KPIs (or how to improve the control of your organisation) vol. I

74% of organisations which are considered leaders in their sectors use KPIs as a fundamental element in their management. It is as clear as that.

And what is a KPI? The abbreviation stands for Key Performance Indicator.

And what are they used for? They serve, fundamentally, to give managers control over their organisation. Think about the steering wheel of a car, but not just any car, but rather a Formula 1 racing car, with all of that mass of controls, switches, buttons, etc. And beyond that, think of the cockpit of an aeroplane, with its multitude of controls, screens, lights, indicators, sensors, etc. This is what a KPI is used for, to control the progress, not of a car or a plane, but of an organisation.

Said another way, KPIs allow us to know if we will be able to reach a specific goal well before we reach it. We measure, in other words, the heading, the performance, and whether or not these are leading us in the right direction. From the previous sentence, it can be deduced that in addition to giving us warnings, KPIs can allow us to make adjustments if they indicate that we are not doing as well as we had anticipated.

For all of this, it can be said that in reality KPIs are not indicators, but rather “instigators”, that is to say, tools that allow us to control those aspects that lead to a specific goal, the causes instead of the effects. The indicators, those which we use to verify that we have, after the fact, reached a goal are in reality KRIs, that is to say, Key Results Indicators.

In order to make this is clear, let’s look at the following three examples.

• If I reduce the time it takes to do a step in the production process, I will increase the per unit profit margin.
• If I increase the number of sales calls per month, sales will increase.
• If I reduce employee turnover, customer satisfaction will increase.

As can be seen, KPIs measure the path toward KRIs.

And now, here is a small exercise that you can easily do. Try to answer the following question: is the indicator “sales” a KPI or a KRI? Does it measure performance or results?

Well, consider this: it can do both. That is to say, it can be a KPI and a KRI. Why? Take a look at the two following examples.

• If I increase the number of sales calls per month, sales will increase.
• If I maintain sales above 1,000 units per week, the annual profit will go up.

As you can see, in both cases the same indicator, “sales”,  allows us to measure both if they have increased (obviously) thanks to a certain cause and also if, by increasing sales, this will have a secondary impact. And this is the key. All indicators, be they KPIs or KRIs, serve to measure goals. They never function by themselves; they would be useless in isolation. They are always related to the goals we intend to reach.

And now we are going to prove it. We are going to put this into practice. Imagine that we have a goal of getting slimmer. There are many indicators that we could use to measure this goal. Here are a few of them: weight, pant size, waist measurement, daily calorie intake, number of meals per day, the number of miles walked per day.

All of the above are indicators. But not all of them will equally help us measure our goal. Let’s start by deciding upon a good indicator of results, that is to say, a good KRI that allows us to measure, over a specific period of time, if we have achieved the goal of getting slimmer. Weight seems to be the most obvious indicator, but is it not true that we could lose weight and not look any thinner if we lost weight on our legs, for example, and not on our mid-section (which is what led to us to want to slim down in the first place)? Therefore, this will not be entirely effective. We had better look for another indicator.

The size of the pants we wear seems like a good option. The smaller the size, the slimmer I have become. But, again, is it not the case that sizes can vary among different brands and that therefore, sizing can be deceptive? So, we’ll need to find another indicator.

To avoid the problem with sizes, we could go by waist measurement. We can use a measuring tape, always making sure to take the measurement at the same place on the waist and then we would have it. This certainly seems reliable. We can use this indicator. We now have our KRI for measuring our goal of slimming down.

Now we are missing the KPI. Which one we should use? Let’s take a look at the last three items of the above list: the daily calorie intake, the number of meals per day or the number of miles walked per day. Why are these KPIs useful for measuring performance? Because we are sure that these three factors are what lead, in varying degrees, to getting thinner. If I eat fewer calories, I will lose get slimmer. If I eat more meals a day, I will get slimmer and if I walk more miles a day, I will also get slimmer.

So I now I have my strategy. I have my KPIs to measure my performance each day towards getting thinner. Every day I can see if I am doing well; if one day I eat more calories, eat fewer times or walk fewer miles, it will be clear that if I do not change my actions, I am not going to get thinner.  I also have my KRI, waist size, that I can check not only on the final day to see if  I have succeeded, but also every day, to see how the actions I am performing (and that I am monitoring as my KPIs) are already contributing to the final result.

As I hope you will have seen in this article, there is much to be gained, in an organization, from the use of KPIs and the corresponding KRIs. We will no longer leave our organization to the whims of chance but will establish a series of controls that can be checked as often as we wish in order to ensure that our actions are taking us in the desired direction.

In later articles we will explore the distinctive features of KPIs so that you can apply them to your organizational model.

[salto]

Marc Ambit – Consultant and teacher at TBS Barcelona Campus

Tags: goals|KPIs|KRIs|project management