Strategies change. No doubt many organisations are right now setting their new three-year plan for how they'll win and succeed. But, management accounts and key performance indicator (KPI) decks often remain constant and unchanged.
One organisation recently announced its new five-year plan with bold intentions for pivoting the business into new markets with revised products and a commitment to the ESG agenda – but their forecast, accounts, and dashboards look exactly the same as they did last year. And the year before it. And the year before that. They've not changed their KPIs, so when they want to review progress against their plan, they don’t actually have the information they need to track it.
Equally, dashboards might all paint a positive picture with great looking results – but the organisation does not actually move any close to achieving its real strategy. We’ve seen lots of businesses (Kodak is an oft-cited example) lulled into a false sense of security by having dashboards reporting a positive picture based on strong revenues – when the actual strategy of the business was to pivot into new markets or products rather than maintain current revenues.
We've seen another organisation who have a strategy focused on 'innovation' wrongly celebrate the volume of output from a factory since that was the metric that was being tracked and reported – rather than something more focused on actual innovation, such as the quantity of successful new product launches. The problem is how easy it is for people to end up valuing the metrics that they're measuring rather than measuring the metrics that they value. So, how do you ensure that your information has the right focus?
Three tips for selecting metrics
Every organisation needs to prioritise different metrics, depending on their circumstances and goals. But you can start to select the right ones for you by asking these key questions. Are your metrics:
1 Aligned to your strategy?
This seems obvious but is so often missed. Lots of companies have a strategy focused on 'growth' – but is that growth of revenue or profit; of customer numbers or average customer spend; of product range or of repeat orders; of existing geography or new territories? All of those are valid strategies– but each will have a different KPI and it's unlikely to be only revenue or profit. So, pick a KPI that actually aligns to what you're trying to achieve – otherwise you will be flying blind.
2 A mixture of leading and lagging?
Lag indicators track results happening now or in the past: such as revenue, headcount, customer sentiment. Lead indicators track a current activity that will change future performance: such as hours spent on learning and development; advertising spend; customer enquiries.
People think lead indicators are hard to record. They aren’t – but the tricky part is picking one that will definitely impact future performance. For example, we might say that a good lead indicator for a business consulting practice is the number of coffees that team members have with current and potential clients. If the number of coffees goes up, there are presumably more interactions with organisations about their business issues, and it's likely that future results will improve as you will win more work in the future. But that can’t be guaranteed – having coffee with a client does not necessarily lead to new project wins.
So, they are fallible – but lead indicators are still useful for providing a view of likely future performance and hence an early warning to take corrective action if needed.
3 Appropriately spotlighted?
If you bury your most relevant metrics amid lots of 'noise', they will not get the appropriate level of attention. I worked with a business many years ago who had a strategy focused on improving profitability. They tracked profit – but also tracked 100 other KPIs. The metric always in the spotlight - in board packs, in internal newsletters, in presentations, in employee awards – was always revenue. The spotlight wasn’t on margin or profit – and results suffered. People started to value revenue over margin because revenue was in the spotlight, and profit was in the background.
Have a look at those three aspects of KPI selection first before asking whether you have the data available to underpin those metrics and whether it's reliable. There may be work to do on both of those fronts – but lack of trusted data does not make the KPI selection wrong. It only means that you will have to embed new processes, systems, or behaviours to capture trusted data which you know you need to measure a metric that matters – rather than poor quality data negating the appropriateness of the metric you are trying to track.
Just don't stand still
We strongly encourage organisations to review their KPI selection regularly, and certainly whenever there is a change to strategy or plans. That way your metrics will always be relevant and pointed at what you really value – meaning that you can have proper visibility of your progress towards achieving your goals rather than relying on gut feel.
As an added benefit, you may find that reviewing your KPIs leads to a reduction in the amount of reporting you collate (but not necessarily the amount of data you capture). Refining your KPI selection can remove a host of unnecessary reporting work for finance. It will also help you to build a strong historical track record to 'back up' your story in the event of a sale or IPO.
For more insight on selecting KPIs and effectively following the guidance above, Simon Davidson.
