ActionCOACH Business Coaching

A key performance indicator (KPI) is simply a measure that predicts future outcomes of performance.  Often confusion arises over what an appropriate KPI is designed to do.  Here are some practical rules for designing KPIs for your business.

1. First, decide what outcomes you want to achieve.  An example may be to achieve $100,000 in net profit for the year.  We all know that net profit does not just show up at our doorstep, so what are the indicators for you that will predict net profit for you in the future? 

Choosing the right outcome is also important.  How motivated are employees going to be for you and your shareholders to line your pockets with net profit?  It is probably not very likely unless that partake in a profit sharing plan.  So, rule #1 is to be sure that you select the right outcomes that you want to achieve.
 
2. Second, decide what activities are most definite to lead to your defined outcomes.  Is it true that you are the best at doing the activities you enjoy most?  Are those activities always the ones that lead to your desired outcomes?  We always love to rationalize our activity and convince ourselves that the things we are working on will make a difference, right?  Here is where we need to be really honest with ourselves and get specific about what are really the best activities. 

Within ActionCoach, we have a very specific formula that is guaranteed to lead to a net profit outcome that is called the 5 Ways.  The KPIs that are part of the 5 Ways are Leads, Conversion Rate, Number of Transactions per Customer, Average Dollar Sale per Customer, and Net Margin.  Increases in these 5 KPIs are guaranteed to produce Net Profits for you.  If you are completely honest, what other KPIs are there for you that will lead to your desired outcome?
 
3. Third, be sure that the KPI is a consistent and indefinite measure of that activity.  When a KPI is implemented, it should be a consistent measure that does not end at some set time period.  For example, could you always measure and improve on the Number of Leads that you are acquiring through your marketing?  The answer is yes.  On the other hand, the implementation of a marketing campaign would be a definite and specific goal but not a KPI.

4. Fourth, decide how you will measure the KPI and report it consistently.  A KPI is not a KPI until it produces a number that can be compared and looked at over a trend in time.  Putting a process and system in place to be sure that the KPI can be accurately reported in a consistent manner is a must; otherwise, a permanent change will not occur leading to inconsistent results.

5. Fifth, decide who is accountable to the KPI and its measure.  My recommendation is to always begin with a company wide KPI before implementing individual KPIs for your team.  If individual KPIs are introduced before a company KPI, then peoples behavior tends to be individual in nature and communication and teamwork break down because people are concerned about their own personal results.  Introducing a company KPI first and then a department KPI next, provides employees an example that you as the leader are taking accountability and that everyone needs to work together to achieve the KPI target. 

One of the most powerful motivators is peer accountability.  If people know that their evaluation is based on the performance as the team as a whole, they will either bring other team members up to new standards or make low performing team members uncomfortable.  The healthy conflict that occurs is a powerful motivator for teams and releases the pressure from an authoritative top down approach.
 
6. Lastly, once you have the reporting and accountability in place, set targets for your KPIs and align incentives to them.  Once you have the systems and consistency in place for your company, you then can introduce incentives to targets you set for the KPIs.  Be careful because once you align monetary incentives to the KPIs, be prepared to see employee behavior change.  You want to be sure that employee behavior is aligned to your correct outcomes and that is why steps 1 through 5 are so important.

As the owner, if you feel like you are the one doing all the work, then introduce KPIs into your company and see your employees take over. 

As always if you have questions or want to learn more, give me a call. 

Have an Awesome Performing Month!