Indicators). Most business leaders, executives and decision makers are already drowning in a daily flood of important, useful or potentially meaningful data. For the most part the nuggets of really important information that could genuinely impact the business and make the decisions easier and more accurate are lost in 30-page reports.
The best way to get the decision maker’s attention is to make sure the KPI data is easily accessible. Don’t make managers and executives wade through reams of needless information to get to what they need in order to make better decisions and improve performance.
Make the KPI reports short, to-the-point, accessible and visually compelling. Blocks of dense text are off-putting, so mix narrative with visual representations of the data to make the report more engaging. The report must also put the information in context at the very start and remind the reader what questions the data is seeking to address.
For KPI reports to be used as intended, and used by the decision makers that receive them, they must be customised to meet the specific requirements of each decision maker. It is therefore essential that whoever creates the report considers each recipient in turn and asks themselves five key questions:
Who is going to read this report?
What do they know about the issues in the report?
What do they expect to see?
What do they want to know?
What will they do with the information?
Your KPI Design Template
You are probably wondering how you should design your KPI (Key Performance Indicator). The following table is a KPI design template in tabular form. It shows two practical examples of how the template can be completed.
|Example 1||Example 2|
Name the strategic objective (from the strategy map), which is being assessed with this indicator.
|Grow Customer Satisfaction
|Grow Our Profits
|Audience / Access
Name the key audience for this indicator and clarify who will have access rights to it
|Board of Directors and Marketing Team||Board of Directors and Finance Team|
|Key Performance Question(s):
Name the performance question(s) this indicator is helping to answer.
|To what extent are our customers satisfied with our service?||To what extent are we generating bottom-line results?|
|How will and won’t this indicator be used?
Describe how the insights this indicator generates will be used and outline how this indicator will not be used.
|The indicator will be used to assess and report on our customer success internally. It will not be used to assess performance of individuals or to determine bonus payments.||The indicator will be used to assess and report financial performance internally and externally. It will also be a key indicator to determine executive pay.|
Pick a short and clear indicator name.
|Net Promoter Score||Net Profit|
|Data Collection Method:
Describe how the data will be collected
|The data will be collected using a mail-based survey.||The data for the net profit metric is collected from the income statement (or the finance and accounting system).|
|Assessment / Formula / Scale
Describe how performance levels will be determined. This can be qualitative, in which case the assessment criteria need to be identified, or it can be numerical or using a scale, in which case the formula or scales with categories need to be identified.
|Using a 0–10 scale (Not at all likely to extremely likely) participants answer: How likely are you to recommend us to a friend?
NPS = pecentage of Promoters (score 9–10) – 5 of Detractors (score 0–6)
|Net Profit ($) = Sales revenue ($) – Total Sales ($)|
|Targets and Performance Thresholds
Identification of targets, benchmarks, and thresholds for traffic lighting.
|55 per cent by the end of 2020||$1,250,000 by the end of 2020|
|Source of Data
Describe where the data will come from.
|Survey of existing customers||Finance and accounting system|
|Data Collection Frequency
Describe how frequently is this indicator will be collected. If possible, include a forward schedule.
|Monthly data collection – sampled 10 per cent of our customer data base||Weekly|
Outline how frequently this indicator will be reported to the different audiences (if applicable).
Name the person or role responsible for collecting and updating the data?
|Ian Miller – Marketing Assistant||Joe Blox (Finance Clerk)|
|Expiry / Revision Date
Identify the date until when this indicator will be valid to or when it will have to be revised.
|24 months||Target to be revised annually|
|Validate your KPI|
|How much will it cost?
Estimate the costs incurred by introducing and maintaining this indicator.
|Costs are significant, but cheaper than a traditional customer satisfaction survey.||The costs of producing the net profit measure are low because the data is readily available.|
|How complete is this indicator?
Briefly assess how well this indicator is helping to answer the associated key performance question and identify possible limitations.
|It provides us with a nice simple number, but the data should be supplemented with unstructured feedback about:
What is particularly good?
What could be improved?
|Net Profit is one of a range of profitability metrics. However, on its own it will not give us the full picture and can lead to short term thinking. It will need to be seen over time and in the context of other measures such as revenue, profit margin, operating profit, return on assets and return on equity.|
|Possible unintended consequences
Briefly describe how this indicator could influence the wrong behaviors or how people could cheat on this KPI.
|People could possibly influence customers before they take the survey or they could select customers who are likely to respond positively.||The danger with net profit is that people could cut costs to the detriment of long-term performance but deliver positive shot term results.|