Why Most Key Performance Indicators Don’t Create Value

If you see a typical company dashboard, you will see key performance indicators (KPIs) with $ signs associated with them. These financial KPIs help drive budgets but they don’t help steer the business. And as a result there is little to no intentional value creation on a sustained basis. Let’s talk why.

The first problem is that many KPIs that companies track are historical. They are lagging indicators vs. leading indicators and as a result they’re after the fact.

Another issue we see commonly is that many KPIs are one dimensional and they can distract from the core issue. For example, you may be tracking production when you really should be following sales.

Most KPIs don’t provide us intelligence. Often times they provide us a snapshot rather than providing us a trend. As a result we don’t get business intelligence that the business needs to improve in real time. But the most important mistake that companies make is that they think of KPIs as measurement vehicles rather than vehicles for value creation.

So, let’s talk about how to make KPIs more effective.

When working with clients, the first thing we do is to identify the performance areas that need to be fixed in the business. Each one of these performance areas has a critical success factor associated with the fixes. And this critical success factor is generally the cause of your success.

These critical success factors are then used to determine the key performance indicators which are the effects of your actions.

To create value a company must connect their goals to their true performance drivers, i.e. the correct Key Performance Indicators. Let’s look at an example to see this in action.

Let’s take a manufacturer which wants to increase its retail sales. Their strategy is to go after shelf space in certain big box retailers. To do that they need capacity. As a result their internal goal is to increase production. They have determined their drivers to be “speed” and “costs” which is why they are tracking items like number of units produced, gross margins, cost of goods sold, labor costs etc.

While these things are important to track, they will not intentionally drive the results that they need. Let’s look at what they could do to improve the chances of successfully achieving their desired result.

As the company gets more focused on its true drivers instead of simply saying speed, it looks at the underlying driver for speed, which in this case is “order-to-delivery cycle time”, and instead of just costs, it identifies labor efficiency as the underlying driver. By changing its focus to these drivers, the company key performance indicators also change to things that it can track and improve mid-stream to items like production cost variance, labor availability, hours earned vs. actual, throughput etc. Meanwhile the old Key Performance Indicators now move to the Results area so the company can have the benefit of seeing what results it intentionally achieved.

To end with a parting thought: by connecting your goals to your true performance drivers, you can immediately start improving performance by focusing on what truly matters.

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