Key performance indicators (KPIs) have long been a fundamental tool for a company’s management to measure performance. KPIs focus management’s attention on a finite array of statistics that are indicative of a company’s performance, and are believed to have explanatory power over the company’s desired financial results, such as profitability.
KPIs have a significant weakness, however. KPIs are backward-looking. When your KPIs are where you want them to be, everything is great. When the KPIs fall short of expectations or goals, there are problems to be addressed. There is, necessarily, an information lag between firm activities and most KPI reports.
KPIs are powerful in that they help to address information overload. Any manager has more information available, or even thrown at them, then they can possibly process in a timely and coherent manner. KPIs allow us to wrestle the fire hose to the ground and point it to where the fire is — or at least in its general direction.
Because KPIs are generally quantified (or at least quantifiable), they provide an objective tool for measuring performance of a business at all levels, from the enterprise level, to the business unit, team, department, and individual employee. KPIs serve as the basis for reporting performance, providing feedback on performance, prompting discussion over what changes, if any, need to be made to the relevant business processes or assets devoted to them, and then implementing those changes. KPIs are often used for goal setting and compensation is frequently connected to them as well.
However, if you are interested in managing proactively, rather than reactively, consider monitoring key performance drivers. Key performance drivers (KPDs) are the day-to-day activities that are required in order to produce the desired KPI results. If the KPDs are correctly identified, then, for the most part, positive results in KPDs should lead to positive KPIs.
Managing KPDs offers two great sources of value. First, you can monitor, pretty much in real time with the right tracking systems, whether employees are doing the things required for the company’s success on a daily basis. When KPDs fall short, you can intervene quickly — before the KPIs are significantly impacted. Second, KPIs can be influenced by luck (good or bad) or factors outside of the company’s realistic control, whereas KPDs are much less likely to impacted by luck.
For example, let’s say you meet your KPI on sales, but 30% of the sales for the quarter is accounted for by the largest order in the company’s history. At the same time, your number of sales calls fell short by 15% of the target. Should you be celebrating, or wiping your brow that you had a big order that covered up the lackluster performance of the sales team?
From a managerial perspective, addressing the slowdown in sales calls is much more vital to the company’s sustainable success. It’s great to get a windfall, but companies that rely on windfalls as a business model don’t last very long. While human nature tends to lead us to value the dollar opportunity lost less than the dollar actually lost, the astute executive knows that they are equal. Had the number of sales calls made hit their target, the KPIs might have been even better.
Below are some very simple examples of KPIs that might be better managed and monitored as the corresponding KPDs:
By monitoring KPDs, you are ensuring that the daily activities necessary to support your company’s goals and ultimate success are being carried out. You may, of course, discover that there is a weak correlation between your company’s KPDs and KPIs. That can actually be a good thing, as it will prompt you to identify different KPDs, and it could prompt your firm to change the activities it emphasizes.
For example, if publishing white papers has no impact on your company’s web traffic, then you may need to re-think the tactic of producing white papers, which means your resources can be more effectively deployed elsewhere.
Monitoring KPDs offers a more proactive path to management and can result in consistently improved KPIs as you are ensuring that the day-to-day activities of your company are aligned with the firm’s goals, and you can ensure that those activities are being pursued vigorously and consistently, which is the path to success.
Michael Blake is the founder of Arpeggio Advisors, a boutique business appraisal and corporate strategy advisory firm based in Atlanta.