The Importance of Setting KPIs and How To Do It Effectively

Research has shown that 60% of fortune 500 organisations and therefore the most successful companies use KPIs in some form or other – which should underline the relevance of KPIs to delivering high performance within a business. But, why are they so crucial and how do they help businesses to drive performance and succeed?

The Importance of Setting KPIs and How To Do It Effectively

The answer to this is that in a complex, rapidly changing and competitive commercial environment, a well designed set of KPIs act like a digital dashboard, providing the senior managers with the tools and insight to monitor performance against their goals and make adjustments which will lead to performance improvements. Arguably managers that operate without a digital dashboard of KPIs are effectively ‘driving blind’.

How to set KPIs

But setting KPIs is more than just writing down some key performance indicators on a piece of paper, it means establishing a set of KPIs and ensuring that they are implemented across your entire business, department or team – ensuring that every employee is focused toward achieving organisational goals. So, how does a manager go about setting KPIs?

Before a manager, can effectively set KPIS, they need to get hold of the company’s balanced scorecard. This will have been developed by the top managers of the business by setting out the overall mission and vision and building a strategy map – which in turn sets out the factors which drive performance. Out of this are developed high level objectives which are ‘balanced’ across financial, client, process, learning and growth goals. Smaller businesses may not have a balanced scorecard, but they will have a strategy document depicting their annual business goals and this is what managers should use in these environments to set team KPIS.

It is crucial that you use these documents to set your team KPIs as this will enable you to align your team’s performance to organisational goals, which will maximise efficiency and drive performance.

With the organisation’s balanced scorecard or strategy document in hand, the middle manager should now cascade these goals down to their team members. For example, the Department Head will set KPI’s and issues them to each of the middle managers than report to him or her. For example, the sales manager might get a financial KPI of ‘increase revenue by 10%’, the customer service team might get a KPI of increase customer satisfaction score by 10% and so on. These middle managers will them need to provide individual KPIS to their team members to ensure team member performance is aligned with the balanced scorecard. For example, the sales staff could be given individual KPIs to increase sales by 10% and customer service staff may be issued a KPI to increase satisfaction scores by 10% also.

Middle Managers are crucial for the setting of KPIS

As you can see from this approach that for KPIs to be set effectively, they must be set as part of a management cascade starting from the top down to ensure that the organisation is pulling together to achieve the same goal. Managers, at every level of the cascade, no matter how small or large the business, are crucial to ensure that KPIs are set and issued to their subordinates, otherwise the balanced scorecard system breaks down altogether.

No business is too small for KPIs

There may be a tendency to think that balanced scorecards and KPIs are a tool for large business, but it would be a mistake to think this. The levels of administration and complexity should automatically scale down accordingly to be perfectly manageable for a small business – which means there is no excuse for not using them, especially when we have seen that the majority of successful business do in fact use KPIs.