How to Select the Proper KPI (Part 1)
Like gears in a car, each metric in your business needs to be the proper fit in order for it to function successfully. Relying on the wrong metrics will not lead to long-term success. If you are using a KRI when you should be using a KPI, you may experience some short-term success, but nothing incredible or sustainable. Using the proper metrics is critical in creating a well-functioning, successful company. In order to be sure you're using the right metrics in the right way, you first need to be able to define the differences between a key results indicator, and a key performance indicator.
KPI or KRI?
When it comes to performance success, both metrics have a part to play.
KRIsKey result indicators alert to success, which is important in understanding your progress. These metrics inform management and shareholders on the overall health of the company, such as monthly/yearly income. These metrics tend to be financial in nature, and are not easily actionable.
KPIsKey performance indicators dissect and measure success, which is the most important metric when it comes to building or replicating a working business strategy. These metrics tend to be easily actionable, and are not often financial in nature.
For each company, their KPIs will differ according to:
• The different perspectives that shape the company
• The success factors needed to achieve in each perspective
• The relationship between each success factor
Before you can start defining perspectives or their success factors, you need to clearly define the map between your company objectives and what needs to be monitored. Once you define the objectives you want to achieve, you will be better equipped to define your company’s perspectives and success factors, which are key in defining your KPIs.
Different Perspectives & Their Success Factors
Instead of looking at one area in the company, all areas of the organization need to be viewed, and each area’s success factors defined, in order to select the proper KPIs. Here we’ve broken them down into six areas:
|Perspective||Potential Success Factors|
|1. Finance||Cost reduction, efficient utilization of labor|
|2. Customer||Brand recognition, introduction of new services, retention of key customers|
|3. Internal Process||Completion of projects on time|
|4. Learning & Growth||Increase employee productivity, maintain industry credibility through certifications|
|5. Employee Satisfaction||Retention of key employees, rewarding and recognition of staff|
|6. Environment & Community||Supporting minorities through employment, becoming a "first choice" employer|
The Relationship between Each Success Factor
Once the success factors for each perspective have been identified, you need to analyze each factor to determine which are critical success factors. Critical success factors are the factors from which KPIs are chosen. In order to identify which of your success factors can be considered critical, you need to ask the following questions:
• How does this success factor affect this area of the organization?
• How does this success factor impact the other success factors listed?
For example, say one success factor you’ve identified is “retention of key customers” in "Customers". By retaining key customers you not only effect the Customers perspective, but you can also effect the Employee Satisfaction (retention of key employees), and Learning and Growth (increase employee productivity) perspectives. That makes this success factor a critical success factor, because it impacts other success factors and perspectives.
Part 2: Continuing from where we leave off, part 2 explains how to choose your KPIs from your critical success factors, and make sure the KPIs you've selected will be successful.
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