Three Steps for Understandable, Meaningful, and Measurable KPIs

In my first article on relevant metrics and key performance indicators (KPIs), I explained why limiting management’s strategic planning to high-level goal setting is doomed to failure. For strategic goals to be realized, they have to be translated into daily KPIs that are meaningful to everyone in the company. At my company, we approach this goal deployment process in three parts.

1. Cascade from the top, plan from the bottom

Goals always start at the top with companywide annual objectives. But when it comes time for deployment, business leaders must think from the bottom up about how the organization as a whole is going to meet those goals. Take a five-percent corporate cost reduction target as an example. Management’s first task is to break that five-percent figure down into specific tactics and actions throughout the company to achieve the target at the front end of the business.

In this case, business leaders might project that a five-percent cost reduction for the company would mean $4 million in cost reduction in manufacturing. Looking more deeply, they would determine that to achieve the $4 million in savings—in addition to everything else they plan to do (such as restructuring)—they need to improve labor productivity by a certain amount. Based on the analysis of potential gains, the goal for each plant and production line may be higher or lower than the overall productivity gain, but they would collectively flow upward to achieve the target for manufacturing.

In addition to labor ratio reductions, achieving the productivity targets for each line might require higher uptime, which would require faster set-up and changeover times, and more diligent maintenance practices. These would all require another layer of daily KPIs and goals.

2. Make detailed action plans

Once the lower level KPIs and targets have been identified, you need to develop specific action plans as to how you are going to achieve the targets. Focusing attention on an area by measuring it may improve performance in the short term, but concrete process changes will be required to make improvements that can be sustained. To achieve the goals, you need to spell out the specific actions that are going to be taken, who owns those actions, and when those actions are going to take place.

Having a specific time line in place allows business leaders to track progress in terms of activities completed and results achieved. You want to avoid the “hockey-stick effect” when there’s little progress throughout the year until the final quarter when everyone suddenly gets to work to achieve the annual objective.

Sustainable, transformative changes can’t be made that way. You need to drive your action plan forward from the beginning of the year to yield results in the first month and subsequent months all year long.

3. Measure and countermeasure

To keep the organization on track toward the corporate targets, business leaders must have some way of reviewing actions and results on a monthly basis. A quick dashboard view, for example, might show red, yellow, and green status for projects and goals.

This is not a passive exercise. During these monthly reviews, managers must stay vigilant for any sign of trouble. The numbers may be green today, but there may be signs that in the next month or two it could go to yellow or red.

However, these monthly reviews should not become problem-solving sessions. When you look at the numbers, you should expect to see the targeted results. If countermeasures are needed, business leaders need to know ahead of time what actions will be taken and what the results will be over the next 30-day cycle to achieve the targeted results. On the other side, managers must have the freedom to react quickly to problems before they become larger issues that delay progress.

This review process includes over-performance as well. If leaders see an area where expectations are dramatically exceeded, they need to take action. Maybe they can leverage those over-performing resources somewhere else in the business, or cascade them across the business to get better results.

Finally, all of these metrics and goal deployment activities must be visible to the entire organization. This information needs to flow into higher-level monthly roundups that summarize results and tell business leaders if everything is going according to plan at the top level. And, if it isn't, what’s being done to get back on target.

First published Oct. 14, 2014, on the TBM Consulting Group blog.

About The Author