What Should KPI’s Really Measure?

Human Resource Management System

No small business (SB) owner questions the importance of measuring their company’s performance properly. Yet many I’ve mentored over more than 20 years generally struggle with the challenge. As an owner put it to me, “they [the employees and managers] start looking for the exits.” Looking at many actual small business KPIs (all the charts and spreadsheets), I can understand why so many owners and employees switch off. To stop this happening, owners need to remind themselves, their managers and employees of a few important truths about KPIs.

KPIs are about relationships. Managers spend an inordinate amount of time and money measuring the satisfaction levels of their staff. How many of you run employee satisfaction surveys and make sure managers conduct frequent check-ins with their direct reports. That’s fine up to a point. But when I ask owners what the business is getting out of this, their eyes glaze over.

KPIs need to reflect the fact that value creation is a two-way street, and that both sides of the transaction need to get something out of it. Think about it. Why do you want employees to be engaged? Because you need something from them. It’s critical to understand the decision-making strategic factor criteria that key stakeholders use to support your business and what you want from them in return. The two-way street for employees is defined by how well the company delivers on the things that employees want and by tracking the productivity and innovation of employees as a group. Most businesses fail to develop measures around both sides.

You see the same problems with sales, where the focus is largely on what companies get out of the deal rather than on what they’re giving to customers. A client of mine put it this way: “Years ago, my management team discussion would focus on sales and margin and a breakdown of those numbers. But once we opened our minds to stakeholders, our monthly performance reviews took on a different perspective. We now discuss KPIs on the drivers of sales, such as customer service scores and product rankings.” The digital revolution has made this a lot easier. Now you have a society which is much more sophisticated in knowing what it wants. With technology including social media, there’s a greater degree of transparency about how you’re performing.

Consider causality. To most owners, a set of performance measures just looks like a table of numbers. Since they appear to be concurrent, managers rarely question the way each measure impacts the others over time. But leading indicators should predict the future. If your business does well with employees now, that drives results for other stakeholders such as customers tomorrow. If your business does well with customers tomorrow, then shareholder outcomes will be improved the day after. Once SB owners understand what KPIs are supposed to do, they start asking themselves some really interesting questions about how their business works.

The numbers are never the whole story. Key performance indicators are only partial measures of something. Any set is incomplete. The word “indicator” gives that away. It is only with continued use and review that they remain relevant. Each year as circumstances change, owners need to tweak their KPIs to make it just that bit better. Measures found to have a “weak” correlation with client outcomes need to be dropped and replace with more relevant outcome measures. Many SB owners try to keep the number of KPIs manageable…maybe a maximum of 10? As the conditions around your business alter, be prepared to morph your performance measures. It’s set and reset, not set and forget. The dynamics of your business operating environment are changing all the time in response to digital innovation, social media, and the emergence of Covid-19.

It’s time to rethink how you develop your performance measures. Look at performance as a two-way street and watch for the linkages between indicators and the impact of one upon another. And most importantly, be ready to adapt to changing circumstances.

For more thoughts on human resource management, view the free video entitled Human Resource Management.

Copyright ©John Trenary 2021

Leave a Reply

%d bloggers like this: