How do you decide which KPIs to use?

How do you decide which KPIs to use?

I’m preparing for GrowCFO’s September Premium member quest right now. The subject is “How to Develop a KPI Dashboard”. We’ll examine the eight criteria for great performance measures during the quest. All eight are essential, but there are three that stand out:

1) Selecting KPIs that align with your strategic objectives and drive value.

2) Making sure your KPIs will impact future performance

3) Choosing KPIs that you can influence

Within the quest, we will use practical exercises to identify potential KPIs and rank them by importance, but there’s much to learn about why you do this. You can find out more about the quest here.

Let’s take a more detailed view of these three criteria in turn.

1) Linking Strategy to Value: Navigating KPIs, OKRs, and Performance Indicators

In the ever-evolving business management landscape, bridging the gap between strategy and value creation is paramount. Organisations formulate intricate strategies to achieve their long-term goals, but these strategies can only bear fruit when accompanied by effective measurement techniques. This is where Key Performance Indicators (KPIs), Objectives and Key Results (OKRs), and performance indicators come into play. However, it’s not just about measuring outcomes; understanding the nuances of each metric is essential for driving success.

Strategic KPIs vs Operational KPIs

KPIs are compasses that guide an organisation’s progress towards its strategic objectives. These indicators are categorised into two broad types: strategic KPIs and operational KPIs.

Strategic KPIs are high-level metrics that align with an organisation’s overall goals. They provide a holistic view of performance, typically measured over longer periods. For instance, a strategic KPI for a software company might be “Market Share Increase by X% over the next two years.” These KPIs are instrumental in tracking the success of the company’s strategic initiatives.

On the other hand, operational KPIs zoom in on the day-to-day activities that contribute to achieving strategic KPIs. These are more focused metrics that provide insights into operational efficiency and effectiveness. For the software company, an operational KPI could be “Average Resolution Time for Customer Support Tickets.” Operational KPIs help monitor the immediate actions that shape the larger strategic picture.

OKRs: Bridging Aspirations and Execution

Objectives and Key Results (OKRs) have gained significant popularity as a method to link strategic intent with tangible outcomes. OKRs provide a framework for setting ambitious objectives and defining specific, measurable key results that denote success.

Objectives encapsulate the organisation’s aspirations. They are qualitative, inspirational, and often ambitious statements of intent. For instance, an objective could be “Become a Leader in Sustainable Packaging Solutions.”

Key Results, conversely, are concrete, quantifiable outcomes that mark progress towards achieving the objective. A key result for the sustainable packaging company might be “Reduce Plastic Usage by 30% through Innovative Materials.” OKRs create alignment throughout the organization by breaking down lofty goals into actionable steps and measurable results.

Performance Indicators: Balancing Inputs and Outcomes

While outcomes-focused metrics are essential, they don’t always provide the complete picture. Performance indicators encompass leading and lagging metrics, offering insights into the inputs and processes that drive outcomes.

A leading performance indicator is a predictive metric that gauges activities or factors contributing to future success. For example, a leading indicator for a retail store’s sales performance could be “Number of Footfall Engagements in a Week.” This metric anticipates potential sales by analysing customer engagement.

A lagging performance indicator, conversely, reflects historical performance. In the retail store context, a lagging indicator would be “Monthly Sales Revenue.” This metric informs about past success but doesn’t offer actionable insights.

Measuring More than Just Outcomes

While outcomes are undeniably crucial, focusing solely on them can lead to a myopic view of an organisation’s performance. Measuring inputs, processes, and leading indicators helps identify bottlenecks, inefficiencies, and opportunities for improvement long before outcomes are realized.

Moreover, an overemphasis on outcomes might discourage risk-taking and innovation. When failure to achieve a specific outcome is perceived as a failure, employees might hesitate to experiment with new approaches. In contrast, a balanced approach to measuring performance acknowledges that even failed attempts can yield valuable insights.

The synergy between strategy and value is fuelled by well-defined KPIs, strategic alignment through OKRs, and a holistic approach to measuring performance indicators. Organizations must grasp the distinction between strategic and operational KPIs, harness the power of OKRs to bridge strategy and execution, and appreciate the significance of performance indicators beyond mere outcomes. Businesses can measure their progress and shape their path towards enduring success by doing so.

2) The Crucial Connection: Why Your KPIs Must Impact Performance

In the dynamic landscape of modern business, pursuing success is not merely a matter of setting goals – it’s about crafting a strategy that propels these aspirations into reality. KPIs are central to this strategy, the compasses that guide an organisation’s journey towards its objectives. However, not all KPIs are created equal; KPIs must directly impact performance to drive meaningful progress.

The Ripple Effect: The Power of Significant KPI Changes

Imagine steering a ship towards a distant destination. Small adjustments to the rudder may lead to slight shifts in direction, but the significant turns alter the course. Similarly, KPIs are the navigational tools determining whether an organisation is on track to reach its goals. However, the magnitude of change in a KPI’s value doesn’t always translate linearly to the overall outcome.

Consider a retail company aiming to increase its customer satisfaction scores. If a minor change in its KPI – such as a slight improvement in average response time to customer inquiries – results in only a fractional uptick in customer satisfaction, the impact might be negligible. On the other hand, a more substantial improvement, like enhancing the quality of customer interactions, could lead to a remarkable leap in customer satisfaction levels. Therefore, it’s not just about monitoring KPIs; it’s about focusing on those that can bring about transformative changes.

Ranking Impact: The High, Medium, Low Hierarchy

In a world of limited resources and boundless aspirations, prioritisation is a cornerstone of effective decision-making. The same principle applies when selecting KPIs. Tracking every metric is not practical or efficient, especially when not all metrics contribute equally to achieving overarching goals. This is where ranking KPIs based on their impact becomes invaluable.

The “High, Medium, Low” hierarchy is a KPI selection guideline. This approach involves categorising KPIs into three tiers based on their potential impact on performance. High-impact KPIs wield the most significant influence on outcomes and are the primary focus. Medium-impact KPIs contribute to a lesser extent, while Low-impact KPIs, although still valuable for specific insights, have a minimal impact on the overall goals.

Imagine an e-commerce platform aiming to enhance conversion rates. While many metrics contribute to this objective – such as website traffic, product page views, and checkout abandonment rates – the “High” impact metrics deserve the lion’s attention. For instance, monitoring the percentage of visitors who complete a purchase (“Conversion Rate”) might have a far more pronounced effect on achieving the overarching goal than tracking minor website traffic fluctuations.

3) The Power of Influence: Why Your Ability to Impact KPIs Matters

In the intricate dance of business management, Key Performance Indicators (KPIs) are choreographers guiding an organization towards its goals. However, it’s not enough to merely observe KPIs; the ability to influence them holds immense importance. Understanding the extent of your influence and focusing on high-influence KPIs can be a game-changer. In this article, we delve into the reasons behind the significance of your influence on KPIs and explore the value of prioritising high-influence measures.

A Spectrum of Influence: Can you move the lever?

Consider KPIs as levers you can push or pull to steer your organisation’s trajectory. Yet, not all levers are created equal. Some KPIs respond more readily to your actions, while others might seem stubbornly immune to your efforts. Evaluating the extent of your influence over a KPI is crucial because it provides insight into how your actions can affect the outcomes you desire.

For instance, imagine a marketing team aiming to increase website traffic. Your influence is substantial if your team’s actions – such as optimising content for search engines, running targeted ad campaigns, and leveraging social media – directly and significantly impact driving traffic. On the other hand, if external factors like market trends or competitors largely dictate traffic levels, your influence might be limited.

Ranking Influence: The High, Medium, Low Spectrum

Amidst the myriad of tasks vying for attention, allocating resources effectively is a perpetual challenge. This is where ranking KPIs based on their influence comes into play. By classifying KPIs into tiers – High, Medium, and Low influence – you can direct your efforts towards measures that respond most positively to your actions.

High-influence KPIs are the ones that your actions can directly shape and mould. These KPIs are strongly tied to your efforts, and the changes you implement are likely to generate significant shifts in outcomes. Prioritising high-influence KPIs enables you to optimise your efforts for maximum impact.

Continuing with the marketing team example, if your team’s actions on social media, content optimisation, and advertising campaigns have a pronounced impact on driving website traffic, then “Website Traffic” becomes a high-influence KPI. Focusing on this KPI ensures that your efforts yield the desired results.

Maximising Resources and Efforts

Time, effort, and resources are finite commodities in any organization. Devoting these precious assets to tracking KPIs that barely change performance can be counterproductive. By honing in on KPIs that wield substantial impact and that you can influence, an organisation can maximise its ability to allocate resources where they matter most.

Moreover, focusing on high-impact KPIs fosters a sense of clarity and direction. Concentrating on high-influence KPIs optimises resource allocation by directing efforts that are most likely to yield substantial results. Employees understand where to channel their energies, making their efforts more purposeful and aligned with the organisation’s vision. This sense of purpose can galvanise teams, resulting in heightened motivation and a stronger collective drive to succeed.

KPIs are not passive observers of business performance; they are mirrors that reflect the outcomes of your actions. Recognising your ability to influence KPIs and understanding the extent of that influence can lead to strategic decisions that steer your organisation towards its goals. By ranking KPI influence and impact and then honing in on measures that are both high impact and high influence, you amplify your ability to make a tangible impact.

Through this strategic approach to KPI selection, businesses can navigate the complexities of modern markets with greater efficiency, focus, and the power to impact performance where it truly matters.

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