How to Design Key Performance Indicators
Key Performance Indicators (KPIs) provide a way for management to develop a common language around the most important processes within an organization. They also provide a way to develop actionable metrics which connect to the bottom line, regardless of department. Good KPIs will be actionable and measurable with a direct relationship to profitability. It is also important to set clear targets and assign reporting accountability for each metric. This article will walk you through the thought process of creating a customer service based metric, from pinpointing the most important processes to setting targets and reporting accountability.
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Instructions
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Define the most critical processes in your business.The most important aspect of this step is to connect to real bottom line results. If the indicator does not effect the bottom line, it will not be effective.
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Choose a metric related to customer service. If it is for the manufacturing industry, this might be a reduction of errors in final output. If it relates to retail, it might be the number of repeat customers. If wholesale, it might accuracy in delivery.
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List the top four or five processes that are connected to the customer service metric. Following the manufacturing example above, if the goal is to reduce the number of errors in product you will need to create a process map to better understand the steps involved and which processes take the most time. Which processes require the most manpower support? Which processes create a delay in delivery if not carried out?
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Connect the metric to the bottom line. Some consultants will ask you to connect to goals, but it is not uncommon for organizational goals to be misaligned with the bottom line. Each metric should be easily traced to either an increase in revenue or a reduction in costs (in some cases, such as controller-ship, it might be connected to your ability to stay legal, but leave this to your legal or audit team). For instance, if your metric is the number of errors per 1000 orders, try connecting to the cost of labor or the numnber of units sold.
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Make the metric actionable and measurable. If your metric is based on returning clients and you're not measuring this, don't create a metric based on this aspect. Start simple. The easiest metric to start from is revenue over costs or gross margin. To refine, choose a particular product segment (widget one revenue) over the costs to make the product (widget one costs). Continue the refining the process. Try the number of units sold over a particular aspect of costs, such as labor (usually the highest cost), delivery or overhead.
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For each KPI, define the title, how it will be measured, and the target. If looking at the number of sales per lead, define what qualifies as a sale or lead. For measurement, connect to the bottom line and assign ownership. Who will be accountable for reporting the calculation. In order to set a target you need to measure where you are. If the KPI is sales per lead, the target could be a 5 percent increase over number of sales per lead. This can be a 5 percent increase over the dollar amount of sales or the number of sales, however, the dollar amount will help to focus your sales staff on creating value over volume.
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Set up regular reporting. Everyone in the organization should be connected to key KPIs. If they aren't, reassign them. Everyone should also be clear on targets. This should not be a secret report among higher level management.
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Continue to refine and set up a system of rewards for top performers or departments.
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