One of the most critical factors for an owner/manager to master is deciding what to measure. This key to success is based on an understand that where we focus our team does too. By carefully selecting what to measure and implementing processes for doing so easily, we direct our team’s energies.
If you need evidence that people focus on what you measure, let’s look at what has happened in public schools in the United States after testing was implemented.
The intent of testing in schools was to create an empirical way to ensure that students had key skills before allowing them to progress to the next grade. This was supposed to ensure that no child received a sub-par education. Then teachers’ raises were tied to how well their students did on tests. Schools were rated on how well the student body did on testing. School ratings made schools more or less eligible for all kinds of things, including federal funding.
Now schools work on ensuring students can pass the test even if they have a less effective overall learning experience. The only goal is to get students to pass the test.
Your areas of focus and measurement are commonly referred to as key performance indicators (KPIs). Companies spend significant energy in defining the KPIs that will deliver the results that they want. This is part science and part art. The art part is being able to anticipate what a person will do when you apply the metric and the associated consequences or rewards.
Let’s walk through the steps to define your KPIs to get the results you want.
Decide what you want people to do differently because of what you are measuring. Are you looking to drive higher sales? Reduce errors? Increase productivity? Reduce absenteeism? You need to clearly identify the goal before taking any action.
You may end up with a long list of things you want to change. If so, prioritize them, as too many areas of focus are just an ineffective as not having any.
KPIs need to be written just like SMART goals. They need to be specific, measurable, actionable, realistic and timely. They also need to be something that can easily be tracked in a reliable way.
Tracking how many sales each salesperson completes in a month is pretty easy. Tracking the attitude of people on your team is not.
Each department may need its own KPIs that are specific to what they do. All of the KPIs in the organization should easily relate to the overall direction of the company.
Tenure may play a role in KPIs as well. It isn’t realistic to expect a new employee to deliver results at the same level as a tenured employee. Be careful that your KPIs don’t discourage a new person from striving for success.
The key to getting people to take action on KPIs is to tie the needed behavior to something that people either want or do not want. Different KPIs naturally lend themselves to one or the other.
Imagine you manage a factory that requires a minimum of 75 people at work each day to meet productivity goals. You employ 100 people and things definitely work better when you have 85 of them at work. Your KPI for line workers would probably be a percentage of days worked that they needed to be present in order to keep their job. In the same factory, your managers might receive a bonus if they managed their team so that the workers’ attendance was higher than the minimum.
In that same factory, you might have a safety KPI that was the number of days that the factory went without anyone being injured. You might also have a quality KPI that measured how many units were produced without errors. Each would need to have either a consequence or a reward associated with it.
People who bring in sales are often rewarded based on the amount of business they bring in.
The hard part about KPI consequences or rewards is predicting what people will do. It helps to ask yourself if you were your employee, what would you do?
Let’s consider attendance consequences for your factory. What if being late carried the same consequence being absent? Your goal is to get people to not be late. What actually happens is people who are running late may decide not to come to work at all, since there is no difference in the consequences. Rather than creating more people who take getting to work on time seriously, you’ve now unintentionally incentivized people to take a whole day off. A better approach might be a lesser consequence for people who are late that ramps up if they are late multiple times.
Don’t forget that negative things you are counting need to have an expiration date. For example, when do absences or lates roll off of someone’s record? If everyone starts each month with a clean slate, people are more likely to be absent or late at the end of the month. This is why most businesses have the incident roll off after a certain number of days, weeks or months.
People who are earning bonuses or commissions are usually looking for the easiest route to get the maximum payout. Let’s assume you have several business-to-business products to sell. One of them is priced as a loss leader to get your salesforce in the door so they have the opportunity to sell the other things that actually make the company money. If your KPI is to make 20 sales per month, you may have salespeople who sell only the cheap product, thereby meeting their sales goal but not making the company money. A better KPI would be to upsell 10 customers on something other than the loss leader, ensuring that their goals encourage them to take profitable action.
No matter how well you have thought through your KPIs and have carefully considered appropriate consequences and/or rewards, how you explain the idea will make a significant difference in how easily your team gets on board. Here are the most common pitfalls to avoid:
Monitor progress as the KPIs are implemented. Are the results going in the direction you anticipated? While there maybe a short adjustment period, you should see movement in your KPIs within a month or two. Some KPI results will have a shorter window than others.
If the trend is in a negative direction, you may need to make changes sooner rather than later. This is an opportunity to explore what you missed during planning so you can avoid that in the future.
Most of the time the results will lead in a direction that is positive but may not be exactly what you intended. If the overall trend is positive, be cautious about make changes too frequently, as this can damage morale.
Often what happens is the change is wonderful for 80% of your workforce and the remaining 20% struggles to one degree or another. This is when you need to evaluate these situations individually.
Is the issue that this person isn’t a great fit for your organization or the position they are in? Does the person need additional training? Did the change affect how motivated they are? Are there things outside of work that are actually a bigger impact than the change at work?
As you get answers to these questions, you’ll have a better idea of how to address the individual situations.
In most cases, you shouldn’t change KPIs more than twice a year. This allows people to get comfortable with the changes you’ve requested so that they are able to feel settled again. In fact, if you make changes on a predictable schedule, many of your employees will handle the change better.
However, there are exceptions. If the change is leading in an overall negative direction, a course correction may be needed. Also, significant changes to market conditions may require a change so that your organization stays relevant. In both of these cases, the communication must be targeted so that employees understand why they are being asked to change direction again.
Your goal is to find the best things to measure. The right ones make the biggest impact to your bottom line and avoid pitfalls that are damaging to your organization. With a little focus, you can create KPIs that help your business thrive with efficiency and effectiveness.