Key performance indicators and how to apply them
04 December 2020
Key performance indicators and how to apply them
Leading for the companies is always the vision, the purpose of an organisation to exist. To achieve the vision, a business strategy is prepared, specified in the corporate goals. The contribution of achieving these goals for solving specific business problems is measured by the performance indicators.
KPIs (Key Performance Indicators) have also become popular among large corporations, which until recently looked primarily at hierarchical structures and strategic processes. Responding to the scale of the organisations - complicated to matrixes, sharing administrative and functional dependencies.
We now live in the next level, where the performance of each employee and a team is a subject to measurement indicators. This is shown by the results of the global MIT survey (M. Schrage and D. Kiron, "Leading With Next-Generation Key Performance Indicators," MIT Sloan Management Review, June 2018), in which 70% of a total of 3,200 senior managers say that they use KPIs in the management of people and processes to a greater (respectively 27%) or more moderate degree (43%).
Where in management do these KPIs nestle?
Leading is always the vision - until recently we actively discussed the so-called vision and mission, now gathered together as a higher purpose of the organisation, in other words - the reason to exist. To achieve the vision, a business strategy is prepared, specified in the corporate goals. The contribution of the achievement of these goals to the solution of specific business problems is measured by the performance indicators.
If the leader manages to bring out with the help of his team sufficiently good operational goals to achieve the business strategy, then every specific single action can be left in the hands of the team or the individual and monitored with case-specific KPIs. Their definition and the scales for achieving each goal reflect all the details that affect the success of the operational goal - most often the performance indicators are grouped into no more than 6 KPIs.
What is important for the KPI approach to work?
The main requirement addresses the goals because even a small deviation or ambiguity is reflected in a large shift in the effort, respectively in the results. The easiest approach for the practical application to define the goals is the SMART-tactics. An abbreviation of the five main criteria for well-defined goals gives a good overview of the necessary actions and even protects against pitfalls along the way:
S (specific) stands for the precision that is essential for determining what we want to achieve and why it is important. Each goal must be clear enough for all participants in the process.
M (measurable) indicates the need for the goal to be quantitative, respectively to be sufficiently visible - usually in a relation to a specific standard, to what extent the goal has been achieved.
A (achievable) directly connects the great aspirations with the practical possibility to accomplish the goal.
R (relevant) indicates the affiliation of the defined goal to the targeted outcome - each goal must measure something that is both important and improves performance.
T (time-bound) again connects the goal with its specific application, on this occasion in time: achieving the goal in these days is more than ever a matter of speed, so each of our goals must have a time frame.
There are examples of KPIs in each area - from finance, say profit levels or ROI (return on investment), to sales departments - most often expressed in percentage changes liek sales growth for a specific target group, growth of market share for a specific segment, to less familiar for the KPI's approach areas such as supply chain management (for example, improving the delivery time of main raw material by 2 days) or human capital management (for example successful integration a new automated process for the annual leaves of at least 75% of employees into the business-as-usual routine within the first 6 months after the introduction).
Defining KPIs is positioned in the hierarchy between the business strategy goals and the operational actions to achieve them, hence allowing it to be an efficient tool for flexible human capital management in the organisation.