Do you know about on how to set properly the Key Performance Indicator in your organization?
If you don't know the exact formula in setting KPI, the only thing that you should know about KPI is that KPIs should always be S.M.A.R.T. - Specific. Measurable. Achievable. Realistic. And Timely.
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Your question seems a little muddled. KPI's are about monitoring performance and being able to identify early when things are starting to go wrong. SMART objectives are targets that you are seeking to attain. One is a management tool, the other a strategic goal-setting tool. Both are good, but for different things.
For KPI's I would start by developing a model of your business. Either a process-based one showing the flow of the business (boxes & arrows), or a narrative one like the Business Canvass. That will tell you (though you probably already know this) what the key constraints / success factors are for your business. Then work out what measurable criteria are available, set some boundary limits and start measuring. At this point you might bring in some SPC tools to identify trends from 'noise'. You should also be clear what your change levers are and what actions to take if you start to miss your KPIs.
1. Map Your Core Business Processes
Before you can drive the performance of your business you need to have a clear picture of the core processes. Draw a flow diagram that shows the major steps you go through to generate revenue. This may include steps like;
2. Establish Roles, Responsibilities & Critical Success Factors
You now need to allocate a role to each step in your core process. Who actually completes that step? For instance the Sales Manager might take the enquiry and provide the quote, the Operations Supervisor then orders supplies and so on.
You then need to look at what it is that person needs to do successfully in that role to ensure the business is able to achieve its goals.
For instance, the Sales Manager may need to;
Be polite, courteous, efficient and professional on the phone
Accurately complete enquiry forms
Submit enquiry for Ops Supervisor within 1 hour
Get quote back to Customer within 24 hours
Win the order
Follow-up and ask for repeat order
Win repeat order
3. Choose the basis of your KPI
Once you have completed Step 2 you may have a list of 5 - 10 critical factors that need to be addressed to ensure that role is completed successfully. From that list you now need to select your KPI's. You should try to have only 1 or 2 KPI's per role. If there is a person already in the role we suggest you include them in discussions and the decision process. There are some vital factors that need to be taken into account when selecting KPI's.
a. The person in the role needs to have full control over achieving that KPI
For instance it is no good making the Sales Manager accountable for "Getting quote back to customer within 24 hours" if they have no way of driving the Ops Supervisor to give them the quote or compiling information is beyond their control.
b. You need to have hard, objective data
You need to be able to compile hard, objective data to measure the KPI. Looking through your list of options consider which ones you can truly measure. Without hard data it is difficult to get a clear picture of what's really going on in the business. Also hard data enables more fruitful and objective discussions during performance reviews with individual team members.
Following our example, it may be important to be polite and courteous on the phone and certainly you can give feedback by listening to someone when they are talking to customers. However, it may not be a very good KPI as it can be extremely difficult, subjective and potentially costly to measure.
4. Set the KPI
Having completed the analysis outlined above you should arrive at 1 or 2 options. Choose the ones that are most critical for business success. In our Sales Manager example winning an order and getting a repeat order are selected as the KPI's. Therefore the KPI's become:
KPI 1: Ratio of successful orders to enquiries
KPI 2: Number of customers submitting a repeat order in 12 months
You may notice that by addressing these KPI's a number of the other critical factors are addressed in part. For instance, if the enquiry is not handled professionally then initial and repeat orders are unlikely.
5. Set the target and review date
Your final step is to set the performance levels. These need to align with your business goals but also need to be considered achievable by you team members. Ideally you set the targets in consultation with those people who will need to achieve them.
KPI 1: Ratio of successful orders to enquiries, Target = 75%
KPI 2: Ratio of customers submitting a repeat order in 12 months, Target = 80%
Once you and your team members have established the targets you then need to set the review dates. The ideal frequency for review is highly contextual. For instance, it may make more sense to review repeat purchase rates annually rather than monthly depending on the buying habits of your customers.
You also might like to consider some form of reward or incentivisation for achieving goals. Sometimes this is as simple as a gift voucher or a dinner. Other options are profit sharing and bonus payments. Make sure you discuss any incentivisation options with your team before implementing them, don't assume to know what they want or what motivates them. Time and again making these assumptions has proven to be a very costly mistake. You may be suprised just how simple the reward may need to be.
KPIs are meant to aid you understand internally how your business is performing n light of the size and capacity of your investment, also it is a benchmark on the sector you are in since most sectors have their own KPIs that indicate the healthiness of a business or investment. so you can have 2 sets of KPIs depending on your business type.
Usually there are multiple KPI's. They should be chosen to measure and monitor characteristics that indicate if you are achieving business objectives. Some KPI's can be measurements that are available instantly (short term "pulse" indicators, and other are determined or calculated through analysis (longer term "change" indicators). After reviewing the business operations, objectives and what can be accurately measured, KPI's can be determined.
Ideally, link KPIs to specific behaviors or outcomes of the organization.
KPI's have to be SMART and Simple.
The best type of KPI relate to the completed action and not the process.
Within each section, there should be no more that 4-6 KPI's
KPI's are also measured over a time period. this may depend on your business plan. Some maybe short say 1 year, others maybe longer say 5 years.
I have found it best to review KPI's at least each quarter or 1/2 year, just to make sure that the progress is on track. That way you can see how the persons performance is traveling, and you are in a position to interact and assist in any area that is lacking.
There is little value in setting up KPI's and then not reviewing then until the end of the agreed time period.
You should also use any management tool as a proactive tool rather that a reactive one.
The idea is that this is a tool designed to help everyone maintain their focus and development according to the companies business plan.
Just reviewing sales / profit numbers against budget is nowhere near the achievements or goals that any good KPI should produce.
The KPI's are a function of the results you're after. How you set them depends on those results. In short, some things are easier to measure than others. In all cases, be sure to measure what you want and be sure you want what you measure.
Stein, We've simplified this process for small business owners using a method we call Tuning Your Revenue Engine. An introductory video for this process has been posted at the following location here on the mosaicHUB website: http://www.mosaichub.com/member/p/dino-eliadis/portfolio/tuning-your-revenue-engine
There are other tools available on our website as well at http://dinoeliadis.net/business-improvement/small-business-management/ .
I am happy to assist if you have trouble applying any of these tools to your business.
Yes, Each member of your business should be judged on 3 or more KPI´s. The trouble is when you use more than 3 the model becomes too headstrong and unmanageable. But as the focus is to grow your business and enhance it with trained and a dedicated team. KPI´s should involve honest discussion on how to improve and maintain your business combined with a sense of assistance and congratulations with achieving the level dictated at the launch of your structures.
Setting up a Scorecards (groups of KPIs) can be relatively simple in small and flat organization (1-2 levels in the hierarchy).
You select/define quantitative measurements that reflect improvements in important areas of the business.
When the organization is more complex, you have to balance the KPIs with other KPIs and make sure they don't conflict KPIs from other parts of the organization. A good book that can help: The Balanced Scorecards by Kaplan and Norton.
I think you should start with asking questions right from business goals of an organization. So lets say, organization wants to achieve 10 % growth year on year. What does it mean for your department, how will your department/function align with these goals, where will you need help, when will you be able to deliver on these goals etc. Once you start asking these questions and find answers, you can apply a S.M.A.R.T theory to jot down goals for each individuals.
It depends on your organization and what you are going for. I would recommend a great book I had to read for school, http://financialintelligencebook.com/
I think the title was different when I read it, and I don't think the bottom line is the only thing you should worry about it any kind of business, but it is rather important to understand the numbers behind a business. And in order for your business to run, you will have to turn a profit eventually.
Personally, I feel it is difficult to quantify the impact a business is having on the external environment, but it is important to have multiple quantifiable indicators.
In Lean Startup, Eric Ries talks about setting up hypotheses that are testable. I think the key is the step before that where you figure out what problem you are trying to solve, what need you are fulfilling. The numbers are important but it is of the utmost importance that indicators such as KPI are actually answering the right questions. And that is dependent on the type of business you are running.
In relationship coaching, if it's not a S.M.A.R.T. goal, it's not really a goal!
First question would be does everyone who contributes to the performance understand the metric, its relevance and what part they play in its delivery?
Before setting KPI's you have to understand what your business objectives are. Once the strategies of the business have been clearly defined and communicated, then you can go about setting your strategic KPI's.
You also then have to set your short term goals and objectives to enable you to achieve your strategic goals. Once again, KPI's need to be set to monitor these.
A KPI's is nothing more than a way of monitoring your performance against your objectives. If you cannot see a direct link between your goals and KPI's then you have the wrong measures in place.
Also, try and make as many of your KPI's as possible lean indicators. Lead indicators enable you to see gaps in your performance very early so you can make smaller, more frequent adjustments rather than large less frequent changes.
KPIs are appropriate for cascading goals from higher levels to lower levels. Generally speaking, KPIs are more appropriate for operational management than for use in deploying strategy.
Should you be using KPSs for in support of a strategy, make sure you actually have a strategy that addresses a core challenge for the organization and that you are looking for points of leverage that actually move the needle and don't just contribute the ever-present "metrics clutter."
They should also relate to the goals and purposes of the group, organisation or company. They are a measure of the products one needs to attain in order to achieve the goals and purposes of the group. Simply setting KPIs that are specific, Achievable, Realistric and Timely does not say WHAT KPIs to set, only how they should be set.
KPIs are the handful of numbers you most want to watch to monitor the performance of your company. Not necessarily numbers from your financials. Could be ratios or percentages. Many of these are forward-looking indicators.
They need to be sensitive, so that if they shift, you notice the significance immediately so you can take corrective action. Some examples from my small business owner clients:
-- Restaurant. Food cost and labor cost as a percentage of revenue. It must stay within a narrow range. Too high, and there's no profit. Too low, it means service or quality is slipping. He watches this every week.
-- Installer of high-tech equipment. Backlog of jobs. Dollar amount, likelihood that they will come through, and when
-- Architect/designer. Must closely watch the number of hours spent on jobs, because employees tend to spend too much time
-- Bakery. Tracking labor costs to produce different goods is crucial, and difficult to get employees to keep track accurately
-- Contractor. Comparing job estimates with final job costs, to see if they made their target margin, and if not, why not.
-- Retail chain with several stores. Tracks figures across Nov, Dec, and Jan, since that is the busy season. Sales per selling employee is a key number.
As you can see, these vary a lot, but each number is critical to tracking performance of that company. Each must have:
- a reliable tracking system
- procedures to collect and tabulate the data
- regular reports and review process
- be displayed so the owner (or key managers) can quickly grasp the significant information
- rules on how to respond, depending on what the numbers say.
Sometimes the owner is not the best one to watch these numbers. We neglect them in the course of busy days. So a skilled CFO or other financial person is often an important adviser for the owner