The Ultimate KPI Guide: How to Develop KPIs

So, this brings us on to the heart of the process. Now, the heart of the process is actually two steps, and there's a reason for that. I've discovered through running lots and lots of workshops over the years, that there are two types of personality when it comes to KPIs.

There's the dreamer. Dreamers want to measure everything and typically they tend to be senior people who do not have to deal with the practicality of actually implementing KPIs, gathering data, processing that data, and then presenting it.

Then you have your pragmatists. These are the people, very often who are at the coalface when it comes to KPI production, they've seen a lot of the failures and problems, and they're acutely aware of the amount of resource and effort required. And they typically want to keep the list as short as possible. Now, you cannot have a single step process that keeps both parties happy. So what we do is we split that into two halves.

We create a longlist for the dreamers using something called KPI trees, and then the next step is to rationalize that list in a structured way. So, let's talk about the long listing or the KPI trees now, rather than explain it in academic terms, I'm going to show you a practical example. And that practical example is something that we can all relate to. It's 'Being healthy'. So, we are going to build a simple KPI tree for Being Healthy. Now, a KPI tree takes a high level outcome that we're looking for, and it will often be a selection of the Big Six, but in this case it is 'Being Healthy' and we will break that down into a series of smaller outcomes. So we're going to start just by breaking this down into two further levels and then we're going to expand it. So, we're going to repeat the process until we've got a proper KPI tree.

So, let's take Being Healthy. Now, there's lots of dimensions to being healthy. There's being fit. There's eating well, there's relaxing, there's having good quality sleep and so on.

Let's take Eating Well.

So that's a core part of Being Healthy for everyone. Eating Well is more specific than Being Healthy, but it's still really, really broad. Eating Well, can be managing a balance of carbs, protein and fat. It could be making sure you take on board enough vitamins minerals, micronutrients or it can mean managing your calorie intake, just making sure you don't eat too much or too little in terms of calories. Now we're getting to a level where we can actually measure something you can't directly measure Eat Well. You can't directly measure, Be Healthy, but you can directly measure Calorie Intake. So then we go, that's our first KPI: Calories Consumed.

Now, we can scale this approach and you can end up with a tree that looks like this. So along the top, you see the right amount of good quality sleep, being in a relaxed state on a regular basis, minimizing unhealthy habits, eating well and being aerobically fit. And controlling or losing weight. So, you can see we've taken just the same approach as we did with that single branch, and we've broken the top level into multiple next-level outcomes. We then go along and do the same thing on the next level. Now, I'm not going to go through all of the boxes on here, but I will just zoom in on one particular section, which is where we're looking at good quality sleep, managing unhealthy habits and managing calorie intake. Now, what you might notice here is there are red lines, and these red lines show where we have a conflict. So, if I drank a bottle of wine, that's going to have a negative impact on my quality of sleep. It's going to have a negative impact on 'managing drinking', and it's going to have a negative impact on 'managing calorie intake' because there's lots of so-called empty calories in alcohol.

So what we're doing here is we're actually starting to build up a map of the relationships between the things we're looking to measure. So. A KPI tree is primarily there to help you generate the list of candidate KPIs, but it also helps you understand the relationship between the outcomes that you're looking for. This is incredibly powerful because it means that you don't fall into the trap of targeting one KPI, pushing it too far, and then having unexpected negative consequences elsewhere. Because with this visual representation, you can see how things link together, so it helps you consider all the implications of maximizing or minimizing a particular driver on this tree.

So, we've started with a simple, personal example that everyone can relate to. Let's take a look at a slightly more work orientated one. Let's take a look at service quality. Service quality. Is something that applies to any service organization and service quality has a direct impact on both growth and profitability.

So, happy customers lead to a growing and profitable business. So if we look at this, we can see that we talk about 'Our service being inline with customer expectations'. That's one of the key drivers for growth. If we exceed their expectations, then we will grow rapidly. If we undershoot expectation, then we will probably contract, lose money and so on.

Then we talk about having a 'Problem, free service'. So making sure that customers get what they expect and they don't get any nasty surprises. And then we talk about having 'Happy Customers'. So our customers are happy, but also being aware of how happy or unhappy our customers are. So we've got that as a statement: 'We know how happy our customers are'.

Then we can break those down to the next level.

So, for 'Service Expectation', we talk about 'accurate service'. We talk about sorting out any problems that may occur 'quickly and well', we talk about 'managing our service delivery quality', measuring 'customer happiness', 'minimizing complaints', or 'making sure that we have minimal complaints', 'making sure that our customers tell people when they are happy, and that they tell us that they're happy or unhappy as well.

Once you get down to that level, it becomes really quite straightforward to actually come up with the KPIs. So, if we look at sorting out 'problems well, and quickly', we've got all kinds of indicators, like 'reopened cases', time' to resolution', 'median live complaint age', 'ticket, closure rate', 'how many complaints are escalated', whether people asked for 'refunds' and whether they asked for 'invoice discounts'.

Now, this is a slightly unusual tree in that it has lots of red lines on it, more than a normal KPI tree. And there's a good reason for that. If you think about your mobile or cellular provider, have you ever picked up a phone, called the service center and said, 'Hi, I just wanted to tell you what a fabulous job you're doing'.

It's never going to happen. So, service KPIs are typically driven by failure and they're typically driven by failure demand. So it's quite common on a service KPI tree to have lots of red links. So things going wrong and far fewer of the dark gray links that we would typically see on other KPI trees, but that's a characteristic of the thing that we are measuring. So, there we've taken two of the Big Six and we've held a service quality lens over it. You can do just the same thing with any business dimension. So in this case, we've got finance. Now this KPI tree shows all the classic accounting measures like cost of inventory, salaries, total controllable costs, cash receipts in period, and puts it within a framework of a KPI tree.

So this enables a non-finance specialist, to make good sense of the KPIs and understand how they relate and how they interact. Now, if you had to madetomeasurekpis.com you are able to download this KPI tree along with all the definitions of the KPIs shown here. If you just had to the KPI store, it's a free download so you can get yourself a copy of this for nothing. So I've shown you three examples, be healthy service quality, and very briefly the finance KPI tree. It's time to reflect on KPI trees. There are massive benefits and is one big disadvantage to them. Firstly, they can explain a complex situation visually. I will often print these out on a wide format printer, sometimes the printouts of 20 meters long, but they make perfect sense because you built them with the team, they understand how they fit together and they're visual, so it's really easy to induct other people into it so they can rapidly understand the logic behind it and buy-in.

I never build these trees on my own. I always build them with a team and that process of building them together helps build agreement. It's really critical. And it's probably the most powerful part of this process is the fact that as you build the tree, you start to ask fundamental questions about 'What are we trying to achieve?', 'How does the business work?', 'What do we need to consider here?'. So, the conversations that surround a KPI tree are incredibly powerful as well. Every KPI on the finished tree links directly to one of our strategic outcomes that we're looking for. So you can say why we're measuring or want to measure every single KPI that's on the tree. It shows how measures interact. One of the common problems that people have time and time again, is taking a KPI on isolation and not understanding how that outcome links to the other outcomes. So, one example might be Average Handling Time in a call center. Now the logic goes well, if we shorten the Average Handling Time, we can handle more calls. Great. Okay. Let's squeeze the Average Handling Time as much as possible! Well, if you do that, what happens is you pressure your agents into closing calls too quickly, they may not resolve the customer's problems first time, they may be rude or abrupt with the customer. They may not write up the notes properly. So, there can be all kinds of unfortunate side effects from targeting one KPI in isolation and not looking at how it affects others. So, KPI trees are great for heading that problem off.

There is one big disadvantaged though, and it's kind of by design. They produce too many KPIs. So I recently did one of these for a large consolidator in the US in the medical sector. We came up with a long list of 1300 KPIs. You are never going to measure 1300 KPIs in that business. But what we have is we have a universe from which we can then choose the most important ones, and that brings us onto our shortlisting stage. This is where we're going to take a chainsaw to the long list. And we're going to bring it down to a much more manageable and practical list.