The Cardinal Sins of KPI Reporting
By: Emily Bourne
As technology continues to dominate the manufacturing world, an emphasis on data-driven decision making has come the focal point of strategic digital transformation. Manufacturers have more access to data at their fingertips than ever, but face difficult choices in determining what level of investment is appropriate for the organization. In general, we often like to think that more data will bring more transparency and, ipso facto better results. However, depending on where your organization falls along the Data Collection Continuum, increased levels of transparency bring a variety of organizational challenges. Ultimately, what truly creates sustainable competitive advantage is an organization’s ability to effectively extract valuable insights from their data. Ineffective use of the data can paralyze an organization, halting progress completely. In short, quality must be prioritized over quantity when it comes to data collection and performance management. When managing by key performance indicators (KPIs), be sure to avoid these 5 common mistakes:
1. Reactive Management
Many companies fall into the trap of looking too heavily or sometimes exclusively, at historical performance rather than future opportunities for improvement. In a sense, this retroactive perspective only presents a piece of the “opportunity pie” – any subsequent strategic development will only be based on part of the opportunity. For example, when evaluating customer focus and setting sales targets, are you looking at just your historical sales performance? If you base your sales targets on what you have sold in the past, you will miss out on what you could be selling to them. For example, let’s say you’re forecasting for Customer A for the upcoming year. Historically, you’ve reliably averaged about $5,000 per year with this customer. A reactive approach would be to forecast $5,000 or $5,500 for the upcoming year to grow the account. However, with a little research, you may discover that Customer A has 50 locations nationwide, and you’ve historically only sold to two of them – you’re therefore missing out on 48 additional opportunities within the same company. In taking a proactive management approach, you may discover it’s feasible to sell to additional locations, growing the opportunity with Customer A exponentially. Additionally, an effective and proactive management strategy requires expanding your customer base. Within your target market pool, who would you love to have as a customer and what stands in the way of establishing that relationship? Selecting high priority targets and analyzing barriers will allow your organization to understand needs of key market players on a more granular level, which can then be used to develop a measured strategy to go after them. Considering customers and/or channel partners outside of your traditional market or vertical is also a critical step in developing a sustainable customer acquisition strategy. Retaining a proactive mindset for both deepening existing customer relationships and acquiring new customers will ensure your company’s ability to adapt to an ever-changing market.
2. Tactically Driven
Additionally, many KPIs are focused too heavily on tactical delivery rather than strategic direction. The primary way we see this cardinal sin is when actions are prioritized over outcomes or measuring “activity” instead of “results”. The purpose of setting and managing by KPIs is intended to have a significant impact on the business, and therefore must be aligned with the strategic objectives of the organization. While KPIs can be extremely useful, it’s important to note that setting KPIs for the sake of it will shift priority and focus elsewhere, creating inefficiency. We often see sales teams, for example, held to activity-based metrics like the number of customer touch points (phone, email, etc.) rather than outcome-based measurements (quote to close ratio, lead conversion, account penetration, etc.). If sales reps are incentivized by quantity(ie: the number of people they call) rather than quality(their ability to establish relationships and tap into the needs of the customer), larger strategic goals of customer engagement, acquisition, and retention will suffer.
3. Lack of Buy-In
The key to successful KPI management is engagement and buy-in across all levels of the organization. While KPIs must come from the top down, all subsequent levels must be actively committed towards furthering the strategic goals of the organization within their realm of control. This means at the top, gaining buy-in should be just as much of a priority as determining which metrics to track. All too often, leadership sets well-intentioned metrics which are perfectly aligned with key strategic objectives but fail in execution due to lack of engagement. Failure to adequately outline and communicate KPI expectations, processes, and incentive systems will result in lackluster or entirely absent buy-in from critical people and departments within an organization. At a high level, planning for buy-in can be thought of through the classic 5 W’s: who, what, where, when, and why. The who and the what refer to the expectations and accountability. Meaning, which individuals, departments, and/or teams are responsible for achieving these metrics, and what specifically are they expected to achieve? Planning for when and where is also critical to outline when developing a communication plan – how often should these KPIs be analyzed (annually, quarterly, monthly, daily, hourly?), and what is the reporting structure (formal review, email updates, recurring meetings, etc.). Finally, considering the why is a critical component of driving buy in and engagement – why should teams and departments work towards this goal? Consider the way most strategy planning meeting go: on an annual basis, a relatively small group comprised of top-level executive leadership team gets together and spends a day or two setting goals and KPIs for the rest of the organization. However, given that the decisions made in these planning meetings must trickle down across all teams and individuals across the business to maximize efficacy, it’s crucial to consider how these KPIs would affect the day to day processes, tools, and responsibilities across multiple teams that are not present at the time these decisions are made. It takes an additional effort at the top level to reflect on the changes this requires through the 5W approach in order to effectively gain buy-in and align the business as a whole.
4. Delayed Recognition
Transparent measurement and timely enforcement are equally crucial in sustaining momentum long term. It’s ineffective to recognize accomplishments, address an issue, and/or provide constructive feedback after the opportunity window has closed. We often see companies that recognize wins too far after the fact, once the momentum of the success has worn off. Similarly, as it pertains to punishment, a true change in behavior will not take place if addressed too far after the original occurrence. For example, if the sales activity for one quarter is only rewarded when the purchase order is invoiced in the next quarter, the sales representative is experiencing a 3-month delay in feedback. His or her sales activity over those 3-months could have been stellar or lackluster, but the reward will be relevant to activities which occurred 3 months prior. To plan for buy-in, leadership must place just as much emphasis on establishing a process to drive engagement as they do in developing KPI metrics. Establishing clear communication, guidelines, and building in early wins are critical in gaining buy-in and placing teams on the right path to achieve high level objectives.
5. Inaccurate Data
Last but certainly not least, when it comes to managing KPIs, high-integrity data is absolutely essential. Incorrect reporting and the decisions which ultimately result is the fastest way to lose trust in the KPI management process. We recommend establishing data integrity gut-check points so that score cards can be both systematically and randomly checked for accuracy. An added benefit to these check-points is a deepened understanding of the data sources, measurement criteria, and performance metrics, which should facilitate increased engagement and critical thinking.
Paying close attention to these common mistakes can help realign your organization’s strategic direction towards a more aligned, productive, and result-oriented path. What other KPI cardinal sins have you seen? Please feel free to comment below.