5 Attributes Of An Effective KPI System
In my two most recent blog posts on Key Performance Indicators, I covered The Basics of KPIs and Why Non-Financial Metrics Matter and How to Define KPIs That Are Optimal For A Manufacturing Business. Today’s post addresses the five most important things that a KPI system should promote in order to better enable your business to meet its performance goals.
An effective KPI system should foster:
• The elimination of departmental barriers so everyone has a common objective or objectives driven by corporate management.
• Use of a central repository of customer, supply chain and financial data to help you more easily manage metrics that are unified around a corporate strategy map.
• The ability to measure progress across the company and to identify areas requiring improvement using enterprise performance analysis tools.
• The ability to leverage exception management to proactively monitor where unacceptable performance is and to notify appropriate owners of the anomalies.
• A closed-loop process of defining strategies, executing the performance of those strategies, and evaluating performance in order to determine if the strategy was effective or requires change.
Elimination of Departmental Barriers
Regardless of the specific performance criteria that are central to your immediate or long-term business goal, each key performance indicator should be structured so it connects to the duties of everyone at the company and, as such, eliminates departmental barriers. By keeping KPIs simple and attaching them to your company’s mission, customer experience, and/or financial performance, you can better maximize employee understanding on how to contribute. And when coupled with incentive programs that reinforce behaviors that work toward attaining KPIs, high employee engagement usually results.
Central Repository
Having a central location to collect, store, and report KPI data makes it much easier to manage metrics that are unified around a strategy map. Summarizing and focusing the detailed data that you deal with every day into something that’s coherent for management helps to help ensure synergy and attainment of corporate goals. By using data from such a repository (or warehouse) to support the generation of your KPI metrics, you can very effectively score your performance against business objectives, monitor progress in real-time, provide drill to detail capability, generate cause-and-effect models and, most importantly, measurably improve the bottom line.
Performance Measurement
With perspectives aligned to corporate goals, key performance indicators (KPIs) should be shared with internal and external stakeholders via dashboards. A dashboard is like the instrumentation panel of your business, where various gauges indicate the health of the business in terms of parameters that are critical for the success of business strategy.
Within the dashboard, KPIs are presented in a manner that gives executives enhanced analytical insights, showing not only the current levels of performance against each KPI, but providing the capabilities to create “what-if” scenarios and exception reports which are immensely helpful in giving vital information to executives to initiate necessary corrective (or proactive) actions.
Exception Management
Exception management within a KPI system ensures that performance issues (e.g., low inventory to open orders, increasing days’ sales outstanding, trending decreases in product-specific sales, etc.) are rapidly identified and those appropriate individuals are notified so they can further investigate what’s causing the anomalies. It’s also powerful because it gives employees the responsibility to make decisions based on the regular analysis of KPIs that are directly tied to their job function. Plus, it can help to reduce managerial load and allow managers to spend their time more effectively in areas where it will have the most impact.
Closed-Loop Process
Effective scorecarding and exception management are powerful catalysts for making the need for change visible and the opportunity for improvement clear, helping to close the loop in the performance management cycle and to replace the “blame culture” that often sprouts when areas of low performance are revealed.