Distinguishing Between Ineffective And Effective KPIs

Instituting strategic KPIs is a laudable – and sensible – goal. KPIs, or Key Performance Indicators, are measurable metrics you can use to track progress toward specific business goals. An employee’s KPI attainment directly affects his or her team, the team’s attainment affects the department or division, and so on up to the level of the executive board.

At the level of the board, of course, decisions are complex and may feel highly abstract. By adopting KPIs, you ensure decisions at each level are informed by concrete results and accurate projections. One of the most beneficial results of embracing KPIs is that you can steer toward a data-driven business culture.

Although KPIs are indispensable, too many companies spend time tracking the wrong things.

Inexperience can cause managers to choose the wrong KPIs for a team, of course. Correcting this is relatively easy, and it could be seen as a learning experience on the road to better leadership. But even among those with years of expertise, cognitive bias can sometimes lead to poor KPI selection.

When KPIs are not aligned with business objectives, they lead to misplaced time and effort. Individuals can learn to track and improve any behavior their leaders name, but if that behavior is not a true driver of results, you may end up with a team that is very well-prepared to succeed in a business they are not in!

Before discussing what makes a good KPI, it is instructive to highlight common bad KPIs.

Recognizing Bad KPIs Before They Become Time Sinks

In general, it is far easier to come up with a bad KPI than a good one – and bad KPIs almost always look useful and informative at first. The inability to choose, apply, and stick with meaningful KPIs is one major reason why many small businesses fail, but bad KPIs can also confound large enterprises with robust resources.

It is a relief, then, that most ineffective KPIs follow recognizable patterns:

1. Bad KPIs Measure The Wrong (But More Noticeable) Thing

Many online businesses fall into this trap. They may have a sound business model, buyer personas, and suppliers at the ready. However, their leaders do not understand the application of KPIs. To decide how the business is performing, they look mainly at website traffic, thinking “if we build it, they will come.”

That results in a rude awakening down the line when financial numbers are not what they should be!

The problem here is focusing on what is most visible rather than most relevant. Analytics software can tell you in seconds how much traffic a website is getting and where it is coming from. However, that traffic is little more than overhead unless it contributes to the financial success of the business.

In this scenario, the solution may be to emphasize conversion rate – that is, the percentage of visitors who become email subscribers and, ultimately, customers. As conversion rate is rarely easy to see, newcomers to KPI definition can overlook it, despite its evident connection to bottom line results.

2. Bad KPIs Measure The Wrong Part Of A Valuable Thing

For this example, consider a metric that many of us take for granted: Attendance.

Until very recently, it was assumed that the modern office environment is indispensable to business results. Therefore, the number of people coming to the office and staying through their entire shift was the bellwether of progress. That there could be any other way of doing things was barely worth contemplating.

Although some enterprises offered a level of remote work to select employees, it was conceived as a benefit – a hard-earned “carrot” that deviates from the norm, the “stick” of daily commutes and office routine. We all know how this worked out in the end: Companies must now push to adapt to a new way of life.

For many firms all around the world, office attendance is at zero.

With operations untethered from familiar settings, many managers are having difficulty reconciling old views of productivity with the new reality. Some demand minute-by-minute accounting of reports’ time, not recognizing they must recalibrate KPIs: That is, measure results of effective time management rather than the process.

3. They Measure A Valuable Thing In An Inaccurate Way

Some KPIs are complex and easily misunderstood. For example, there are KPIs commonly used in sales and marketing that require using the right formula on multiple raw inputs. These can be considered second-order KPIs since they derive from multiple other KPIs that are more directly influenced by individual efforts.

Cost of Customer Acquisition is one example of a KPI that can have many inputs, being applied to active campaigns and channels in different ways. A certain amount of numerical fluency is necessary to work with these KPIs. Even if you use software that calculates them automatically, do not assume it is correct until you have verified the fundamental assumptions encoded in how figures are recorded, reported, and arrived at.

Selecting KPIs That Foster Sustainable Business Success

Depending on the complexity of your business, KPI definition and roll-out can be a months-long process that requires executive sponsorship to spark adoption. At each stage, however, you can verify the usefulness of new KPIs by checking their fit against these four points:

1. Choose Your Most Substantial Goals

The Franklin Covey Institute reports only 15% of employees know their organization’s most important goals. Either goals are unclear or there are more than can ever be met. To reach goals with excellence, leaders would be wise to select only 2-3 of the most important objectives that will not be realized without disciplined action.

2. Make Sure KPIs Are Attached To Those Goals

KPIs must have clear relevance to these critical goals. Not only must your KPIs be measurable, they must also be explainable. Personnel whose work is decisive in whether KPIs improve must know precisely what actions move them forward. This enables them to make fast, accurate decisions when priority conflicts inevitably arise.

3. Pare Down KPIs To An Amount You Can Maintain

Just as your enterprise can only have a certain number of “all-important” goals, each individual should only have a few KPIs. Clear, well-chosen KPIs should apply to individuals, teams, and departments so that increases in one area naturally flow upward to buoy the other contributors affected by them.

4. Ensure Departments Have Relevant KPIs

Each department will have its own metrics and its own relationship to them. Some, such as marketing, may need to define KPIs on a more granular basis based on the performance of multiple campaigns. As departments report results, they should strive to emphasize those that bring clarity and purpose to strategic discussions.

Even with comprehensive knowledge of your business, choosing KPIs can feel like picking through a dark, dense jungle. Beyond selection comes implementation, data capture, and reporting – and beyond them, a healthier and more effective business culture. Equal Parts connects your KPIs to results, creating the culture you want.

To learn more, contact us today.