This is a guest post from David McNutt, Parter at Navigate Management Consulting
Getting a solid handle on the performance of your business isn’t easy. End of the month reports don’t help much because they just look backwards. Effective managers need to know much more current information to make decisions that will drive business success forward.
A Key Performance Indicator (KPI) is any measure that is significant in understanding how the business is performing and it can be used in many different functions and levels: marketing, sales, operations, installation, service, purchasing, administration, net worth, valuation, etc. Defining, measuring and reporting a key performance metric requires thought and planning because a mature application of a good KPI can have enormous positive impact on the business, in the short term and long term.
Here are some things to ask and think about when you are designing KPI metrics for your business.
- What is the business question that you are trying to answer?
- To whom in the business does this question apply?
- Why is this question important?
- What actions or decisions can be taken with this information?
- Where does the data reside to answer this question?
- What is the specific measure, dimension, granularity of the information?
- Who is the target of the information and how will it be shared and displayed?
- What further questions does this KPI metric raise?
How to Interpret your KPIs
Once you have a specific KPI metric you need to know how to use it. The difference between data and information is that data are just a bunch of measurement points – think of a multi-column Excel spreadsheet with no column headers. By contrast, information collects, interprets, and displays data in such a way that it creates understanding for the recipient. So a good KPI could also be called Key Performance Information. Can it be easily understood by the recipient and can they take actions to regularly manage it? If so, the information has created a cadence of accountability that can have huge benefit.
In medicine, KPIs are called vital signs. They are the current, if only momentary, measures of a patient’s condition. As nurses monitor these signs they get information for treatment/response decisions to affect the outcome of the patient. Nurses know what they can do, what to report upstream, what expedient action might be necessary, and they can monitor the results of these actions.
In business good KPIs act like levers – measuring smaller actions that can create greater outcomes. Measurements that are monitored so that managers can make earlier decisions to affect business performance. It’s not always easy to determine which ones matter or are easy to obtain, but when you can manage the levers of the business, performance is greatly improved.
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