Guidance for Setting KPIs
Pro sports move so fast today that officials can’t always get a good view of the action, so we rely on instant replay to verify or overturn the calls on the field.
I paid for a good chunk of my college expenses officiating for softball, baseball, football and basketball games. Speaking from those experiences, without the benefit of slow motion and multiple camera angles, making the right call was always a matter of being in the right position. Likewise, as a business leader there’s no instant replay or official review to help you make the right call, which is why being in the right position is so important.
Not only does being in position allow you to see what’s happening in your business, it establishes a common viewpoint that helps everyone know if your company is winning or losing each day. Here's what that means in practice. one of the responsibilities of operational leaders is to select and reinforce the company's key performance measures.
Establishing and tracking these KPIs is akin to being in the right position. These measures must mirror leadership's view of what success looks like. When setting KPIs, these metrics must:
- Provide a clear understanding of the current health for your business, not where it was at the end of last month.
- Be aligned with both past and emerging customer expectations, and not compared too closely against industry standard or historic data
- Reflect the mantra that “good is never good enough.”
Take on-time delivery. You can play it safe and measure performance based on your customer commit dates or promise dates. That’s not a bad starting point. Your people’s performance and bonuses may even be linked to such metrics. But if that’s how your competitors are also measuring their performance, from your customer’s perspective, the best you can do is only be as good as everyone else.
What if you measured delivery performance based on the customer request date instead? Ignore for a moment your current capabilities, and your average order-to-delivery lead times. Regardless of how “unreasonable” your customer requests might be, it’s important to understand what they really want. This is one of the foundational elements of the Toyota Business System: View your business through your customers’ eyes. Don’t view it from what you can do now or how you get rewarded today. Measure your business performance based on what your customers are asking for. Then leverage that understanding to build the necessary capabilities and deliver additional value.
- What would happen if you could meet your customers’ crazy expectations, like two-day delivery instead of two weeks?
- What would you need to change to do that consistently?
- If you developed that capability, how would it strengthen your relationships with your customers and drive sales growth?
Until you seriously consider such expectations, you won’t know what’s possible.
Inventory management offers another example. Many manufacturers are happy if their inventory turns are somewhere around the industry average. We frequently hear managers say something like, “My inventory turnover is in line or at the top of my industry group. Why should we do any better?” Think about what such a viewpoint does from a cultural perspective. When a leader says the company is already at the industry benchmark and can’t improve, everyone goes into “status quo mode” and stops thinking about how to get better. The expectations of many employees are blinded by how leaders view the business.
Until you get in position and establish the right KPIs, everyone in your business won’t be able to make the best calls for your business in 2017.