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KPI fundamentals and how they benefit your organization

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Why measure stuff for business? 

If you’re not looking at where you’ve been or projecting where you’re going, you only use your gut when you try to pivot or add something new. Make sure your business house is in order before you build on an addition. Building a new addition onto a deteriorating structure or system only makes more weak structures and systems.

What is a macrometric and a micrometric? Micrometrics are controllable measures, and macrometrics are uncontrollable measures. Goals and KPIs are macrometrics, while the measures that calculate those goals and KPIs are the micrometrics.

Since goals are uncontrollable, only knowing the goals doesn’t help you improve them. Every business should have marketing/sales, operations, human capital, and financial activities. These should have attributable goals. 

KPIs are formulas for calculating goals (no worries, there will be no math today). Micrometrics are the drivers that influence the KPIs. 

Deep dive into KPIs

KPIs need predictive value, which means you can determine the outcome. 

As mentioned earlier, there are four major types of activities that every business has:

  • For the marketing sales activities, the goal is revenue. Therefore, the first KPI should be the sales count, and then the formula would equal revenue. 
  • For human capital activities, all businesses should measure employee retention. Two possible KPIs are overall employee well-being. The other KPI is employee stay percentage. 
  • Operations goals for products might include efficiency ratings, widgets made per day, and the forecasted demand. Operations goals for service could be capacity used, how much business they are servicing, and what the availability is to service. Operations goals for non-profits are the people served per period and the projected number of people that need the service in that area. 
  • For financial activities, get yourself a CFO-for-hire to teach you about strategic finance. They need clean data (so still think of GWD), but they way they look at numbers and their interpretations are outside of our wheelhouse. And we know a CFO-for-hire if you need one. 

KPIs can go awry, leading to negative consequences, when they lack specific goals, established units of measurement, or deadlines for determining when success or failure happens. In the book The Tyranny of Metrics, by Muller 2018, he cites some specific cases. One example is from Wells Fargo, where 5,300 employees gamed the system. They were held accountable for meeting sales goals and couldn’t achieve them, so they started setting up fake accounts. A web marketing specialist can drive traffic to a website without caring much about the quality of people visiting. Surgeons not wanting their public ratings diminished don’t take on complex cases. NASA had a KPI, but two departments were using different measurement systems. This mismatch resulted in rovers crashing into Mars. 

Five tips on how to prevent your goals and KPIs from misbehaving:

  1. Do not set unrealistic goals. For example, one potential client asked us to guarantee that we would double his sales. Of course, this is unrealistic for anyone, especially when we would not have operational control. 
  2. Include critical people in setting goals. Agree on goals and align on KPIs. You should include the people responsible for KPIs.
  3. Ensure the KPIs are widely known and shared directly or indirectly throughout the organization. For example, cycle time for billing may seem like an accounting accounts receivable issue. Still, it impacts other business areas — from strategic planning to bonuses and raises to marketing. 
  4. The solution to everything isn’t to create a KPI. If the KPI doesn’t wrap into a goal, or there are no micrometrics that make up a KPI, it isn’t a great idea to measure it and hold someone accountable. 
  5. Don’t stop at just identifying KPIs. It is the micrometrics that are the levers that change the game. 

To recap:

  • Make all goals, KPIs, and micrometrics meaningful, measurable, and actionable. 
  • Always align KPIs with goals. Then align all top executives. 
  • If it’s not a part of the formula for a goal, then is it a micrometric that defines the KPI? 
  • Don’t be surprised. Track your measurements so that you can create strategic adjustments. Goals are your past, and KPIs and micrometrics can forecast your future. Micrometrics are the levers you regularly monitor. 
  • Align your KPIs with reward and recognition. For example, pay attention to the micrometrics that different teams are responsible for, and be sure to reward and recognize those.
  • The law of large numbers means that the more you do something, the more predictable the outcome. For example, the more you flip a quarter, the more predictable the outcome becomes. Therefore, use large enough numbers to ensure a predictable outcome.
  • Be aware of over-steering and under-steering. How you react to small changes matters. Under-steering is doing nothing to change, while over-steering can cause over-correcting (or mounting a “Chicken Little/The Sky is Falling” campaign that frustrates people). 
  • Avoid KPI traps that lead to gaming the system.