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Determining Your Company’s Key Performance Indicators
A question frequently asked by businesses of all sizes is what should my Key-Performance-Indicators (KPIs) be and how many should I have? They often look to other companies in their industry including suppliers and customers to see what they may use to run their business. Frequently, they are fraught with frustration by the lack of data in the public domain.
Fortunately, you don’t need to look to outside data sources to determine the best KPIs for your business, division or department. The identification of KPI’s begins with defining the organization’s strategy. One of the most effective frameworks used in strategic planning is called Objective and Key Results (OKR). Using OKR you can ascertain what is most important to the organization and focus the energy on a handful of KPIs that you know will drive results.
What is The Objective and Key Results (OKR) Framework?
The origin of most modern management frameworks starts in the industrial revolution with the likes of Frederick Winslow Taylor, Henry Ford and Mary Parker Follet, where the focus was on the systematic measurement of output and how to get more out of workers. Standing on the shoulders of these great thinkers, in the 1950s, Peter Drucker developed the Management-By-Objective (MBO”) framework. MBO gained popularity in use through the 1960s and 70s. The OKR framework evolves the MBO methodology by combining traditional management and goal-setting approaches, like MBO, with the mnemonic SMART. Initially created in the 1970s by the leaders of Intel and Oracle, OKR gained significant popularity after it was introduced and adopted by Google through investor John Doerr, who still uses it today.
The OKR framework is a collaborative framework that supports goal setting by encouraging focus, alignment, accountability and stretching throughout an organization. Working through the OKR framework an organization defines its Objectives, and the metrics in which the Objectives will be measured to determine if the Objective is meant. The OKR Framework is transparent and ensures alignment between the different functions of an enterprise.
The OKR Formula
Starting at the top of the organization, Objectives are the desired goals of the company. It defines the direction in which the organization is headed so that all resources can be focused on their success. The senior executives of an organization need to answer the question: “What is most important for the next 3, 6 or 12 months? A typical OKR framework has only 3-5 Objectives which are significant, concrete, action oriented and ideally inspirational.
Key Results are how the Objectives are measured and are used to align resources during the journey to achieve the Objectives. Key Results must be SMART (Specific, Measurable, Achievable, Relevant and Time-Based). A good way to think of which Key Results to use as to ask the question, “As measured by…” after stating the Objective. For example, the Objective may be for an organization to become a market leader within its industry. A Key Result of the Objective can be measured by hitting 10% sales growth per year for the next 5 years.
Using OKRs to Derive an Organization’s KPIs
Armed with the knowledge of organization-wide Objectives and Key Results, the process can be cascaded down to departments and divisions who can set their own OKRs to meet or exceed those expectations. The KPI’s throughout the organization should cumulate in achieving the Key Results derived from the OKR Framework. Frequently the key results at the executive level become the Objectives at lower levels.
Companies within the same industries may have similar or identical KPIs, but only looking externally to find appropriate KPIs for your organization will most often lead to misguided results. For example, what if the comparison organizations do not care about the environment and have a sole focus on bottom-line results? Adopting their KPIs could create unrealistic expectations and lead to burn-out and failure.
As a rule of thumb, for any tier lower than the C-suite, about ½ of their Objectives should be cascaded down from above and ½ bubbled up from them or below.
WARNING: Beware of Unintended Consequences and Stay Flexible
KPIs that are only chosen to increase volume or efficiency may increase the risk of adverse decision making in order to meet the metrics. For example, in the 1970s Lee Iacocc, then the CEO of Ford, set out to challenge low-cost foreign rivals through the development of a new budget-priced subcompact. He set out the following Objectives for Ford’s engineers:
- Development of a true sub-compact platform in both size and weight (must be less than 2 thousand pounds)
- Have a low cost of ownership (price, fuel consumption, reliability, etc.)
- Have clear product superiority (appearance, comfort, features, etc.)
What can be clearly identified as missing above today, is the lack of a quality component such as safety. Because of that, the Ford Pinto went down in history as being known as a firetrap having killed hundreds of people. The flaw, the removal of a one-pound, one-dollar piece of plastic during the design phase that would have prevented the puncturing of the gas tank during a rear-end collision in order to meet the 2-thousand-pound weight limit requirement. To prevent a similar mistake in your organization, look to create matched pairs of both quantity and quality KPIs to provide guide rails throughout the organization.
The speed of business is increasing, therefore, the importance of KPIs will change along with changes in the organization’s strategy. The OKR framework should be revisited quarterly to throw out KPIs that are no longer relevant, are not working or do not make sense anymore. Frequently, an organization starts out with too many KPIs and then works that down over a 3-12-month period as they find what works best for them.
By following the OKR framework an organization can set long-term Objectives that can be measured and tracked through its Key Results while focusing its resource to the areas that will likely ensure the greatest success. KPI’s derived from Key Results will ensure that when deviations from expectations occur, mitigating measures can be enacted.
The OKR Framework is fluid. At least quarterly, and during times of market stress or enhanced opportunity, organizational leaders should revisit the OKRs to ensure they are still relevant and update as necessary. By defining clear goals, every member of the organization can focus on, and work toward, the most important goals. OKRs keep everyone away from distraction and boost collaboration since every team member is well-informed and understands the priorities.
The following article was originally published on FPAexperts.com and has been republished with permission.