THE SCIENCE ON KPI CONSTRUCTION
I found an article in LinkedIn regarding to a lot of people is confused with target and KPI, for the writer the differences between both concepts are so important and it should be clear for the people under her/his charge.
Looking for more details about it, some writers explain the differences and how we can identify each one, however I think that here we have three view points to understand:
- Aim sponsor. According to business needs they establish the goal for all team
- KPI designer. Team with focus in the performance follow up
- Workforce. Team with focus on production or commercial areas.
In order to be clear, we can put an example related to financial institution:
- Aim: Boost the sales as double of previous year
- Target: 100,000 loans
- Sales force: 1,000 sale agents
In this case for aim sponsor, the “double in sales” means a challenge and message for the company based on different analysis (financial, operational, legal, market, etc.), this message is not touchable for workforce, but with it, the board try to align the team at the same boat.
Usually the finance department is the source for the target (100k loans), however this figure can not be communicated to a sale agent as goal, that’s why this target is divided among the number of sales team, and follow up time (month, weeks, day); there we find a generic target that is reachable for sale agent. (2 sales per week).
Considering that all agent makes the target of 2 sales per week, the original target should be overpassed, it sounds easy and simple “last year a sale agent issued one loan and this year they have to make two per week”, you do not need a complicated KPI with many metrics.
If you consider that your production machine works as mentioned above your business never reach your business goal, in this case as sample you can put in mind the following aspects:
- Sales agents that production level is higher than 2 sales per week
- Sales agents with 0 sales
- Rejection rate (% of applications are rejected)
- Market saturation
Therefore we have several variables that need monitoring, there it the reason to built a KPI where the generic target is convert to a specific target by each sale agent, for example one agent who makes 3 loans, for this week he has to make 5. (It is no the double) and maybe it could represents a big challenge for the agent (take care with it), the specific target should be challenger but reachable, but the you have to ask more due to vacants and agents with 0 production.
When you talk we the people who design a KPI (IT team), they are so happy adding since the beginning all metrics and post the KPI was created and distribuited ask for adding a new metric is the worst requirement that you can make for them. A KPI must have a basic metrics and according to target it should be change because the sale force have to aligned to it, also a KPI with a lot of metrics is no useful for team, they never see all metrics and it could be produce confusion.
Given that, a KPI should be have the following metrics and aspects:
- Basic metrics
- Target progress
- Metrics related to target
- History to identify out layers, seasonality and trend
- Sighs for low and high performance and how it could be impact on bonus (use some traffic lights)
- Metrics with simple to understand and easy to calculate
Remember the following point as aspects to check before put a KPI in production environment:
- KPI without targets metrics –> Team will not be aligned with the goal company.
- KPI without commission metric –> Sale force will not see/use the KPI
- KPI with numerous metrics –> The KPI will no useful for the team
- KPI with complicate interpretation –> metrics not easy to understand or calculate means a not confident KPI, mainly in metrics related to commission.
According to the level you can built a KPI or dashboard, both tools are not the same, the KPI has detail about the progress for the low level of company, meanwhile the dash board give us a quickly view with charts the status of the business.
A final comment, taking the initial consideration regarding to the difference between goal and KPI, for people in a management position is helpful to understand the difference between these two, but my humble opinion thereby referring the work force is resumed in the following expression: “KPI with my target is the only tool that I need to work”, the difference is no needed.
I wish this information makes sense for experienced people, and on the other hand for people making a KPI, I hope it to be useful, but if you want more info or any kind of support please feel free to contact me.