Creating and operationalizing key performance indicators

Every company has heard of key performance indicators (KPIs). These basic metrics — which may be qualitative or quantitative and include anything from bottom line revenue to customer acquisition costs — deliver a straightforward explanation of how efficiently and effectively the business is running across various domains and points in time.

Most companies have and use KPIs, but it is surprising how often they paint an incomplete picture at best, or an inaccurate one at worst. This is troublesome since targeting, tracking, and operationalizing decisions from KPIs is one of the most consistent and sure-fire ways to positively benefit a company's performance.

Getting back to basics

Another way to think of a KPI is as a measure of how effectively a process has turned an input into an output. Usually, the simpler these measures are, the better. KPIs can focus on the output of a single machine or process, or ladder up to encompass a company’s entire output.

Some easy examples include:

• Pieces, units, lines per labour hour
• Cost per unit produced
• Quality yield
• Material yield
• Etc.

The most direct way to measure something will usually produce the best results. However, it’s not generally finding things to measure where organizations struggle, but operationalizing their results.

From insight to action

KPIs are of little value unless and until someone takes responsibility for turning the insight into an action. A number or qualitative response in an enterprise resource planning (ERP) platform or on a clipboard produces no value if it isn’t influencing behaviour.

At a minimum, leaders must be comparing KPIs to accepted or desired standards which represent a best repeatable performance. The KPI should roll up to a percentage performance measurement against the standard. The difference between the standard (100 percent) and the KPI is called a variance — and the ability to identify a variance in a process is precisely what KPIs are for.

An important aside about KPIs exceeding 100 percent: While these so-called vanity metrics may look good to superiors and stakeholders, they offer little tangible value in improving outcomes or driving action in the business. Worse, they’re more likely to indicate inappropriate or inadequate standards, rather than exceptional performance.

Seeing problems, finding solutions

What we can measure, we can understand — and what we can understand, we can control. Variances indicate problems in a system, process, or human resource, and managers have two major roles in measuring and actioning KPIs: First is to ensure their average process variances are as close to zero as possible. Second is to identify the problem(s) and and take action to correct it/them when they occur. Over time — as managers address problems, more clearly define expectations, and eliminate inefficiencies — these root causes should decline, and variances should trend as close to zero as possible.

Contact Us

For help identifying and operationalizing standards and key performance indicators in your business, contact a member of our Southern Ontario team.

Matt Pirie, MBA
Manager, Consulting Services
905.617.2348
[email protected]

Hussam Malek, P.Eng, PMP, M.Eng, MBA
Partner, Consulting
416.515.3866
[email protected]

Ryan Magee
Partner, Private Enterprise
416.613.3120
[email protected]