How quickly can you tell if your business is doing well? How easily do you or your employees know if they have had a good day or a good month? How well does your business respond to highs and lows in performance? And do KPIs in your business help you evaluate its performance frequently enough to enable you to make required adjustments, guiding you constantly to achieving your objectives?
KPIs, if selected and designed correctly, help keep overall business objectives front of mind and at the centre of decision-making. If you are one of the many businesses where KPIs aren’t as effective as they should be, here are 8 reasons why:
1. They are complex and difficult to explain
Have you come across situations where people have struggled to explain a KPI to you? And more crucially, have you found yourself struggling to understand what the KPI actually implies?
Well, complexity is one of the identified reasons why KPIs don’t work in many businesses. There are instances where businesses incorporate too many factors mathematically into a single KPI, making it difficult to understand overall performance. Consequently, complex and difficult KPIs lead to performance charts that are either insensitive or hypersensitive, masking or exaggerating events and improvements, making the KPI less impactful. At the same time, there are instances where too few factors are considered, rendering the KPI irrelevant.
Typically, you should be able to explain a KPI, and what it is telling the business, in 10 to 20 seconds and interpret a KPI performance chart in 3 seconds.
2. They are unreliable and inaccurate
Do you recall instances where you encountered hesitation when asking if the results reported were correct? What about times when data that were reported a few days ago had now changed? And the time when you questioned why the data indicated declining performance, and the respondent blamed inaccuracy of data?
The prospect of finding KPI reporting inaccurate and unreliable is troubling for any business leader. It should be of great concern if you continue to find errors or results that change upon questioning, or results that the team does not believe in.
KPIs that involve excessive manual processing and calculations, from data entry to calculations, are prone to errors. KPIs that rely heavily on manual processing or manual upload of data can also cause reliability issues, since there may be instances where routine KPI reports may not have all data included. And finally, sometimes having a different person do the reporting makes the data inaccurate. This could be due to the usual owner of the KPI report being away.
Any reason that makes a KPI unreliable or inaccurate ends up making the KPI less relevant. It also introduces a culture of ‘second-guessing’ at the leadership level and slows down decision-making. Such situations can be compared to driving a car with a faulty fuel gauge. The chances of running out of fuel or stopping too often to refuel are both equally detrimental for efficiency.
3. They are difficult to access
How many times do you search for KPI reports before asking your team where they are? And even worse, how many times does the responsible KPI lead not know where the report is? And how many people in your business generally know how to check the performance of KPIs?
Accessibility of KPIs is a challenge for many businesses, more than what many estimate it to be. KPIs often rely on calculations and data sets, and for businesses without sophisticated reporting tools, it makes sense to keep the report tucked away in a computer, avoiding the risk of corrupting data or the formulas.
I am sure we have seen KPI reporting files getting corrupted or formulas accidentally deleted. But access to KPI reports can be an issue for businesses with sophisticated reporting tools. With licencing issues or even with the limitation of staff to be able to use the reporting applications, reports may be restricted to a handful of skilled individuals.
4. They lag the business
Do you recall a time when you asked for KPI performance data and you were told it wouldn’t be available for two days? Or if the report did arrive on time, it contained data from two days ago?
You cannot drive forward looking at the rear vision mirror! It may be useful for reversing and for staying still but certainly not for progressing forward. Since a KPI is important for the business, having it reported with old data diminishes the value of reporting, and gradually, if not addressed, the KPI loses relevance for you and your team. In some industries though, one-day old data is acceptable, but there are more scientific methods to determine if one-day old data is actually acceptable. An additional consequence, other than the KPI losing relevance, is that people will begin to assume outcomes and make decisions based on outdated facts. This has an almost equal probability of failing as succeeding.
5.They don’t stretch the team
It is rarely the case, but have you come across KPIs that are consistently indicating favorable performance? What is the typical response from the owner of the KPI? What has been your response?
While attaining good KPI outcomes is excellent, the question to ask is if the team was or is being stretched enough? Is there more benefit hiding behind a lower expected outcome? More critically, it warrants an evaluation of why the KPI is met and what reasons others aren’t. Is it because there are more resources? Is it because of the simplicity of the KPI? And extending this, based on responses to determining whether business resources are excessively biased towards KPIs performing well. A business truly succeeds in the long run when it is successful in all KPIs, not just a handful.
6. They are difficult to implement
Have there been instances where KPIs have been established, only to realize that the data required to measure performance isn’t collected or the business system is unable to deliver the data as required?
There may be instances where new KPIs are required in the business; however, sometimes there will be situations where the required KPIs cannot be developed as the data doesn’t exist. For businesses operating with a digital system, these changes can be easy if resources to enact the change are available.
This assumes the requirement is able to be incorporated in the system. For businesses with manual systems, adding new KPIs can be challenging and costly, and even more so for businesses without a method to properly collect, store and report data, which often is the case for growing businesses in the construction industry as the need for collecting, storing and reporting data doesn’t exist when they are a smaller business.
7. They differ by function
Have you found yourself pausing when saying you would like the KPIs to trend up, since in some instances up could imply deteriorating performance? Have you tried connecting dots between functions but couldn’t since KPIs were categorized differently by function? Have you struggled to define the overall outcome on the business since the KPIs did not easily piece together?
It is very common to see some KPIs trending upwards to show improvement while some trend downwards to show improvement. I recommend clients standardize their charts so that improvement always goes upwards. Color coding is another useful method. The fundamental reason in this category for KPIs not getting used in business though is the absence of flow. Being able to seamlessly and visually connect the KPIs to the overall performance of the business is key to letting KPIs be an integral part of the business. Imagine if all charts point upwards for improvement. Seeing this will give you assurance within a few minutes that the business is making progress. This is all the executives and the employees need to know, in the time they need to know it. Mixing upward-pointing graphs with downwards ones doesn’t allow people to easily connect the dots, and it’s tempting to move on to more pressing or visually obvious matters affecting business.
Grouping or categorization of data for reporting is also key in the visualization of the KPIs. For ease of use, KPIs need to be grouped similarly, in a manner that depicts the flow. If work is grouped by projects, then it is good to depict the performance of KPIs consistently by project and not have some KPIs report by project while others are by names of project managers or customers.
Standardisation is all about having a method to quickly communicate how the KPI is performing. The less time looking at the chart, the more time you have to work and improve the KPI.
8. They trigger no action
This point doesn’t really deal with the KPI itself but the behaviour triggered in the business to respond to the performance of the KPI. What is your response when a KPI performance is down-trending? How does the rest of the team or your superiors respond? Does it only get reported or is there discussion that takes place? And what is the response when the performance shows an improvement trend?
KPIs for the purpose of reporting is the fastest way to disassociate KPIs with the business. It defeats the purpose of having KPIs and makes reporting a non-value added task. Taking action and responding to KPIs, and later observing the effect on the KPI is what makes KPIs valuable and meaningful for businesses.
With the follow-through comes action plans and, more importantly, accountability. It is at this stage that the purpose of the KPI extends beyond what’s being measured to it being an initiator or catalyst for transformation in the business.
Conclusion
KPIs are an essential part of any business and help to trigger behaviors that will drive a business forward towards their goals and aspirations. But while the basic concept of KPIs is easy to understand, many businesses struggle to recognize the importance of developing, implementing and utilizing KPIs. KPIs are early warning systems used to tell businesses how they are doing and how they will do in the future.
Therefore, it is good practice to share them with employees and spend time drilling, refining and questioning KPIs – it’s these simple things that make KPI work for businesses. They can be easily ignored in the daily grind, but this is a massive mistake.
Summarizing the 8 reasons why KPIs don’t work in your business:
- They are complex and difficult to explain
- They are unreliable and inaccurate
- They are difficult to access
- They lag the business
- They don’t stretch the team
- They are difficult to implement
- They differ by function
- They trigger no action
And finally, experience has shown that it takes leadership and discipline to operate alongside KPIs efficiently and successfully.
Shivendra Kumar is the founder and director of Shivendra & Co, a business improvement consultancy that helps businesses in the construction and infrastructure sector resolve problems, remove inefficiencies, reduce complexity and uplift customer satisfaction – quickly. His blogs cover topics related to business improvement, strategy implementation and innovation.