After considering how Key Performance Indicators link to corporate objectives, now we come to the process of writing down KPIs in a KPI template.
For each KPI, there should be:
- KPI ID
This unique identification number helps keep track of indicators and facilitate automation systems
- Indicator name
This is a short name which explain clearly the gist of the indicator
- KPI owner
This identifies the person/department responsible for delivering the performance against this indicator.
This is a more technical aspect of designing KPIs. Organisations need to carefully evaluate the strengths and weaknesses of different measurement instruments and pick the most suitable one. The following aspects need to be considered:
- Data collection method
Depending on the nature of the value driver for which you are determining KPIs, you may use methods that yield more qualitative data than others. Although quantitative data is easier to quantify, rich and qualitative data can generate invaluable insights and contexts.
Some popular methods are: data tracking and collection systems, surveys, questionnaires, in-depth interviews, focus groups, external assessments, observations, peer-to-peer evaluation.
- Source of data
Organisations need to identify if data is readily available for collection and if the source is reliable. In case there are barriers that may challenge the validity of data, you may consider an alternative method or combine different methods together.
- Formula/Scale/Assessment method
This dictates how performance levels are determined or how data is captured. For quantitative data, it is possible to apply formulae (e.g. net profit margin, ROI) or scales; while for qualitative data, you need to identify the assessment criteria.
Some popular scales being used include Nominal, Ordinal, Internal and Ratio. In addition, the Likert scale which measures the extent to which respondents agree or disagree with statements, is also common.
You need to think about how often KPIs are collected and this depends on the nature of each KPI. For instance, internal KPIs are often measured more frequently while external KPIs (e.g. brand ranking) may only be available once or twice a year. It is also important to consider what frequency yields enough data to answer the outlined Key Performance Questions (KPQs).
The most important rationale behind KPIs is that they lead organisations towards the set goals. Therefore, you cannot simply identify what and how you want to measure, how the performance indicator is captured without saying where you want it to go. This is the step in which you state the desired level of performance in a set time period. A good target is:
- Specific and time-bound
- Aspirational but attainable
- Based on quality information
Targets can be set as absolute (e.g. increase by 100), proportional (e.g. increase by 20%), relative to benchmarks (e.g. in the top 100 in the sector), relative to costs/budgets (e.g. reduce by 10% same level of budget).
Some advice for setting targets:
- Review historical data and trends
- Take into account fluctuations in performance, e.g. peaks, troughs, seasons
- Consider global, national, local targets, best practice benchmarks etc.
- Take into account cause-effect relationships
- Consider any dependence on other factors
When certain KPIs hit or miss the set targets, there are colours, known as “traffic lighting” to indicate the levels of performance. Hence, KPI designers also specify the thresholds for underperformance (Red), medium performance (Yellow), good performance (Green) and even over performance (Blue).
In the last blog article of our series of 5 on KPIs, we will discuss some final considerations before implementing KPIs.
Click to read the previous articles:
- Why we measure business performance and caution points
- Key Performance Indicators: Definition and examples
- How to build a KPI template (part 1)