I felt the need to write an article about how managing directors and business owners can set better KPIs in their organisation because, even when given examples of KPIs, people so often over-complicate the whole concept and become very unsure.
The truth is, it’s a lot simpler than you think to set effective direction for your team.
What Are KPIs?
KPI stands for “Key Performance Indicator”. While there are thousands of definitions across the Internet for this, I want to make this simple for you.
In a sentence, KPIs are the deliverables – the output that you are expecting from your staff.
That’s it. What do you want your staff to produce? Those are their KPIs.
The key thing here is setting these in such a way that your team continues to remain motivated, actually achieves those KPIs, and ultimately drives the business forward.
Why is Setting KPIs Important?
Let me summarise it in four simple points:
- The profitability of your business depends on how well your employees consistently perform important (not just urgent!) activities.
- Employees perform best when they understand how their performance contributes to the success of the business, and how their performance is measured.
- Small changes in critical areas can have a great impact on the bottom line.
- What gets measured gets done, and what gets rewarded gets done again.
Here a few guiding principles that have helped my clients effectively set KPIs for their team members:
Principle 1: KPIs Have A Short Lifetime
Your business is a constantly evolving machine. It will not stay the same way for the next year or two years and so, equally, the very specific KPIs or activities for your team will not remain consistent over that time.
When you start any quarter of the year, you will have a set of deliverables that make sense at that point in time.
When you come to review your activity at the end of the quarter, you may realise certain things have not been working well, or that other things have been working much better than you thought. You then should nudge the direction of the business towards what’s working, and therefore also nudge your team’s KPIs to go in that direction. As long as all this nudging happens in concert, your business remains cohesive.
This is part of what happens at our Strategic Growth Intensives with our clients every quarter – reviewing the previous quarter and planning the next 90 days of activity to focus on maximising growth and/or achieving their ultimate goals.
This principle is also especially important when looking at setting KPIs for new staff members, which you should do during a good induction process. Not only is there this need to be flexible to change direction later, but you are probably also not yet aware of the more specific strengths and weaknesses of this new member. You, therefore, do not know in which activities they will produce the best results (and adjust targets accordingly).
In limiting yourself to a shorter time frame, you can also limit the number of KPIs you are assigning – you should be paring it down to just 3 or 5 key deliverables for the quarter. This makes it achievable, and also highly focuses activity on the most important things.
Principle 2: KPIs Should Be More Numbers Than Activities
Numbers are essential in planning and growing your business because your business speaks to you in the language of numbers.
The problem with setting KPIs and asking, “What do I want my team to achieve?” is that most business owners answer with something like, “I want my marketing team to keep our social media channels updated and send out emails once a week.” Or “I want my administration person to keep our calendars in order.” Or “I want the operations manager to give me simplified reports each week.” This is understandable since you are trying to make sure that, as a good manager, you are managing activities rather than people.
Let be very clear here though: activities are not targets. Activities are what help you achieve targets. And targets are what help you achieve growth.
When you are setting key performance indicators (even KPIs for yourself as managing director), you should be looking to set a particular number that is both directly related to the activities they are doing and to the growth of the business. You can then make clearer decisions on which activities should be focused on, according to how much they contribute to that number.
This is perhaps more easily understood using an example. Let’s take your marketing team.
Example: Key Performance Indicators for Marketing
The ultimate goal of marketing is to produce qualified leads that feed into your sales process (and then the sales team’s ultimate goal is to produce clients / customers from those qualified leads). That’s the number that is ultimately contributing to your business’s success (as clients / customers obviously lead to profits!)
Now you sit down with your marketing team and say, “We need to get n number of qualified leads. What channels do we have and how many leads do you think we can get from each channel?”
Then together you decide that you can get X qualified leads from email marketing, Y leads from social media, Z from Adwords and so on.
Those then become the key KPIs that the marketing team are focused on and apply to their dashboard. And those numbers then indicate to your team how much time and effort needs to be put in each channel, and the activities flow easily from there.
There are, of course, exceptions and what I would call “projects” – and these will most commonly come up in your marketing and your administration teams. This is because there are plenty of activities that do not always produce a clear, definitive quantitative result. A good example is something like producing a testimonial video. While the activity itself will not contribute directly to the qualified leads target, it’s a useful piece of media that can be used in other channels (such as pay-per-click advertising, or in the sales process) to eventually produce leads.
So you are allowed to set some KPIs which are ‘project’ based. But you must start with – and prioritise – your number-based targets if you wish to create predictable growth in your business.
Principle 3: KPIs Should be Focused on Reporting
What are the simple reports you need from your team members in order to stay in control and make key decisions about your business? What is the key information you need to know what is working and not working?
That should inform exactly which metrics are the most important for you to be measuring from your team members, and what metrics they should be focused on optimising.
Everything, really, should relate back ultimately to the profit and loss or balance sheet – the metric you are measuring from your team member should impact one of your two critical financial documents in some way. If they aren’t, then you need to think very hard about whether that metric is actually relevant to your business growth, or whether it’s a vanity metric.
Example: Key Performance Indicators for Operations
A typical position where many businesses struggle to measure key performance indicators is in operations. Some of the key performance indicators for an operations manager might have to do with planning, human resources, reporting, communication – things that typically don’t have metrics, right? Well, actually, there are metrics there – and they do directly impact the profits and losses.
For example, planning – a key metric for your operations manager might be something like, “Ensure the sales and marketing team wins n clients this quarter.” The activities might then be monitoring the marketing and sales team’s trackers, organising internal meetings, and monitoring the important dashboards for those teams – to ensure they are actually moving towards winning that n number of clients.
This makes your operations manager accountable for contributing to the business directly. How they do that is by ensuring that the operations (which are actually other team member’s responsibilities) are focused on producing the correct number of clients. Their direct work is in managing the activities throughout the business, but you direct their ultimate focus to the business goal, through their KPI. They also thus share each win with the other team members, and everyone feels some ownership over each ‘win’.
You also need to think about this from your own time management point of view. Remember that time is one of your most precious resources and you need to use it very wisely. What reports do your team members need to share with you so that you can monitor the activities as swiftly as possible?
Some businesses – and some team members – need daily reporting. For others, weekly is the sufficient balance of giving enough room to breathe while keeping the managing director(s) or business owner(s) informed and able to make decisions. It is rare that monthly reporting is sufficient, as often you will be leaving things too late to pivot effectively and leaving money on the table. Whatever the frequency, it is about consistent and insightful reporting.
If you follow these three principles of keeping KPIs shorter term, mostly numerical and focused on their usefulness in reporting upwards, then you will ensure your KPIs are not just useless data but actual meaningful information that you can apply to create conscious business growth.