One of the most difficult things to understand in strategy is the key performance indicator. Lots of people have a fuzzy idea about what performance is, so it’s not a terrible surprise to realize they can’t measure it, either. Let’s take a short trip down memory lane; please recall diagnostic versus objective metrics. Goals are objective metrics. They answer the question of whether you’re there yet in the road trip of life.
If goals are the answer to “are we there yet?”, then key performance indicators are your top diagnostic measures, the most important answers to the question of “how is the trip going?”.
Previously, I discussed shatterpoints, or points in any system that are so critical that if they broke, the system would stop. These are your key performance indicators – parts of the system that have an outsized influence on the system as a whole. In the example of a road trip, there are many different things you can measure, but relatively few that will make or break your trip. If your speed drops to zero, the road trip is effectively over. If the fuel gauge drops to zero, the road trip is effectively over. If the kids run out of movies to watch in the back seat and the new movies meter drops to zero, the trip will still be fine, albeit with more complaints.
Ask yourself this when developing and understanding key performance indicators: if the number you’re measuring dropped to zero, how impacted would your business be? For example, if the number of web site visitors dropped to zero, would your business be out of business? For some companies like Amazon, the answer is an unqualified yes. For other companies like the local plumbing store, the answer is no. They might feel the impact if they’re web savvy, but it won’t immediately be game over. For most companies, if the number of customers dropped to zero, it would immediately be game over.
Each department in a business will have its own key performance indicators as well. If a department has a goal, then the key performance indicators are the critical factors that contribute to that goal. The simplest way to distill a given department’s key performance indicators is to think of them as a self-contained business unit, a miniature company within a company. If, for example, you’re an inbound marketing shop, then qualified leads are your product, and web site traffic might well be a key performance indicator for manufacturing that product, even if it isn’t a key performance indicator for the company as a whole.
The most dangerous trap a company can fall into with regard to key performance indicators is to have non-impactful KPIs, to believe something is critical when in fact it’s not critical, or worse, to believe something is non-critical when in fact the life of the company depends on it. You must take the time and devote the effort to identifying what’s really important to you and your company, or else you’ll measure the wrong things and then watch as your company’s performance tanks.
Remember, at the end of the day, key performance indicators are the ones that, if they drop to zero, you’re going out of business. Keep that in mind to help clear the air of confusion and distraction and you’ll distill out the essentials of your company, business, or organization.
Want to read more like this from Christopher Penn? Get daily updates now: