Strategy, Legal & Operations

Are KPIs really working for your business?

There’s few successful businesses that don’t use some form of key performance indicator (KPI) system. Used skilfully and correctly, KPIs can drive a business towards growth and continued success.

But used incorrectly and without thought, they can drive a business into the ground – and even lead to issues with staff turnover when people become unhappy with the requirements placed on them.

Here are some problems with KPIs. See what you think. How many are affecting your business or workforce?

1. KPIs are a layer of abstraction that measure the past

You don’t drive a car by looking only in the mirror, so why do businesses only use KPIs that show measurements taken from past data?

It’s true that there’s much that can be learned from the recent past, or even historical data, but a modern business is able to make better use of software to produce KPIs and dashboards that are linked to data as it’s being generated right now. This kind of approach lets you be responsive within your business, rather than merely reactive.

How many of your KPIs rely upon data that’s weeks, or even months old? How can you change that situation?

Using KPIs in the wrong way can hold your business back

2. KPIs can be a straitjacket

This is less of a problem with the KPI itself and more a problem with how they are interpreted by management. Let’s say the sales department is suddenly underperforming. As the manager of that team you speak to staff and discover a simple explanation: a competitor cut their prices, making it harder to make sales.

The natural response would be to undercut that new price, or perhaps switch the team’s focus to different products to make up the shortfall. But, sadly, the KPI that measures them isn’t dynamic. They only measure performance in the narrow terms of the existing products.

And because you and your team of sales staff do not want to fail your KPI measurement, you abandon the sensible plans outlined above and instead plough on in a futile task of selling against a competitor’s suddenly superior offering.

Not only does this kind of approach affect business but it also profoundly affects staff morale.

How can you avoid this happening in your business? Wouldn’t it make sense to build flexibility into your KPI? Or even to be able to abandon it and apply a fresh KPI when needed? If you have up-to-date data and dashboards, this becomes easier to do without suffering any disruption.

3. KPIs can’t measure the many intangibles

KPIs are terrific when it comes to measuring things that can be expressed in monetary values, or other kinds of figures. Everything else? They’re less good. They can’t measure corporate culture, for example. They can’t measure morale. They can’t truly measure happiness.

True, you can set a KPI for your human resources staff so that, for example, they improve moral by a tangible amount. But that’s still not really examining the intangible realities that exist in your business on a day-to-day basis.

An overreliance on KPIs just isn’t good for business. You need to know their uses – and limit them to situations where they will be effective.

Don't get left behind as far as your data insights go

It’s worth taking a closer look at your KPIs and what they mean for your business

4. KPIs tend to originate in the finance department

Businesses are profit-driven, of course, and this means many KPIs either originate within the finance department, or at the very least are reviewed there in order to determine their usefulness. However, as with point three above, is it really true that everything you should measure within your business can be measured in terms of dollar (or euro/sterling etc) amount?

Even if you’re not measuring the intangibles, can a KPI focused on a particular profit goal really measure the performance of a customer relations staff member, for example, who might encourage a customer to come back to your business a year later in order to place a big order?

How can you ensure your KPIs deliver profit – yet avoid making them too focused on the hard lines of income?

5. KPIs are often generated in an entirely unscientific way

Put simply, how do you know you’re measuring the right thing – and that the methods you’re using to measure it even make sense?

The goal of KPIs is to directly initiate responsive action if the results are not what they need to be, but if you’re measuring the wrong thing then you’re going to respond in the wrong way too.

How do you even choose a KPI in the first place? Many managers fall back to what they were told to do in business school, or they measure data points that have historically been measured in their industry. These must be good – right?

Who would ever challenge received wisdom – aside from those guys down the street who have the record profits because they’re doing something new?

Even worse, some KPIs are created based on “gut feeling”, with people saying things such as: “Well, I’ve worked in the industry for a decade and I know that we need to measure these data points.”

Is this really the best way to undertake business? Does a KPI have its own KPI to measure its effectiveness? If your business isn’t experiencing the growth it requires and all your KPIs are apparently reporting good results, then isn’t something profoundly wrong somewhere?