In any strategic planning meeting, coaching session or performance review, youâll likely discuss KPIs. You might hear them referred to as âperformance metricsâ, âfundamentalsâ, or my favorite, âthe numbersâ. No matter what your team calls them, weâre all talking about the same thing: Key Performance Indicators.
The trouble is, if you ask 5 different people what the purpose of a KPI is, youâll likely get 5 different answers. Thatâs because, while KPIs are ubiquitous in todayâs competitive business environments, the term has become overused and misunderstood. You could say KPIs have joined other powerful but oft-misused terms like âsynergyâ, âproactiveâ and âcoachingâ.
While KPIs are used across almost every business, few businesses use them effectively. This is a problem because, in todayâs competitive markets, businesses fail quickly if they canât keep pace with their competitors. This article will help by showing you how KPIs can be used to drive performance with your team.
So What are KPIs?
Managers use Key Performance Indicators (KPIs) to turn a vision into measurable goals. For instance, a companyâs vision might be to become âthe worldâs #1 seller of sprocketsâ.
Suppose their leading competitor sells 20% more sprockets than them. In this case, the company might set a goal to âincrease sales by 25%â, and the KPI theyâd use would be ânumber of sprockets soldâ.
That KPI would trickle down through the company and affect everyone elseâs goals and KPIs. For instance, the production team would aim to increase capacity, the sales team would aim to sell more, the operations team would aim to manage costs of expansion, and so on.
KPIs are useful because they clarify where employees should focus their time. For instance, a salesperson will have a sales target, but probably not a âstorage room cleanlinessâ target. When that salesperson is choosing between making sales or cleaning the storage room, the choice should be clear.
High-Level versus Frontline KPIs
In a well-run organization, KPIs are used to measure performance at every level. Whether youâre the CEO or an entry-level staff-member, the only thing that changes is the scope:
High-level KPIs are the responsibility of executive leadership. Theyâre used to measure the overall performance of a company
The ultimate high-level KPI for most organizations is revenue. Some other common examples include stock price, market share, and environmental impact.
Front-line KPIs are the responsibility of everyone from middle-managers to entry-level employees. Theyâre used to measure the various activities that support the high-level KPIs.
If thereâs a high-level goal around sales, then the front-lines will probably have sales targets. If thereâs a high-level target around manufacturing costs, then the production staff will have targets around waste reduction.
How a High-Level KPI Trickles Down
I used to work for a national retail chain. In that business, the Vice-President of Sales had a goal to grow sales across the company by 20% year-over-year (YoY), and the KPI was âSales Revenueâ.
As a Store Manager, I had two KPIs related to that goal. First, I was expected to increase my sales volume by 20% YoY, and my KPI was ânumber of salesâ. Second, I had a goal to make a sale to at least 15% of all customers who came into my store, and my KPI was âSales Conversion %â.
My goals trickled down to my salespeople, who had targets related to the number of sales the store was expected to make, divided by how many hours they worked (with some other considerations).
As you can see, the KPIs of the salespeople directly support the KPIs of the Vice-President.
Developing KPIs
The development of an organizationâs Key Performance Indicators is usually done at the strategic-planning level. You may or may not actually be involved in this work. Regardless, itâs valuable to understand how your KPIs work and what their limitations are in order to improve your coaching.
In order for KPIs to work, they need to be well-defined and well thought out. This means you need to put on your âanalyst hatâ and answer the question: âif we meet our KPIs, will we achieve our goals?â
For example, you want to avoid setting KPIs that can be manipulated to achieve success. We see this all the time.
Consider the 2008 financial crisis. Many banks implemented KPIs that encouraged salespeople to sell mortgages to anyone, even risky clients. When those risky clients started defaulting on their loans, those banks closed down or had to be bailed out. This was shocking to an industry where everyone from the salespeople to the CEOâs were getting bonuses for hitting their KPI targets.
If you manage in a business where the KPIs can be manipulated, itâs on you to enforce the âspiritâ of the KPIs. That is, to make sure that good judgment is used, and KPI success equals business success. There are two things that you should do to make sure youâre KPIs actually lead to business success:
1. Connect KPIs to a âS.M.A.R.T.â Goal
A good KPI starts with a good goal. This is because, of course, KPIs are meant to ensure that a goal is achieved. For instance, if the company’s goal is to âincrease customer retentionâ, itâs hard to represent that with a single measurement. You can implement a KPI around âProduct Returnsâ, but how will you know whatâs good? 10%? 25%?
The goal needs to be linked to a S.M.A.R.T. goal like âAchieve an annual return rate of less than 10%â. With that, your KPI would be âReturn Rateâ, and each salesperson would have a target Return Rate of <10%.
Pro-tip: A wise manager would probably make it <8%, to compensate for any staff who miss their target.
2. Make Secondary KPIs that Protect Against Manipulation
For instance, say you have a salesperson who has goals and a KPI related to âsales volumeâ. This salesperson should also have goals and KPIs related to âdiscount rateâ, âreturn rateâ, and âcustomer satisfactionâ. This would help ensure a quality sale while supporting the overall goal of increased revenue.
- For more information on how to develop KPIs, see this article by Hubspot.com
- For a list of common KPIs, see this article by Onstrategyhq.com
Coach with KPIs
As a manager, itâs your job to drive performance for your business. Since the frontline staff are responsible for the activities that determine whether you succeed or fail, you need to loop them in. Iâve seen managers hide performance indicators to âshelterâ their staff, to gatekeep information, or both. Those managers got fired after their team underperformed without even realizing it.
As a manager, you want your team to have a very clear picture of what success looks like. You do this by making them aware of the KPIs, their order of importance, and how theyâre doing with them. Talk about them every day, every coaching session, and every meeting. Post them where everyone can see them. They arenât called âKeyâ Performance Indicators for nothingâââget comfortable sounding like a broken record.
You should make each staff member aware of how theyâre doing with their own KPIs, as well as how the team as a whole is doing. This helps them to understand how theyâre doing comparatively. This statement might be a bit controversialâââIâve heard a lot of managers express concern that this might âdiscourage a personâ. However, these managers usually havenât asked their staff how theyâd feel about it. Researchers at Office Vibe asked, and they found that over 65% of employees want more information about their performance.
Try it. Youâll find that, when communicated skilfully, everyone from your highest to lowest performers want to know how theyâre doing comparatively.
9 out of 10 managers avoid giving feedback because theyâre worried that employees will react poorly.
â Chris (@ChrisjBergen) March 31, 2020
As a result, less than 50% of employees know if theyâre doing a good job.
Final Thoughts
The highest-performing team I ever managed was obsessed with KPIs. Every day, theyâd print, post and discuss their individual and team-based KPIs before I even got in the door. Theyâd have come up with a strategy to ensure everyone had a winning day and month. The top performers would always help the bottom performers because they wanted them to succeed. And because everyone knew where everyone stood, it was easy for them to motivate and support one another.
At a former job of mine, a manager was fired for declining performance, and several of their employees were transferred to other managers, one of whom came to me. The first coaching session I had with them, I shared the KPIs. Their response: âWow, Iâve never seen these before!â That employee went on to become a leader in peer-to-peer coaching and a top-performer for me.
With that team, I became a bit of a meme. Theyâd post photoshopped pictures of me in the store, poking fun at my obsession with KPIs. I loved it, because even though they made fun of me, they did the same thing, and won loads of awards along the way.
The point is this: talk about KPIs constantly, and your team will think about the KPIs constantly. And as Peter Drucker said, âwhat gets measured, gets doneâ.
Key Takeaways
- KPIs are a measurement designed to demonstrate progress towards a goal. They are used to measure progress at every level of an organization, from the CEO to entry-level staff.
- KPIs are linked to targets and can be applied to any department, whether that be finance, housekeeping, sales, or any other department or individual. There is no employee who cannot and should not have KPIs as part of their regular coaching and performance reviews.
- Employees at all levels should be aware of the goals and KPIs, understand why they are important, and how their work contributes.
