If there’s one simple tool that you can put into action today that will dramatically improve the quality of your KPIs and add a stack of professional credibility to your reputation, good quality KPI definition is it. What I’m about to describe may sound very obvious and simple, but that doesn’t make it any less useful or powerful.
An issue that almost every business seems to have is what I call the ‘common sense’ problem. What I mean by this is that many KPIs and measures use descriptive names. This can be very dangerous as the human mind has a tendency to make assumptions based on the name.
Let’s take an example. There is a very common operational measure called ‘utilisation’. It is often used by professional services firms to show what proportion of the available employee time was used for billed work to the client. It’s an important measure, and one that is used across a number of industries.
So here’s a plain English definition: ‘Utilisation is the ratio of billed hours to available hours for an individual.’
That seems pretty simple, doesn’t it? But let’s look at some of the questions that this does not answer:
- By available hours do you mean nominal or actual and do you include overtime?
- What about holidays or sickness absence, is that zero utilisation?
- By individual do you mean only individuals who are billable, or do you include support staff?
- Do you include mandatory commitments, such as safety training, in the available hours?
- What about sales? This is clearly a value-add activity but is not billable.
- What happens if you bill at a much reduced hourly rate? Does that utilisation count the same as full-rate work?
- What do you do with staff who have dual roles, only one of which is a billable position?
Clearly there is plenty of scope for misunderstanding here. It’s pretty rare to find a plain English definition that does not give rise to lots of similar questions.
So what’s the way around this?
It’s a KPI definition database. When I say database I mean it in the loosest sense of the word. It could just be a Word document or an Excel spreadsheet. The important thing is that you record a really clear description of precisely what is being measured, where, how and when.
So on the next page are the questions that need to be answered for each and every KPI to help you avoid this kind of confusion.
The thirteen questions you need to answer for KPI definition
|KPI name||Use a ‘what-it-says-is-what-it-is’ type name so that it doesn’t mislead. Be very careful with terms like ‘efficiency’ and ‘effectiveness’ – there are lots of variants on these and everyone will have a strong view that their usage is the right one.|
|Measurement intent||Describes the measure and the reasoning behind its selection as an indicator of progress against a strategic objective. Put simply ‘Why are you measuring this?’|
|KPI definition/formula||Provides a detailed formula for the calculation of a numeric value for the measure. A simple test for how well you have defined a KPI is to pose the question ‘Could a reasonably numerate stranger calculate the value using this definition and relevant source data?’|
|Frequency of update||Identifies how often it’s calculated. This is important for a number of reasons- one of the less obvious ones being ‘end effects’- where the reporting cycle may create some overlap errors. A long reporting cycle usually lessens these while a short one will make this more acute.|
|Units of measure||Identifies the units in which the measure will be reported. Is it a dimensionless ratio (e.g. efficiency) or is it a good old-fashioned ‘real’ measure with dimensions (e.g. kilograms- money or calls per day)?|
|Notes/Assumptions||Clarifies terms used and highlights key assumptions within the formula. Almost all measures and KPIs have flaws issues and problems. The key thing is to document these issues- make people aware of them and avoid making flawed analyses based on these issues.|
|KPI information availability||Whether the information required is: readily available- available with some effort or not available. This gives you a feeling for the pain involved in compiling a KPI and can give you a ‘hit list’ for automating and streamlining KPI production.|
|Data elements and source||The data elements required to calculate this measure and the source systems- databases- documents etc. of those data elements. This should go down to painful levels of detail showing on which server a file sits- in which directory and where on the spreadsheet the data can be found. Naming conventions should also be included where documents cover a certain period.|
|Target (where known)||What is the target value?|
|Source and logic behind setting targets||Where does the target come from? Why is it set at the level it is? I’ve seen countless organisations where no one can answer this question. Why are you aiming for a certain score? It’s pretty embarrassing not to know the answer to this.|
|Person responsible for target setting||One person must ultimately be responsible for setting the target even if it’s agreed by consensus/debate/vote.|
|Person accountable for set targets||This is the person who carries the ‘strategic can’ for the target setting. They should be consulted on the target and its aims- but may not be responsible for setting its actual value.|
|Person responsible for tracking and reporting targets||Who manages the day-to-day process of target setting and reporting?|
Each of these questions needs to be answered for each KPI and measure in the organisation. Tedious? Yes. Important? Also, yes. The definitions should be held in a single managed location so that multiple definitions don’t coexist. This will avoid confusion and arguments.
The benefits of this kind of KPI definition are:
- It forces your organisation to clarify and discuss the KPI definitions.
- Any weakness or uncertainty around a KPI is written down and ‘out in the open’.
- You avoid having similar sounding (or identical) KPIs or measures that are actually calculated in different ways.
- It is a reference document for people who are unclear or uncertain how a measure is calculated.
Setting up KPI definitions well is a bit like flossing regularly. Most people agree you should do it, but very few people do it regularly, or well.
You can download the KPI Definition template from my website using this shortlink http://wp.me/p1H6XP-zD
For more detail on the KPI definition and choosing the best KPIs, check out my book KPI Checklists using the link below.