Use these four objectives when setting your key performance indicators.
Imagine your business has a bin full of candy. You tell one employee to keep as much candy as possible in the bin, while you tell another to use that candy to attract customers. Wouldn't these two employees end up in a standoff?
Obviously, this scenario is one of conflicting directives. Yet many companies have difficulty understanding which measurements are metrics of companywide success and should thus be designated key performance indicators. While financial departments might measure success in cost reduction or budget efficiency, for example, marketing departments measure success on leads generated. The problem is that these goals can't both be maximized in the same space.
Ultimately, businesses that set KPIs from the top down create cascading objectives that isolate departments and create internal stress, conflict and confusion. On the other hand, organizations that learn to identify which metrics are truly KPIs can avoid interdepartmental conflict by prioritizing those metrics that allow all teams – from the supply chain to marketing to sales – to use those KPIs to gain value.
A better approach to setting KPIs
Conflict sets up a business for losses in both finances and employee productivity. In fact, nearly a quarter of employees have taken a sick day to avoid conflict. Those employees who don't skirt conflict spend two and a half hours a week trying to resolve disputes. Given that employees who take five sick days per year can cost a business about $700 and U.S. companies shell out nearly $360 billion annually on conflict resolution – not to mention the costs of failed projects or quitting workers – this "minor" obstacle of competing success metrics can suddenly become a major problem.
To create harmony, businesses need clearer organizational views of KPIs that help eliminate clashing objectives and find wins across the board, particularly when it comes to understanding how marketing KPIs align with overall business performance. For instance, if marketing teams are investing in initiatives that maximize leads, then finance teams must be willing to measure success on ROI rather than spending. Likewise, if spending efficiency is the goal, then marketing teams should collaborate with finance teams to identify cost-effective investment avenues.
In order to find and implement interdepartmental KPIs, then, companies should follow these four objectives.
1. Establish how every KPI drives profit – and prove it.
Every performance metric for every department should be linked to company profit. In addition, there should be measurable proof that it has a positive effect on profit, as opposed to simply looking at its effect on revenue or cost reduction. Because all businesses aim to make profits and nonprofits aim to drive donations (which are like profits), KPIs should measure progress toward this goal. Those that don't should be dropped.
Once you've identified these profit-linked KPIs, balance your company's marketing strategies and objectives to see how they're driving your profit funnel. Then you can build your KPIs around driving this success by creating indicators that are measurable and expressed as numbers. Increasing sales by X percent, improving conversion rates by X percent over X period of time, or decreasing costs by X amount in X number of months are all tangible and explicit goals the entire company can work toward. Any remaining team or individual goals should then be set to support these overall goals.
2. Limit KPIs to stay focused.
Even with the profit rule in place, you should limit your number of KPIs to avoid confusion, enhance focus and drive growth. Companies with too many metrics find it tough to distinguish which are truly meaningful. While keeping diverse and extensive metrics isn't fundamentally bad, trying to focus on all of them simultaneously can be.
Marketing can get especially bogged down by too many measurements. Not all marketing metrics are KPIs, and not all important marketing KPIs have to be financially based (take lead creation, for example). But marketing metrics must have clear impacts on profit and top-level company goals in order to be considered KPIs. They should also be emphasized over any other metrics to eliminate noise during decision-making.
To sift through and identify your KPIs, use the following criteria:
- Is the KPI measurable reliably and consistently, not just in hard numbers? If the metric is unable to measure performance over time or measure success (or the lack thereof) consistently, then it can't be relied on to benchmark results.
- Does the KPI support your business model? Which metrics are appropriate depends on your size, growth plan and industry. A startup trying to situate itself in the marketplace is going to be concerned with different goals from an established business wanting to maintain steady growth and improve customer retention.
- Is there overlap between KPIs? If more than one KPI is essentially measuring the same thing, then pick the more impactful measurement and drop the others. For example, you can ignore the overall number of sales leads if you're measuring success on only those leads that are qualified and vetted. While there's no magic number of KPIs, having fewer than 10 allows you to prioritize metrics and determine which are crucial to success.
3. Emphasize alignment across the board.
Every department and team must work toward the same strategy and focus to eliminate confusion and inefficiency. This requires good communication among teams, fostered by a leader's ability to reduce friction by better aligning KPIs with company goals.
For this reason, leaders should review departmental KPIs and evaluate them against the strategic goals. Does each metric help clarify – intra- and interdepartmentally – how that department is supporting the strategy and profit of the business? Are the KPIs relevant and manageable? These reviews can be conducted during alignment meetings and should occur at least every six months.
4. Use forecasting to foreground those goals.
Consider a factory foreman. The foreman knows he must oversee widget production and that each widget has the potential to become revenue. Because more widgets mean more revenue, should the foreman's goal be to produce as many widgets as possible? No. His job is to produce the right number of widgets for that particular market at that particular time, as well as to make the production more efficient.
In sum, because his KPI is determined both by the current market and his productivity, his control is limited to the widget's production, meaning that a proxy to that revenue must be formed. This is where KPIs and forecasting can keep the foreman on track. Forecasting allows a business to make sure those production goals are aligned with the strategy. The foreman isn't forced to estimate how many widgets he must produce, and marketing teams aren't expected to guess how many leads to drive. By reducing uncertainty through this combination of KPIs and forecasting, the business can then move forward cohesively with these goals.
All employees must be able to understand and leverage KPIs, but whittling down the number of KPIs to home in on the most essential ones can be challenging when looking at your company overall. By aligning these limited KPIs with profit and by practicing forecasting, though, you'll find that there's nothing more unifying for your company than working toward those collaboratively understood and practiced measures of success.