How to select KPIs image

How to Select Useful / Usable / Appropriate / Relevant KPIs

Read this page in about 5 minutes ~ Published: November 2014 ~  Share this page:

Organisations have no shortage of performance indicators, and that’s good - as it is through these measures that it is possible to keep track of what is going on. Research has shown that organisations which use performance information to inform management decisions tend to do better in most of the key dimensions we care about.

However there are challenges. Collecting reliable data about performance can be difficult and resource intensive, and most organisations are able to identify so many performance measures that were you to collect them all, its managers (either individually or working as a team) simply could not pay attention to all of them all of the time.

Typically organisations respond to these challenges in two ways. First, organisations invest in semi-automatic computer systems to collect, analyse and report their performance information. Second, managers seek to identify and focus their attention on the more important measures among all those that they can review : they define a class of ‘most important’ measures - the “Key Performance Indicators” (KPIs).

Measure selection

The burning question that then arises is “what are these ‘most important’ measures?” - in practical terms, who should select the KPIs, and how should they make this selection? A lot of time and energy has been invested by very many people to find an answer to this question: here is a summary in the form of three ‘lessons learnt’.

  1. Lesson 1. Choosing KPIs should be driven by a clear understanding of what you want to do with the information when you get it: there are no universally useful KPIs - what is useful is very much determined by who is going to use the information. The ‘key’ information needed by someone running a power station is quite different to that which would be key for someone building a road, or running an investment bank. We know that key data varies by the sector, industry, organisation, role and even level within an organisation of the person who will be using the data. If you are going to focus your attention on just a few numbers then you need to have a justifiable reason why these ones rather than any of the others: the best reasons are those that relate to the hoped for benefits that will accrue to the organisation from this focused attention.
  2. Lesson 2. KPIs should be chosen from measures that can be obtained frequently, reliably and relatively easily. Much of the information managers say they would like to have is not easily available (in 2GC’s experience, among senior managers, about half of all the measures they say they would like to monitor are ones not previously collected by the organisation): useful data is data that is available, so sometimes good alternatives have to be found. If the information is indeed key for a manager to do their job, it is sensible that they are able to monitor it at least quarterly. Lots of important subjective information (such as customer satisfaction) is often measured less frequently than this (if it is measured at all), but a measure that is infrequently reported makes for a poor KPI choice.
  3. Lesson 3. KPIs should link to things you can actually do something about. Since we design organisations to allow people to specialise in different roles, what is key to one person quite possibly will be only marginally relevant to another. Asking managers to focus their attention on measures that they can do nothing about simply encourages employees to ignore them (and at the same time any other KPIs you have identified). Sometimes the issue is caused by an organisation explicitly choosing to use measures that none in the organisation can do anything about - for example currency exchange rates. But more often problems are caused when KPIs have been chosen by ‘someone else’ (for example external consultants, or a specialist team within the organisation) who are not that familiar with the ‘scope’ of each part of the organisation. Frequently in this circumstance measures are chosen that are thought to be ‘generally important’ and then applied to everyone, or the external team make (an imperfect) guess about what is locally relevant to each team - either way the net result is for many people to see the KPIs as being outside of their scope to influence; which as noted above reduces their value considerably.

A better way of selecting KPIs

Applying the three lessons given above is complicated: we can understand what each lesson is about, but how do we fix things so that all three are addressed? These are the issues that 2GC has focused its attention on over the last 15 years: our approach is informed by the simple but powerful ACME framework.

2GC developed the ACME framework to help with its work developing and implementing strategy implementation frameworks for large organisations, but it can also be applied to KPI selection activities. ACME comprises four stages that you can work through as part of your work to develop a set of KPIs. These steps are:

  • Articulate. Work out clearly what you are hoping to achieve by having the KPI: if it is in place and working well, what will be the outcome for the organisation? At this stage, focus on the benefit you are looking for - don’t think too much about what the KPI itself should be.
  • Communicate. Who will be involved in working with this KPI? Talk to them about what you are trying to achieve (as you described in the Articulate step) and get their feedback on what actually the organisation can do to influence the outcomes you’ve got in mind. Gain agreement with them on the things that could or should be done. Choose the general areas your KPIs need to cover to reflect the outcome of these conversations.
  • Monitor. Delegate the selection of the KPIs themselves to those who will actually use them - if you are clear about the outcome (from the Articulate step) and the areas to focus on (from the Communicate step) - it will be easier for people within the organisation to identify measures (KPIs) that are appropriate and relevant to their roles.
  • Engage. KPIs are only useful if you are seen to be paying attention to them - so put in place a set of actions that show that the senior management of the organisation are interested in the information the KPIs provide: regular meetings to discuss KPI performance is perhaps the easiest, but other steps are possible too.

If you would like to discuss your KPI and strategy requirements with 2GC then please contact us!

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