Creating Meaningful KPIs: Why use a KPI Tree?
Most strategic objectives are high-level outcomes. It’s very hard to agree with total confidence that you should, for example, measure ‘process moisture content’ as a way of delivering ‘lowest cost per metre production of all manufacturers’ unless you understand precisely how one links to the other. KPI Tress are all about turning strategic objectives into meaningful KPIs.
What does a KPI Tree look like?
Here's an example I have developed for training. This one is fully fleshed-out and is for the strategic objective that pretty much everyone can buy-into - 'Be Healthy'
There are a number of benefits that come from using KPI Trees.
Benefit 1 - Sum up a complex situation with just a few indicators
With the KPI Tree you naturally arrange sub-measures into meaningful groups. Creating high-level summary measures becomes relatively straightforward, as all you need to do is decide on the relative weightings and the arithmetic you use to blend the sub-measures.
Benefit 2 - Help build agreement
Every client I have worked with has featured a dominant character in the group. They can bounce a group into a particular set of measures through a mixture of rational argument and strength of will. Creating a KPI Tree avoids this through a highly collaborative series of sessions. It also gives a tool, structure and visible output that anyone can easily challenge and question.
Benefit 3 - Explain the approach
It normally takes two two-hour workshops to get a group up to speed and to successfully create a complex KPI Tree, but it’s possible to get a group to grasp how to read one with about five minutes of explanation. It can also become a powerful way for the executive to explain their strategy in terms that a group can really understand. It shows a depth, coherence and clarity of thought that’s rare when it comes to strategy and measures.
Benefit 4 - Keep in step with changes in strategy
Businesses, markets and executive teams change. It’s absolutely guaranteed that, if you are lucky enough to have a good strategy, it will have to change - possibly very soon. Using the KPI Tree approach means that you can see what impact changes in the strategy will have on measures.
Benefit 5 - Understand how measures interact
You can have too much of a good thing. It’s especially true in the world of measures. By pushing a ‘good’ measure too far you can unexpectedly have a negative impact on your ultimate strategic objective.
All of these benefits help you choose meaningful and effective KPIs. If you don't use an approach like this then your KPIs are normally selected by the person with the loudest voice or strongest personality.
Read my next article Building a KPI Tree or buy my book (link below) to find out how to build your first KPI Tree.