In seven steps to good KPIs
Measuring is knowing. Since the nineties, measuring business processes and business performance has become an indispensable task for professional organizations, including through the Balanced Scorecard. Where in the beginning mention was made of "performance measurement", the focus shifted in the course of this millennium towards "performance management"; and thus from pure measurement to controlling the performance of processes and organizations. In order to perform this control as effectively as possible, organizations appoint critical performance indicators (KPIs). Certainly larger organizations are keen on using KPIs to measure and manage their organization, personnel and processes. This number can rise to 15,000 in large multinationals.
15,000 KPIs! For me, that is the sign that a KPI is no longer doing what it should do and that its use can even be detrimental to its original purpose. But how do you as an organization effectively use KPIs? In this blog I will explain, using an example, how you systematically develop the right KPIs.
Step 1 - Specify your vision and strategy
The first step in developing KPIs is to specify the vision and strategy of the organization. The "success" of an organization is always related to the original goal. A clearly formulated strategy is also very effective as a means of communication to all employees who ultimately have to work with the KPIs. This step essentially describes what success means for your organization.
An organization wants to improve the effectiveness of its purchasing function. That is why the organization draws up the following strategy: "Realize within one year an increase in the added value of the purchasing department of 5%".
Step 2 - Describe all processes in scope of the strategy
A clear description of the relevant business processes is an absolute must. In fact, processes are the implementation of the business strategy. In the end, KPIs are designed for these business processes and if these do not fit in with the strategy and do not help achieve this, the KPI misses its target. In this step, it helps to further divide the entire process into smaller sub-processes. It is ultimately important that you use the KPIs to measure and control each of these sub-processes.
Possible processes are the market analysis, contracting, selecting, evaluating, but also coordination with the requirements authors within the organization
Step 3 - Recognize and define critical success factors (CSFs)
In this step, the team devises KSFs; so what different forms of success are. CSFs are those factors that have a direct and high impact on the efficiency, effectiveness and viability of an organization or product with a clear link to the strategy. Processes and activities associated with a CSF must be performed as well as possible in order to be successful. A CSF is a short sentence, for example: "Increase delivery reliability " or "Increase customer satisfaction ". For most organizations and processes, five KSFs are the maximum to work with. Make sure that the CSFs jointly cover all (important) processes in scope. It is also important that the CSFs help to complete the strategic goals.
The organization has identified the two most important success factors for it: "Improve purchasing effectiveness" and "improve supplier management".
Step 4 - Define KPIs
Only in the fourth step do you think about KPIs. In contrast to the CSFs, the KPIs are quantitative. The KPI is the manier on which you will measure and control the KSF. It is therefore important to think carefully about how you want to measure the KPI. Try to set up a KPI so that it can be measured in a percentage. In addition, data that is collected automatically is a lot more practical than data that needs to be retrieved manually. Make sure that the KPI is clearly formulated and that the measurements can not be manipulated. Especially when personal bonuses are attached to a KPI, this is of great importance. For example "Price realization" It is very important that you clearly formulate how you calculate this, since there are several definitions in circulation. Also involve your entire team in the development of KPIs. Far too often, KPIs are pushed down from higher up in the organization. This causes a lot of resistance and ultimately ensures that KPIs have less effect. So just involve the team. This often also provides new insights and higher motivation!
For KSF "improve purchasing effectiveness", two KPIs have been selected: "percentage of cost reduction per category per month" and "percentage of orders delivered on time". For the "improve supplier management" the organization has chosen one KPI, because most attention is now required: "the percentage of contracts that have not been concluded through a framework agreement".
Step 5 - Determine how data is collected and how results are shown
KPIs often do not work. For example because the required data can not be obtained or can not be obtained on a frequent basis. If, as an organization, you do not adjust your KPI at the time, you run the risk of not getting the wrong results, which will irrevocably send you wrong.
In this step we look at where the data can be retrieved. For example, contracts are centrally stored and tracked if they are concluded via a framework contract. To avoid problems with this, it is wise to include this in the design of the KPIs.
Step 6 - Implement the set of KSFs and KPIs
In the implementation step the system goes live! Data is collected, reports are drawn up and your team is gradually working more with the system. It is very important here that your team will learn how to use the KPIs and that your data flow will be guaranteed. Often a start-up period is needed to evaluate whether all set goals are real and whether all data can be collected in time. How long this period exactly takes depends heavily on the availability of the data and the amount of KPIs. However, discuss the length of this period in advance and stick to it here.
Step 7 - Plan Do Check Act
The most important element in the design and use of KPIs is the use and evaluation of the KPIs. Ensure that you continuously test and update your KPIs and their assumptions. Your KPIs must be as flexible as your organization. A good KPI connects seamlessly with the organization and its processes. A common mistake is that organizations add simple KPIs, but forget to remove old KPIs. This will give you more KPIs than necessary. Having too many KPIs ensures that you can not focus and that you as an organization can become unbalanced. My advice, therefore, is to delete irrelevant KPIs wherever possible instead of adding new KPIs.
In the example organization it is important to measure non-compliance with respect to contract management. Possibly this will no longer contribute to the strategy next year and the KPI will lose priority. Then it is worth considering to remove or replace this KPI. KPIs are always aimed at realizing the strategy and are not cast in concrete.
Does your organization have difficulty designing, implementing or evaluating KPIs or managing the performance of your business processes in general? We like to think along with you! It is always possible to plan a meeting with our consultants without obligation.
Supply Value has based on experience and scientific literature a template developed for KPIs.
This template helps your organization to write specific and clear KPIs.