A Frame for KPI Development Process

My M.Sc. thesis was all about developing a KPI measurement system.  In the project we helped to develop KPIs to direct cooperation in an extended organization (=partnership). I thought it would be interesting to write a post about the world of KPI development and performance measurement systems in general. A short summary of a complex and complicated issue.

How is the KPI development process like?

The process of developing and running the KPI system is divided into two phases. These phases are divided further into smaller pieces. The main phases of KPI development process:

  • Defining the KPIs
  • Measuring the KPIs

The measurement process iterates between these two. No organization is stable so the measures have to be updated every now and then to meet the organizational and strategic goals. Define, measure, redefine, measure and so on. This makes sense.

What should KPIs look like?

A company should chose measures with great care. They say that “you always get what you measure”. If the measures are not set correctly, the organization might start chasing after irrelevant activities. SMART is an acronym, which guides the setting of the objectives. Think of it as the criteria for KPI development. SMART stands for:

  1. S = Specific
  2. M = Measurable
  3. A = Achievable
  4. R = Relevant
  5. T = Time-bound

Specific tries to avoid vague and goals. Measurability makes KPIs observable. How do you track and monitor a KPI if it is not measurable? Achievability relates to motivation and sanity. Is it possible for an actor to achieve the KPI goals? Relevancy cuts out irrelevant measures. Time bound attaches goals into 4-dimensional space. Should someone sell 4 products during the next week or the next quarter?

SMART is relatively self-explanatory and it might seem obvious. However, I think it is a great tool for sanity checking. At some point things are not obvious any more.

How to use KPIs?

The function of a KPI system varies. Each company, department and organizational level have their special needs and therefore different way to use KPIs. One way to look at how to use KPIs is to look at different phases of the KPI measurement process.

The first phase (defining the KPIs) is a good place to bring hidden assumptions visible and create conversation between different organizational functions. The benefits of breaking silos and understanding different actors in the organization are obvious.

In the second phase (measuring the KPIs) a company usually uses the KPI system for monitoring and controlling. After defining the KPIs the actors go out in the field and thrive towards their goals. Management can then monitor organization’s performance, because it has appropriate KPIs in place. A company can link KPIs to individual goals. Linking KPIs with personal goals and incentives is a strong way to direct individual performance.

Thank you for your time. Have a nice day!