For many companies, like here at SAP, October is the pressure-filled time to set projections for next year. These targets must be gauged and translated into performance metrics or Key Performance Indicators (KPIs). So, since a lot of us are involved in this activity, let me share a few pragmatic tips that may help you approach KPIs from a fresh perspective without going into detailed theory.
For performance metrics to best help us monitor and steer our organization, they must have two fundamental features:
- Relevant – They have to provide to the information you need to steer the business, when you need it
- Communicative – They have to fairly represent your business and be easily understood by your audience
Now, let’s zero in on the relevance. To determine whether your KPI makes the grade for this feature, check it against the following three points of relevance:
- Adequacy: Does it cover an important or strategic portion of my business?
- Ambiguity: Does it clearly relate back to my performance?
- Readiness: Are the data points new? Are they easily available?
If A B or C is “no” or “maybe”, you do not have a good KPI.
Let’s put the following easy (and common) statement to the test: “Our target is to grow the market share of our xyz product from 20% to 25% in the next 12 months”.
Adequacy: if the xyz business is a strategic one or a large one, the adequacy is clearly assessed.
Ambiguity: I see on our scorecard exactly 25%, so our first reaction is to celebrate. But then I must ask myself, ‘is the 25% because we perform better than planned, or because the market performance is lower than predicted?’ The broader the ambiguity, the more KPI clarity and value is hampered. If you got 25% because the market was poor, you may have a success story at hand, but you could also still have 12 months of weak sales, and thus, probably a weaker-than-expected operational income. So, your KPI already appears to not make the grade in the broader company context.
Readiness: If you want to use this KPI to steer your business, you will have to regularly assess both the internal sales performances (easy) and the external market performances (difficult, unreliable, and expensive) . This will take extreme effort and time, with subsequent costs and missed opportunities.
Bottom line: Try using a more narrow and straightforward KPI such as “I want my revenues of my xyz product to be x000 mEUR in the next 12 months”. This is simpler – normally already available- and it absolutely fits A,B, and C.
In a large company like SAP, where we have more than 64-thousand global employees spread across different lines of businesses, Relevancy is our number one focus. A relevant KPI directly links the unit’s performance (in the case above the unit xyz) to both the specific company goals and to the individuals’ contribution and related rewards (MBOs). During this process, we are constantly gauging the Adequacy, Ambiguity and Readiness.
It is actually pretty common for teams and managers to be constrained in their comfort zone and adjust the Ambiguity gauge to make sure they have full power or minimal risk of a particular KPI. For instance, in the case above I measured the market share -not the revenues- to parameterize my sales performance to the market situation. Or in a product development unit, I measured the number of new products launched –and not the revenues they generated- to detach my unit from the sales. This normally leads to reduce the Adequacy and the Readiness of the KPI itself and to produce a KPI proliferation (…of “bad” KPIs…) across the organization.
Clearly, the more we move from the perspective of a single department or division to a more corporate or conglomerate view, the broader and more heterogeneous your audience becomes – so finding the right Relevancy for your KPI is the magic.
Next time, we’ll talk about framing your KPI with the Communicative feature. Get ready to discover some new strategies to determine the positive direction of your organization!
Copyright 2014 Andrea Masci, All Rights Reserved.