Imagine driving your car without a dashboard. Running your business without a good Key Performance Indicator (KPI) measurement system is akin to driving a car without a dashboard. Similar to the car dashboard which is essential to reach your destination safely without a speeding ticket or running out of fuel or breaking down; a good KPI measurement system for your business is vital to ensure that the entire organization is making progress towards achieving your business goals. Implementing a KPI measurement system for your business is very important to hold your employees accountable and experience freedom from the operational responsibilities.
A good KPI measurement system quantifies and reports key activities in your business so each and every employee knows how their efforts are impacting the business. Without a KPI measurement system, it is impossible for you and your team to know how the business is running, how they’re doing, and what they need to change. Follow these 5 steps to implement a good KPI measurement system for your business:
1) Identify five to ten KPIs that are most relevant for your business . These KPIs must be tightly linked to your strategy and aligned with business objectives. For example for a manufacturing business, inventory turns and cost/unit would be appropriate vs. for a professional services business, billable hours per employee is more relevant. Table below has a partial list of common KPI’s used by most business owners as organized by business function:
2) Assign appropriate KPIs to every employee in the organization. A good practice is to have the KPIs on the organization chart and the position descriptions. Each employee must have accountability to the subset of KPIs assigned to them and the performance incentive plan must be tied to achieving the KPI goals.
3) Decide on the target for each of the KPIs. Targets should be set considering the benchmarks in your industry as well as your own past performance. Set stretch targets backed by an action plan to hit the targets and ensure accountability for each action.
4) Determine the frequency of measurement of the KPIs. Some KPIs might require daily monitoring while others could be monitored weekly. The criteria for this must be based on the practicality of compiling the KPI as well as your ability to take action or change course. For example, you want to have daily visibility to stock outs, so that the situation can be corrected immediately where as inventory turns could be monitored weekly.
5) Finalize the reporting and method of communicating these KPIs with your organization. Get started with the fastest way to implement the KPI measurement system which is typically an excel based dashboard. Once the process and reporting is refined, you can implement an automated dashboard system .
The KPI measurement system implementation cannot be considered complete until each and everyone in the organization lives and breathes it every day. So, it is very important to communicate the KPI measurement system broadly across the organization and tie the performance incentive plan to achieving the KPI targets. Implementing a good KPI measurement system will ensure your employees are accountable and provide the business owner freedom from the operational responsibilities of the business.