“KPI” (short for “key performance indicator”) is a term that is quite popular in business parlance; some would even call it a buzzword, but I object to that label. A buzzword, as defined by Webster, is “a word or phrase used by members of some in-group, having little or imprecise meaning but sounding impressive to outsiders.” In that case, then, KPI is definitely NOT a buzzword. Key performance indicators are measurements of a company’s progress in achieving performance goals; therefore, “KPIs” have great value and are precise, with substantive meaning, particularly to organizations that want to improve processes and succeed in achieving business objectives. Myth busted.
While I’m at it, allow me to bust a few more KPI-related myths.
Myth: The reason to track KPIs is to have a fancy dashboard. KPI dashboards can be wonderful tools for informed decision making and organizational transparency, assuming you are measuring the right things for the right reasons, but the primary reason to track KPIs is to measure business performance and gauge if process improvement is needed.
Myth: It’s okay to use the same KPIs that everyone else is using. When choosing the KPIs to measure your process, the wide variety of possibilities—indicators for capacity, efficiency, effectiveness, productivity, quality, compliance, competitiveness, profitability and more—might be intimidating enough to cause decision paralysis. Which one of the dozens of possibilities should you apply to your process?
Actually, determining the type of KPI that is relevant for your business process becomes clear when you define the objective of the process. Unfortunately, many organizations haven’t mapped their processes at all; they know they have a problem, but they aren’t sure why their processes are broken. If this sounds familiar, start with a process of discovery: map your process and identify any gaps. What are your problems today? What failures are you trying to prevent? What results are you trying to improve? By identifying these, you will have the information required to introduce value added KPIs relevant to your processes.
Myth: Don’t bother measuring the old process; you’re going to change it anyway.
Establishing baseline measurements for a process is an essential step, not only to verify your understanding of the gaps, but also to measure improvement as changes are made to the process. If you don’t know where you are starting from, how do you know if you are making progress? In the case of some business process improvement initiatives, we find that organizations haven’t been measuring their problem processes at all. We always start by developing a baseline, including establishing systems to measure the flawed process, even if it entails investment on the front end. Having a baseline is that important to the BPI effort.
Myth: The more KPIs you establish, the better.
Although most organizations don’t use enough KPIs, it is possible to overdo it and introduce inefficiency by having too many KPIs. This can happen, for instance, when a process is over-engineered to measure KPIs, and the measurement activities themselves become roadblocks, creating inefficiency and negating the whole point of process improvement. Having a KPI for the sake of having a KPI is a redundant exercise. Unless a KPI is giving you valuable information that is relevant to that process, you are absolutely wasting your time in measuring it.
Myth: Once a KPI, always a KPI.
Just because you used a KPI in the original process doesn’t mean it’s valid and useful in an improved process. Take a common accounts payable process at Company XYZ, for example. Company XYZ employs AP processors/clerks who key in invoices all day long everyday, and that’s all they do. A key KPI for this process is how many invoices are processed per day, per person. However, if Company XYZ automates this front-end AP process, the original KPI is no longer valid. Instead, a new KPI is needed, such as “how many invoices are being ingested into the automated system and going through the process the first time without having to be touched by a person?”
Myth: KPIs can be measured once a year.
To be valid and useful to process improvement, a KPI must be a measurement that can be assessed consistently and regularly on an ongoing basis.
Myth: KPIs are all about numbers, inanimate and harmless.
The process of establishing KPIs is very much intertwined with the change management issues that come into play in any business process improvement effort. KPIs aren’t just inanimate numbers; they can impact real people in real ways. Let’s return to the example above and suppose that the AP clerks received bonuses for exceeding their target number of processed invoices. When Company XYZ automates this process, the clerks not only lose this bonus system to which they have become accustomed but also must change roles entirely. That’s an extreme example, to be sure, but the point is that any discussion about measurement can be perceived by team members as a threat, even if it’s just a threat to “the way we’ve always done it.” These sensitivities must be anticipated, acknowledged, and handled carefully for the business process improvement exercise to succeed.
As mentioned above, an important step in establishing valid and useful KPIs is identifying gaps in your process. You can read more about that in my next blog, “Why Gap Analysis Is Not for the Faint of Heart.”
Authored by Lynne Drea