KPIs aren’t just about evaluating past performance
Many companies follow KPIs as a way to predict performance. However, to truly harness the predictive power of KPIs, you need to map how the KPIs of your key stakeholders fit into each other and, ultimately, into financial performance.
Senior management teams are very accustomed to using KPIs (key performance indicators) to track recent business successes. These metrics are used like report cards, providing information on how things have gone over the past year. Used this way, KPIs are retrospective and, as one executive described to me, “just a bunch of numbers.”
But a properly constructed set of numbers offers much more than a rear view of performance. These metrics can become a powerful and nuanced tool for predicting upcoming changes for your business.
The secret? It’s all in the mapping and the measurement intervals. Let me explain.
Start with success
The end goal of any business is survival and growth. This requires the support of many stakeholders, the ones at the end of the line being business owners or investors. I say “end of the queue” because all the effects that occur inside and outside a business determine whether the business shows a return on investment.
What you get is a string of predictive numbers. If a company keeps its employees happy, you can predict that this will result in an effective relationship with suppliers. And then, effective relationships between employees and suppliers generate great results for customers. Happy employees produce happy customers. And effective relationships with these three stakeholders generate results for, you guessed it, investors – at the end of the queue, as I say.
The full predictive power of KPIs is unleashed by early monitoring relationships.
One of my clients is a business owned by a holding company. It manufactures “grinding media” – large metal balls and rollers used in the mining industry. The grinding racks are placed in rotating barrels, thus crushing the rock into smaller pieces. As a corporate strategy consultant, I helped the management team build a predictive set of KPIs.
We started by identifying the main stakeholders of the company. There were four of them – employees, suppliers, customers and the holding company.
The next step was to examine the relationship that each key stakeholder group had with the business. It’s two-sided, of course – the company wanted something from its stakeholders in exchange for what they wanted. In the case of employees, for example, the company wanted staff to stay in the organization, which is why KPIs were developed around staff turnover. For their part, the employees wanted to be paid well. A map was therefore developed to compare the company’s reward system to industry standards.
In total, seven KPIs have been developed for employee relations, including safety measures and working conditions. Eight KPIs have been designed for customer relations. Five of them were about what the company wanted from customers – measured in terms of revenue, gross margin and market share – and three were about what customers wanted from the company. These included KPIs regarding product quality and customer service.
You can see how it would continue in the case of the suppliers and the holding company. In total, the dashboard contained 21 KPIs.
To fully appreciate how one KPI affects another, it is necessary to map the relationship between the KPIs themselves.
It doesn’t require anything more than a whiteboard or flipchart and pen. We started by designating the end goal on the right side. The aim was for the holding to invest funds in its crushing subsidiary. Working from right to left, we looked at what would create this result. It was guided by three KPIs: profit, return on capital employed and net cash flow.
These in turn were driven by the aforementioned metrics describing what the company wanted from its customers – revenue, gross margin and market share. These were determined by KPIs corresponding to what customers expected from the business (product quality and customer service), which in turn were determined by KPIs for vendors and employees.
When completed, this cause and effect diagram, shown in the graph below, clearly showed how causes on the left of the diagram produce effects on the right. It also clearly demonstrated how poor employee relations fueled the model and ultimately affected the holding company’s investment up or down.
Setting the measuring intervals
The process shows how a KPI dashboard, when viewed in two dimensions as a map, rather than one dimension as a table, provides a predictive model of performance. The last step is to make sure that you have the KPI measurement intervals that you need.
A measurement interval is the time between readings on a KPI. If, for example, I only measure employee satisfaction through an annual survey, that won’t be useful as a predictor of monthly employee turnover results. The information is being collected far too late to be used as a predictor. You would need at least monthly employee satisfaction results to be able to predict whether employees are considering quitting.
So the next step for me and the management team of the company was to work from right to left by assigning measurement intervals. The holding company decided on the amount to invest annually. But it was driven by monthly readings on earnings, return on capital employed, and net cash flow.
Now this is an important point. Once the team and I set these KPIs at monthly, we realized that all the readings to the left in the cause-and-effect diagram that fed them had to be at least monthly to be useful. They could be shorter, like in the weekly, but not longer.
Predict the future of your business
Many management teams consider the production of a KPI dashboard to be a dry and boring exercise. Considered to generate a “bunch of numbers”, it most certainly is. What they don’t like are the dynamics that exist within any set of KPIs.
You expose this by first identifying the key stakeholders in your business and then tracking the impact of one group on another. By deepening and combining the cause and effect relationships between KPIs with measurement intervals, you have a golden opportunity to take the pulse of your organization’s performance.
Your dashboard thus becomes a dynamic representation of how your business will thrive.