KPIs as a Performance Management Tool
An organization or business drive towards a certain goal or goals which are underlined on their vision and mission statement. This vision and mission statement is what gives every organization, both profit and non-profit organization a purpose. You find that both strive to meet the vision (target) by engaging on that organization's mission. This purpose of existence is what defines them and therefore it becomes necessary for every organization to achieve its goals.
In any given organization or business it composes of Units, Departments, Teams, Employees, and Individuals. They all work with a collective mission or objective to attaining a target or set goal. Attain a goal in other terms is actually performing and to perform is simply to do something you set out to and fulfill it at the end of the day. Being able to tell that you have accomplished that what you set out to do means there are results that you compare with the target, this is where KPI comes in.
What is Performance management?
Let's understand what Performance Management means - Performance Management is simply tracking the relevancy and success of your operation toward your goals. It is an evaluation of how you do things in your organization, how every individual utilizes the available resources in every process to achieve those desire results (goals). In performance management, there are several tools that enable us to do this performance appraisal like KPA and KPI.
Today, I will concentrate on KPI as a performance management tool. Being able to perform means you are doing it right every single time you execute those processes going on in your company. It means you are able to manage those operations to be productive throughout that given period.
What is this KPI?
KPI stands for and it means Key Performance Indicator, it is an interface of how well you are performing in your organization. That very significant picture that shows you are doing exactly what you set out to is a KPI dashboard. A dashboard that tells whether your engine is good or you are about to crash down in the middle of nowhere, or you are about to run out of fuel. That is an indicator of where your performance is headed, where your business is going to be in that period of time.
Now that we know this KPI and what Performance Management is, how then are the two related and why are we talking about them. KPI is all about indicating those key performance going on in your company, I can as well say it is telling you which unit, department, team or individual is performing or is making a crucial contribution to the achievement of your goals. It is an interface of performance management.
The most important relation between KPI and performance management is the word 'performance', it is all about the performance of your organization. Designing a very good KPI means you will be monitoring the right measurable and not tracking irrelevant things. You cannot design KPI to measure your product sales and track employee punctuality. You should be able to track the right variable using a well-design ed KPI which sometimes is not the case.
Why is KPI Important?
Measuring of performance is essential for any business to succeed (attain its targets). Without performance measurement, the business management team does not know if the business is reaching the targets set as part of its overall strategy. The organization Target is the key important factor here. Performance must be measured against something, which is why KPIs are used. Measuring anything needs a known value you compare against, maybe financial or non-financial. In addition, the performance measured must be relevant to the company’s strategy.
This is where using the right KPI software becomes essential, you also need to set up and use dashboards to measure performance. Below are highlighted the importance of KPI in performance management.
- To be on the know - Knowing something is not believing, it means you have tangible evidence that you can tie to that what you are claiming to know. It will be totally fake and useless to say you managing your performance if you can not indicate that the set objective is met or about to be achieved. To do this you have to quantify or express your argument in a quantitative way. You use a management tool to establish analysis and present such an established management data/information quantitatively. KPIs are one of the tools that can help you obtain those performance data, analyze, and present them for decision-making.
- Establish the relation between Variables - Take for example you have been called to present performance appraisal findings of your organization to the board and all you can do is dictate to them how well you are working toward the goals without presenting tangible manipulated data that shows how far or how well your team is working toward that goal. You need to have something vivid like production versus sale presentation, relate the revenue generated against the motivate staff, something that links the input and output. You should present those key figures which indicate progress toward achieving a set goal. You need KPI to do the track performance and establish this performance-related data.
- Obtain information - Data is collect because you want to learn or establish a certain relationship between two or more variables. The key variables in performance management are how well your team, process, and individuals are contributing to your goals. It is these data that are manipulated to give information to be used in decision making.
When defining objectives you are setting targets, and when you have attainable those targets you match your processes performance against those achieved targets and establish a relation on how well you are progressing. Remember targets have a timeline and in order to evaluate your performance, you set your objective basing on those timelines.
Like I said before, a dashboard is an interface that indicates certain elements defined by the designer. A car dashboard consists of several indicators from various car parts like engine, lights, fuel tank, speed and distance, it communicates to the driver. KPIs dashboard, therefore, is an interface of key performance that indicates performance from your business units, departments, teams or individuals.
A key Performance indicator is able to communicate through its dashboard on what you have selected to indicate. It is not on KPIs to indicate what it wants but you design your KPIs tool to indicate what you want to track. Before you start this you should have specific time-bound targets you want to attain. They should be a realistic timeline, well-defined and engage all the required resources. You will be evaluating this target based on its attainment at the state timeline.
An organization is a whole functioning system that has several subsystems (departments) and players or individuals who work toward specified goals. They work in harmony and interactively with one objective of attaining a common goal and mark the word main 'common goal'. The moment one of the subsystems divert its attention and concentrated on a different goal the whole system will fail.
Let me use the human body as an example of how your business functions. Everything that the body does is synthesis in the brain and directed to every responsible part, each part takes up its responsibility as the instructed. Let's use a hand, instructed to write. It pickings a pen to write, when the target (to write) is set, the brain instructs the hand to pick a pen having in mind that the required resource (a pen, book and what to write) is in place. The hand will pick the pen put it down on the paper and the eye affirms that the target (writing) has been archived. So is your business, it takes KPIs dashboard as an eye which indicates that the desire action is arrived at.
KPIs dashboard ensures that you track and concentrate on what is in the dashboard and not get distracted to doing other irrelevant things that do not indicate your performance. Let say your target was to know which product in your single business unit (SBU) returns revenue the most in your business. Your KPIs dashboard will be concentrating on that SBU and not the entire mall. Like if you are evaluating revenue on foodstuff unit, the dashboard will be looking at several food products you are selling and their correspondent sales collected.
This data will be crucial in the foodstuff decision making process. You will be able to know which food products to increase and decrease using this information. The whole thing about the KPIs dashboard is what you designed KPI will be indicating.
KPI and decision making process
The decision-making process is simply settling on a single option or more options that are best for your company from the entire options available. It is based on information and facts related to what you are making a decision on. Before a decision-making process commenced the decision-making team must have this information at hand for them to make an informed decision.
The information that is used in any decision-making process has an origin, they are raw data that are useless without analyzing them. KPIs are one of the tools that provide this data and relate them to the actual real-time business status. Look at KPIs designed to track production and sales volume.
Your KPIs has established that the product produce is not serving the market sufficiently, there is a shortage of your products in the market. That is the demand is higher than the supply, you will be tempted to jump into conclusion of increasing the production. Yes, to solve it you have to do that but you are not sure about what aspect will you increase to solve it. Is it through inputting more raw materials, or ensuring that the production process utilizes every last available raw material if there is a lot of wastage? All this has to be measure.
From the above dilemma, you need some information and thus develop a KPI to track the production processes and maybe the customers served and sales volume. This is where the decision-making process begins. It starts with obtaining data, then analyzes, present and finally establishing a relationship. Making informed choices has always impacted the performance positively, therefore using KPI as a performance management tool is a wise move.
Developing KPIs for Optimal Performance Management
We have talked about KPI as a readymade tool but we should not forget that the best KPIs that will serve your performance management issue optimally is the one you develop from your own company. It is the one that originates from the problem you have identified in your organization.
Let us take a defect in our production company as a problem. The sales volume has dropped as a result of the defective product in the market. Before we develop our KIP it is also important to note that the financial KPIs must come first before any other key performance indicators.
Your company's financial KPIs are the driving force that propels everything else even the other KPIs. Organization important goal is a revenue target which is a financial KPI, and from here other KPIs will follow, such as our case the reduction in defects, since defect leads to returned products which mean financial losses and customer complaints.
Keep in mind that always an output KPI comes before an input KPI. You first need to know the market share available and the demand in the market before you start production. Before even you can consider the key performance indicators related to the making of the products and product quality. This is how we will develop our KPI by following a systematic approach:
1. Identify the problem that must be addressed.
For example, a drop in sales of your products in the market from the total previous sales as the result of defects. Now we are set the objective regarding the reduction of the defect as a target. You may, for instance, have a goal of reducing the total number of defect products from 20% to 10%. You design your KPI to address the production process on reducing defects.
2. Plan on reducing the number of defective products.
Define a way or process of doing it, maybe you will be re-engineering the manufacturing process or maybe its defect as a result of packaging or will you add more quality control points on the line?
3. Consider your company’s strategic objectives.
Choose the KPIs that best match the define objective. It is the strategic objective that matters in every decision you will make in your organization. Therefore, ensure that you including individual and departmental performance KPIs which are properly designed. Properly designed KPIs make it possible for management to get the right answers and answer relevant questions.
We often overlooked setting realistic targets that are relevant to the overall underlying objective as part of performance management. It is essential to connect all resources with departmental objectives; every single aspect must be linked to the strategic objectives. KPIs should function as a metrics and the system of monitoring for motivation, use it to reach targets, rather than using it to force constrains.
Making your KPIs functioning
It is better to sit and do nothing than have irrelevant KPIs. It is meant to help you track performance and when it doesn't it is a burden you are investing resources in with no return. It is important to have an actionable KPI for the performance management team.
- Review strategic objectives - If your organizational objectives are not realistic, I mean attainable and time bond you have to review them and redefine them for your KPI to work. Remember you develop the KPI based on the outcome and these outcomes are the desired result, they are the goals and the drivers of all the action in your business. To ensure that your KPI is functioning and ease performance management, review your objective regularly to check if your KPIs are aligned with it.
- Analyze your current performance - The main reason we have KPI in an organization is to indicate the performance, therefore, the KPI dashboard indicates what is going on in your business as far as performance is concerned. Understand anything you, after all, need information; analyzed data or manipulate data that has a meaning and can be interpreted. The dashboard will be meaningful if the obtained data is analyzed.
- Set both short and long term KPI targets - An organization main goal is to achieve its objective but within that journey, there are goals that must be met in order to climb and fulfill the overall goal. For instance, the overall objective of an organization is to provide a product or service to the market at a profit. Before they do that, there is a small task that is accomplished which sees the success of the main goal. KPI also has to focus on the small and specific goals which will combine to indicate the overall performance of the business or process.
- Review targets with your team - Again and again, I will say that teamwork is the key to success, an individual will be overburden and in the process lose the objective in between. Combining effort like the wolves hunting in a pack will bring down large prey. Involve everyone; let them see what the state objective defines. Allow them to learn what they need from them and all will focus on that.
- Review progress and readjust - Constant review and adjustment make you KPI effective, like any tool even farming tools maintenance is the key to efficiency. Imagine a farmer using a blunt hoe, you will use a lot of energy, spend a long time and do a little. Business is the same, time waste cannot be recovered. Review your business and make the necessary adjustment before it is late.
How is KPI linked with Performance Management?
KPI in full means 'Key Performance Indicator' it means it tracks performance and highlights the key areas, department, processes and even individuals who are outstanding on their performance. Performance though is not that important if they are not linked to the business objective. I am sure that if am measuring performance in terms of punctuality, neatness and all the moving around I know am doomed to fail. For performance to be important or to be called key means you are doing exactly and even exceedingly what the strategic objective defines.
Having any KPIs that are not linked directly to your business overall strategy and objective is a significant lack of focus on your strategy. It is hard to link your KPIs and Performance when you do not have a strategic focus. Take for example you want to manage or track the performance of your core process which is not in any way directly to your overall objective. This means you will be evaluating performance which is not productive to your goals. Yes, you will have your KPI dashboard indicating performance but this information on the dashboard means nothing since what you are tracking is way far from you define objectives.
Being able to implement a streamline and select an effective KPI is a determining factor to success. It ensures that you are measuring relevant progress. The management team, therefore, has an integral role when selecting and monitoring key performance indicators so that they avoid measuring irrelevant actions that will mislead the decision-makers.
KPI is a dashboard that gives direction and indicates key figures in the organization management team are lost without it and the overall business focus will be lost. Management should have a well-defined key performance indicator that will be able to turn the business overall strategic focus into a measurable process at each level. The one that links results to every individual.
To summaries the link that exist between performance management and KPI, I would like to use the three key players in the company's success. The top management level, the middle level, and the lower level. Performance is not a single individual factor; it is a collective responsibility that if one level of management fails in driving those key processes to success the whole process is dead. It is the KPIs that track every level to ensure that the strategic objective remains a focus on all levels. This is what is simply meant by performance management.