When KPIs Become Useless - How to Avoid Mistakesposted on 20-3-11-Wed 09:46
|Most Common Mistakes and How to Avoid Them|
|How Many KPIs is Too Many?|
|Key Performance Indicators vs. Targets (Measures vs. Targets)|
|Examples of KPIs and How to Count Them|
|The Final Verdict|
KPIs are the critical sources of information that will help you understand, track and, evaluate how effectively your business, company, or organization is reaching desired targets.
They are widely spread in modern business, but KPIs are often overused or totally misunderstood . Therefore, if they are practiced in the wrong way, their presence is useless or even fatal for the business. Understanding what KPIs are, how to define and use them right can make a massive difference to your company, business, or organization's success as they are the direct indicators of the performance.
Most Common Mistakes and How to Avoid Them
Set KPI Targets and Link Them to Your Business Goals
Every KPI you define must have the right goal associated with it. Key Performance Indicators are only useful when they are aligned with your strategy and when they are helping strategic decision making. KPIs are like guideposts, and if they are not right, they can easily make your company tumble on the wrong path, right into failure. It is really essential that your KPIs are linked to your business goals. When you know what you're trying to achieve in your business, use those objectives to determine relevant KPIs. Don't just measure to collect data, do it because the measures you take will help you reach your targets. For example, align a “How many personal programs we sold this month” KPI to the objective “Increase number of sales per month.” Change your “Defect Percentage” KPI to the “Increase quality” objective.
If KPIs aren't aligned with your business strategy, you will waste an enormous amount of time and money gathering data that isn't going to benefit your business.
When KPIs Become Targets
Key Performance Indicators are efficient tools if they are used as indicators to measure the performance towards company goals. But, if they become targets instead of measurements, your business can be severely damaged.
What actually happens when KPIs become targets? Instead of using them to indicate and improve performance for a better business outcome, workers aim to hit the numbers. A mindless chasing of numbers will lead to reduced performance because people in your company will strive to fulfill the quantities rather than achieving the actual goals. When KPIs become goals, they always drive the wrong behavior, which ultimately leads to inhibited performance improvement.
For example, one hospital got a target that no patient should wait more than 3 hours. This average waiting time was set in order to improve the management and productivity of the hospital. Doctors and nurses should use this time target to identify what they need to do differently in order to achieve the time goal and to improve the service in their hospital. But instead, they see this average time as a target they need to hit no matter what, so they come up with the solutions that will reach the time target but ultimately will reduce the performance quality, and will cost the hospital more money. Employees start triaging patients, and when they realize someone can't be treated within the given time frame, they transfer them to an overnight observation. This way, they met their desired target, they ticked the done box, but this is actually costing the hospital more money, and the patient hasn't received the right treatment.
Goodhart's law says: "When a measure becomes a target, it ceases to be a good measure." KPIs are the most critical measures used by businesses, companies, and organizations, and they are created to pursue progress upon strategic goals. When they are well designed, KPI metrics will provide vital navigation instruments that will give an in-depth understanding of current performance, so the company can come up with the solutions to improve the performance. As its name says, they are indicators , not goals .
Copying the Same Measurements as Someone Else
This is one of the most common mistakes, but also one of the worst things you can do to your business. KPIs should be developed according to your own business goals and needs. They are quite individual, and even if you are in the same branch with someone else, you shouldn't take over their KPIs. Sometimes business owners adopt competitor's KPIs because they think this way they will catch up with them. Business leaders should take KPIs seriously, work out on the information in order to answer critical business questions, and to collect their own data, rather than to look at the competitor's business. After all, you may not even know what your competitor's strategy is, so copying those KPIs will be a complete waste of time and money.
The same goes for adopting popular metrics. Just because you overheard about particular KPI and how everybody is talking about it, doesn't mean that you need it. Customer satisfaction surveys or employee engagement surveys are quite popular, but you should invest in metrics that are focused on your strategies and goals.
Some KPIs are ubiquitous, and most businesses have them, especially around the financials of the company. You may consider adopting these KPIs but analyze fist do you actually need them.
Another common mistake when business leaders are implementing KPIs is that they start measuring absolutely everything. They want to use every single metric, data point or information hot spot, assuming that lots of information will help them, but that's not the case. Trying to use every drop of information is useless, the same as having too little information. If you're trying to squeeze everything from every corner of your business regardless of what you actually need and how you are going to use, it will cause the opposite effect. This approach will damage your business the same as doing nothing and operating without implementing key performance indicators, or maybe even more, because you will use time, money, and people focusing on collecting data you actually don't need.
Don't measure everything measurable. Also, don't count something just because it's easy to calculate! Instead, try to answer particular questions that will help you achieve your strategy and implement KPIs that will answer those questions.
Lack of Communication
Sometimes the effectiveness of KPIs is decreased because of the poor communication with employees. Wheater they are entirely ignored or not used properly, management needs to establish better communication with employees and clearly indicate to them the value of KPIs and their relation to the company. It's very important to represent KPIs as an aspiration and not something aggravating.
Proper internal communications can have a tremendous impact on a company’s profit. The business will profit from better communication through engaged employees who will do the extra work to get the job done and who will understand and have the right motivation.
You spend much time crafting messages and e-mails for your employees, but have you ever tried to reach them through multiple questions, and have you ever requested the feedback? If you want successful internal communication and you want your team to understand and use the KPIs, don't just inform them. Create dialogue, engaging conversations, and feedbacks.
If you want your KPIs to be useful, you must translate them to your employees so that your team can focus on achieving the desired goals. Your company needs to act as a whole, working in the same direction, towards your business goals, entirely dedicated to the company objectives that you established.
Bad Data Quality
KPIs are emanated from data, and that is why the accuracy of intelligence is essential. Low-quality data cannot be used efficiently, and it can be devastating for your business. Seizing the right data in the proper format can be pretty tricky, and even if you manage to do it, things can be lost or mixed up in the translation, especially when it comes to financial and commercial KPIs.
But luckily, there are lots of right strategies that you can use to improve the quality of your data. These seven metrics measure data quality, and they will help you improve the quality of your driven data:
- The ratio of data and errors - This apparent metric allows you to keep track of how the number of identified errors, such as incomplete, missing, or irrelevant data, is corresponding to the size of the data set. Your data quality is improving when you find fewer errors, while the size of your data remains the same or grows.
- Empty values - They're indicating that information is missing or it's reported in the incorrect field. You can determine how many empty fields you have within a data set, then observe how the number changes over time.
- Data transformation error rates - When you are taking the data that is stored in one format, and you are converting it to a different format, problems may occur and lower the quality of your data. You can have an insight into the overall quality if you measure the number of data transformation operations that failed or take to long to complete.
- Dark data - These are pieces of information that can't be used effectively because the quality is questionable. By measuring the quantity of dark data, you will have an insight into the quality of your data.
- E-mail bounce rates - Marketing companies that use e-mails as their marketing strategy, commonly come across this issue, because of the wrong, missing, or outdated data.
- Data storage costs - One other possible sign of data quality issues is when data storage costs are rising while the amount of data you are actually using remains the same. If you are storing data, but you're not using it, it can be a sign of data quality issues. But if your storage costs don't change while your data operations are the same or they are growing, you are most probably improving the quality of data.
- Data time-to-value - Measuring how long it takes for your team to process the results from the given data set is one of the ways to measure the quality of your data. Data quality issues are one of the common things that are slowing the effort to derive valuable information from data.
These metrics are just guidelines on how to measure data quality, and they may be different depending on the specific needs of your company.
Not Analyzing the Data
One other mistake people make with KPIs is that no one inside the company is really analyzing the information to extract the insights relevant to the business. Employees should work out on the information to have an insight into how the data relates to corporate benchmarks or how the metrics change over time and what impact they have on the business. Collecting data is not enough if we don't use them for the improvement of the company. This is most probably the poor communication between decision-makers and those who are analyzing data because usually, the analysis is done at lower levels and reported to the people at the leading positions. Maybe people at the lower positions don't understand the relevance of the data, and they are just presenting it. It's crucial that someone in the right position and level looks at data and interprets what the significance of the data is for the company.
No Actions are Taken
KPIs will shape your strategy and help you make the right business decisions, but only if you and your team act according to your KPIs. Even if you choose the right KPIs and they're cleverly aligned with your business goals, if you don't take any actions, key performance indicators will be completely useless. If you aren’t using your KPIs to form your decisions and drive performance, you are wasting your time, money, and effort.
Usually, there are no actions taken because people don't understand how they should act according to KPIs. The easiest way you can solve this issue is by tweaking the name, instantly giving it clarity and value. If you ask two following questions to your employees, and they don't know what the answer is, consider simply changing the name of your KPIs.
- If this KPI is tracking positively, what action do you want your team to take?
- If this KPI is tracking negatively, what action do you want your team to take?
Managers usually just assume that by using the common names for the KPIs, the team will automatically understand what they should do with them. You can fix this issue by changing the name of the KPI, making it more precise. For example, if your KPI is named 'Customer Service Calls' and your goal is to reduce the number of calls, consider modifying KPI's name to 'Decrease Customer Service Calls.' The new KPI name will make the goal crystal clear, and your employees will be acting according to your goals more straightforward!
KPIs Must be Timely Reportable
In order to track your progress, KPIs must be timely reportable. They must be achievable within a given timeframe and reported continuously on time. Without the timeline, KPIs are useless, and you can't do much with them. For example, 'How many sales we made in the last six months.' Giving the timeframe to your KPIs will make them comparable, and you will be able to track your progress over time.
Must be Comparable and Measurable
Your KPIs must be comparable and measurable. We already mentioned that KPIs must be timely reported so you can compare them over time, but it's also crucial that your KPIs aren't vague and general. They should be based on the exact targets. For example, you can't just name KPIs 'Improvement of work' because you can't actually count that. But if you name your KPIs more specifically, you will be able to count them, analyze, and react according to them. For example, 'Number of new customers' or 'Cost per lead' KPIs will allow you to count, analyze, and respond!
How Many KPIs is Too Many?
Leaders often exaggerate and try to measure every single thing related to their business. Don't be convinced that if you can measure everything, you will manage a successful business. Spending more time on measuring than actually, managing can be pretty devastating for your company. When you are running a massive operation, it's clear that you need to measure lots of things to track your progress. But focusing on measuring those things that ultimately contribute to your business objectives and putting a spotlight on the goals that follow your business vision for the future is essential.
The number of KPIs is quite individual, but it's directly related to the number of strategic objectives one company or organization has, which are depending on the resources and time available to meet the goals set. To put an efficient, measurable strategy in place, the number of strategic goals has to be small. There is a law of diminishing returns:
- If you plan to do 1-3 things, you will achieve 1-3 things
- If you plan to do 4-10 things, you might accomplish 1 or 2
- If you plan to do more than ten goals, you will most probably achieve nothing
Each strategic objective has a minimum of one KPI associated with it and a maximum of no more than three. So how many KPIs do you need? At least 12 and at a maximum 36. When you create a strategy, try not to set more than three strategic objectives into each of the four perspectives. Each perspective will have its own skill base and data resource set.
This is the advice of successful entrepreneurs and leaders with 20+ years of experience, but don't take any information blindly. KPIs are very individual, depending on business goals and many other factors. Just try not to create KPIs overload, because if you focus on too many things, you will get lost and decrease the development of your company.
Key Performance Indicators vs. Targets (Measures vs. Targets)
The measure is a value that ranks the performance of a particular process, and the target is the level at which you want your measure to be. For example, the measure is the number of sales in the past month, and the goal is, for example, a thousand sales per month. The measure will show you at which level your business is performing, and the target is the desired goal. Measures and targets work together, but they are not the same thing. Measures are setting the proverbial bar, and targets are encouraging your employees to jump over that bar. KPIs are showing you how above or below your target is your business performance.
Measures are there to quantify what's been done, and targets are there to determine how much you want to get done. And KPIs? They exist to show you if you achieved your goal and at what level.
Examples of KPIs and How to Count Them
- Audience growth rate - New followers number for the past month divided with the number of total followers multiple with 100, will provide you with the growth rate percentage. Comparing the result with a previous month will give you a trend. Example: (150 divided by 5,000 total followers) * 100 = 3% growth rate
- Post reach - Post views divided with total followers and multiplied with 100 will provide you with the post reach percentage. Example: (300 divided by 6,000 total followers) * 100 = 5.00% post reach
- Virality rate - Shares divided with impressions multiplied with 100, equals the virality rate percentage. Example: (100 shares divided by 1,950 impressions) * 100 = 5.12% virality rate
- Average order value - Total revenue (per year) divided with the total number of orders within the given timeframe (per year) equals average order value.
- Card abandonment rate - The total number of orders divided by the total number of visitors who put something in the chart equals the cart abandonment rate.
- Conversion rate - Goal completions divided by the number of people who had the opportunity to complete the goal equals conversion rate.
- Net profit - Net sales minus costs of goods sold equals gross profit.
- Average profit margin - Gross profit divided by net sales equals gross margin.
- Cost per acquisition - Marketing expenses divided by the total number of customers equals CPA.
The Final Verdict
Many people are discussing if the KPIs are outdated or if they are even beneficial for the business and companies. The truth is that they can be both profitable and destructive, depending on how do you use them. KPIs are incredibly powerful tools for tracking how your business goals are developing towards your goals. If you want them to be beneficial and relevant, set the benchmark for each KPI, so you know exactly where you are according to your goals.
KPIs will provide you with the right focus for your company and team, so all employees work together towards achieving business goals. If your business isn't performing well, KPIs will show you at which level your performance is currently, so you can decide on what actions to take to improve the performance.
But if your KPIs are poorly defined, overwhelmed, or used in the wrong way, it can only damage your company. Be sure to carefully follow the rules and avoid common mistakes described in this article.