The Dashboard Spy has KPIs on the brain!
Just because you have a set of metrics does not mean that you have the KPIs that you need to optimize your business. What is the difference between a mere metric and a true KPI? Let’s take a look at some of the differences between metrics and true KPIs.
By definition a KPI or key performance indicator must be “Key” – that is, critical to the success of your performance. Likewise, the number or measure in question must be an indicator. In fact it should be a leading indicator. Keep in mind that numbers can lead to false implications. Just because there is a correlation does not mean that there is causality. For example, let’s say that you notice from your data that your stadiums sell less hotdogs when it is raining. Obviously this because of the weather which is something that you simply cannot control. Therefore the weather statistics should not be key performance indicators because they are not factors that you can actively manage.
I’ve got KPI’s on my mind because of a recent article I read from Allan Wille, the President of Klipfolio. He’s been doing a lot of thinking and work on KPI Dashboards, and has sent me this great article on KPIs to share with you:
Beware the Dangers of Off-The-Shelf KPIs and Why You Really Need to Roll Your Own Key Performance Indicators
Key performance indicators are so critical to managing performance that they’ve generated enormous and ongoing discussion about what constitutes a KPI and which ones you should monitor.
Part of the discussion concerns the merits of “off-the-shelf” vs. homegrown KPIs. But it shouldn’t be an either/or proposition – to manage performance, you need both KPIs that address universal key measures, and KPIs linked to your unique economic engine. And you need to understand the difference between the two and to choose accordingly.
Off the shelf vs. homegrown
Performance management starts with monitoring certain universally recognized indicators. I believe there are only a few of these, typically financial ratios, such as Quick Ratio (current assets – inventories/current liabilities), P/E Ratio (market value per share/earnings per share), and Debt Equity Ratio (total liabilities/shareholders’ equity).
Beyond those few, the KPIs that really matter should link directly to your economic engine. And they should be specific to your organization.
In his book “Good to Great,” in which he looks at what makes some companies great and others not, Jim Collins addresses the need to truly understand your economic engine. What is the KPI that you, your team, and your company should rally around? Whatever it is, it will be critical to your performance. And I can tell you, it’s not going to be “off the shelf.”
The dangers of off-the-shelf KPIs
Is there a danger to picking off the shelf KPIs? Yes, beyond the few that are truly universal, off-the-shelf KPIs can create a fragmented set of priorities across the enterprise.
While an off-the-shelf KPI, such as Average Production Cost per Line Item, might sound great, what does it really mean if it’s not related to your goals? It will generate heated meetings in which the KPI is discussed and dissected. Is it higher than last month? Is it outside of industry norms? If the KPI isn’t linked to your economic engine, then not only does it not matter, it’s also wasting precious time and resources.
Start with your business drivers
If you’re communicating with the bank or your shareholders, certain universal measures will always be key for understanding and driving performance. Beyond that, though, many KPIs that sound useful can actually do more harm than good.
So choose off-the-shelf KPIs sparingly and carefully. And beyond that, when defining your KPIs, start at the top. Understand what drives your business, and then work from there, tying each KPI to your economic engine and to the part that every department and role in your organization plays in keeping that engine running.