“If a strategy is to be achieved, it must be publicly tracked, measured, and monitored. If you are trying to lose weight, you must get on the scales regularly.”
“What Gets Measured, Gets Done.”
Think about the last time you watched a casual game of pickup basketball between friends in the park or a gym. The attitude is relaxed; people are joking around; people are half sprinting to make plays; people launch unlikely half-court shots; the amount of energy applied to each play varies wildly- it’s fun.
Now, think about what happens to that same game and that same group of players when you add a live scoreboard to the match. Something switches “on” inside these players. Suddenly, the game is no longer a game but rather a test of their competitive spirit and skill. Each player tightens their game, collaboration increases, and each team strives at their best to win and reach their goal.
What made all the difference between the two games was that we started keeping score in the second scenario- that’s the power of measuring our progress through goals. Naturally, humans are competitive creatures, and we are driven to compare ourselves to others and seek to improve what we do and how we do it.
Just as no world-class athlete would want to play a sport without keeping score, metrics help world-class organizations know how well they’re doing. Without measuring progress, people have difficulty staying accountable. It is impossible to measure the development of the strategy-execution without concrete objectives and milestones. Managing and improving strategy-execution then becomes extremely difficult, if not impossible. You keep score if you want to win.
Measuring progress towards outcomes helps us understand exactly where we are in terms of progress, and it also motivates us to do our best work, embrace growth, and then become better. If you want to get Shit Done and Get Shit Done on Time, you will need a system in place to measure and track outcomes and progress.
KEY PERFORMANCE INDICATORS (KPI)
In business, the measurements toward goals are generally known as KPIs or Key Performance Indicators. Ideally, these metrics should be the targets that individuals, teams, or organizations need to achieve to reach their goals.
Companies enhance their process improvements and progress on strategy-execution by designing and deploying local operational dashboards. These dashboards are collections of key indicators that provide feedback on performance and enable executives, managers, and employees to drill deeper into the outputs and processes.
While sometimes a KPI will measure increases in sales, the number of new products launched, or time or cost savings in processes, the aim is to assess progress towards the What. Companies will use KPIs at multiple levels of the organization to evaluate their success at reaching strategic targets. High-level KPIs may focus on the business's overall performance, while low-level KPIs may focus on processes in departments such as sales, marketing, HR, support, and others.
However, for a KPI to be meaningful, there need to be several factors present:
- The KPI needs to be well understood.
- The KPI needs to be impacted by the group that it measures.
- The KPI needs to be maintained and visible in a central location.
For example, if your annual bonus was tied to the ability to reduce your team’s workload by 10% or 100 hours through automation, the chances are that you’d want to focus your energy on meeting this goal. However, if you didn’t understand how the 100-hour target was calculated, or if you could not change the targeted processes, or that it was up to you to self-report the savings, then suddenly, this scenario would become an ineffective KPI.
If you don’t understand your KPI, you will take no action towards it. If KPIs are outside of your realm, you will ignore them. If the organization does not have a centralized and systematic process for collecting the data behind the KPI and tracking its progress, you may be able to cheat the system and report that you saved 500 hours. The trick to set and manage KPIs is to ensure they are fair and challenging but not unrealistic.
A KPI is only as valuable as the action it inspires. Too often, organizations may be tempted to blindly adopt industry-recognized KPIs and wonder why KPI doesn't reflect their own business and fails to affect any positive change.
To identify the right KPIs to use, start by asking these questions:
- What is your desired outcome?
- Why does this outcome matter?
- How are you going to measure progress?
- Who is responsible for the business outcome?
- How will you know you’ve achieved your outcome?
- How often will you review progress towards the outcome?
- How can you influence the outcome?
The following section below will go into the details to set an optimal KPI that is SMART.
The key to designing a good KPI is to follow the SMART principle.
If you’re not familiar with the acronym, SMART stands for- Specific, Measurable, Attainable, Relevant, Time-bound. In other words:
- Is your objective Specific?
- Can you Measure progress towards that goal?
- Is the goal realistically Attainable?
- How Relevant is the goal for your organization?
- What is the Time-frame for achieving this goal?
A KPI is a measurable way to highlight a particular factor that matters and focuses on its energy and resources. Alternatively, if an organization creates multiple weak KPIs, you will set a target that fails to address a business outcome. At best, you’re working towards a goal that has no impact on your organization. At worst, it will result in your business wasting time, money, and other resources that would have best been directed elsewhere. A good KPI focuses on getting one thing right. Make sure you have a clear definition.
A KPI needs to be measurable and for the calculations behind it to be transparent and easily understood. A minimal amount of time and resources should be spent on tracking these results as an initiative. An organization should implement simple processes to measure critical success factors.
Example: Increase new product offerings by 10%.
The base is 100, and 10% is ten more. At year-end, it will be easy enough to count the individual new products successfully launched. Arriving at this measurement should be an objective exercise that is pain-free.
There is a quote from Regan that fits perfectly here: “Trust, but verify.” If someone claims to have met a metric, walk through the validation of the results with them in detail. Ask, “Where can I witness the savings? Point them out for me.” Every organization has seen a continuous improvement team with an Excel spreadsheet full of improvement projects displaying impressive yet entirely imaginary savings that can’t be identified. Not in a general ledger account, not in a cost center, not in the P&L- these savings exist only in thin air.
A KPI target that is too high risks your team quitting before they start while setting a target too low will be demoralizing. A good KPI should consider the team's skills involved and the available time to commit to reaching their goal.
Example: Increase new product offerings by 10% in 1 year.
30% could simply be impossible, but 2% is too easy.
While stretch goals can help people break old rules and do things better, they’re worse than useless if they’re unrealistic or if the people who must meet them aren’t given a chance to debate beforehand and take ownership of them. Arbitrary deadlines negatively impact processes and cause people to panic about an impending deadline rather than concentrate on the work that needs to be accomplished. Often, managers randomly pick deadlines without knowing how long processes will take and destroy the opportunity to drive the team forward with metrics.
A KPI needs to be intimately connected with a critical business objective. A good KPI is not just another business objective but rather something integral to the organization’s success. Setting a KPI to increase the number of internal processes documented would not be advisable as sales are plummeting due to increased competition.
Example: Increase new product offerings by 10% in the most profitable sales channel under competition pressure.
Measure what matters.
A KPI needs to have some sort of time limit set and agreed upon by participants. Just as a game has a point where the whistle blows and play stops, business metrics need to have firm deadlines. The effect is that as different timelines come closer to the present, people will change the urgency and speed at which they work to meet the challenge.
Saying that we need to create 10% more new products (when you get around to it) just doesn’t have the same impact as saying that we need to have 10% more new products by the end of Q3.
Example: Increase new product offerings by 10% by the end of the third quarter. Setting March as the goal would be demoralizing, while December may be too lenient since this team has experience launching new products under pressure.
If you don’t measure it, you can’t manage it- keeping score keeps progress on track. Great KPIs can be vital to achieving strategy-execution, just as mismanaged KPIs can demoralize an entire organization.
Great KPIs express something strategic about what your organization is trying to do. They are a way to create a scoreboard that the organization can rally behind. To remain engaged, the team should always know if they are winning or not. People play more seriously when they are keeping score. Without knowing the score, individuals will be distracted by the next thing that seems most urgent. A great KPI essentially says, “If we can get these few things right, we will beat our competitors.”
There is no perfect KPI or set of KPIs; what works is what works.
On KPI’s, Larry Bossidy famously stated:
“When I see companies that don’t execute, the chances are that they don’t measure, don’t reward, and don’t promote people who know how to get things done.” Simple, straightforward. And he’s probably right. “You don’t need a lot of complex theory or employee surveys… First, you tell people clearly what results you’re looking for. Then you discuss how to get those results… Then you reward people for producing the results.” 3
When setting KPIs, look to include a balanced mix of forward-looking and backward-looking (leading and lagging) measures. Lagging measures tell us how we did, and leading measures tell us how we are doing. If you focus too heavily on lagging measures, we may be slow to react and respond to challenges that need to be addressed quickly. If you focus too heavily on leading measures, you will not gauge your long-term performance. The key takeaway is that great KPIs need to be more than just arbitrary numbers.
If you want a memorable example of KPI’s that produced the opposite effect, Google the Hanoi Rat Massacre of 1902. Here, the French created a program intended to reduce the number of rats in the sewers below the city's French section.
Plan A was to create a bounty program with local contractors to kill and present whole rats to the administration office for payment. The poor native residents were eager to assist the French, and the bloodshed began swiftly. In the last week of April 1902, 7,985 rats were killed—and that was just the beginning. By the end of the month, the numbers were even more astounding. On May 30 alone, 15,041 rats met their end. In June, daily counts topped 10,000, and on June 21, the number was 20,112.
Eventually, the colonists realized that they failed to make a dent in the rat population even with a small army of paid rat killers. And the French also recognized that counting and disposing of rat bodies was an unpleasant exercise.
So, the French proceeded to Plan B, offering any enterprising civilian the opportunity to get in on the hunt. A bounty was set—one cent per rat—and all you had to do to claim it was present a rat’s tail to the municipal offices.
But then things got weird; citizens were spotting more rats than ever all-around town: alive and healthy, running around without their tails.
It turned out the rat hunters realized that amputating a live animal’s tail was more profitable than killing it. A healthy rat, minus a tail, could breed and create many more rats with those valuable tails. Worse yet, there were also reports that some foreign rats from Vietnam were being smuggled into the city. The final straw for the program was that health inspectors discovered pop-up farming operations dedicated to breeding rats in the countryside on the outskirts of Hanoi.
Don’t create KPIs that lead to tail-less rats.
Be sure that KPIs can tell you where to focus energy and resources to obtain the most significant benefit. If you expect excellence, it’s up to you to set the standards for results and performance. Measure each task or goal and place it in a realistic timeline. Give people a clear target, and they’ll work to reach it—and maybe even surpass it.