1. What is a KPI?

Firstly, before diving into why businesses should all select and monitor their KPIs, let's talk about the definition of KPIs (key performance indicators). There are many KPI definitions if you search for this term. One possible (and my favourite) definition that describes the meaning of KPIs well is as follows. KPIs are selected indicators that best measure progress towards an entity's strategic priorities. An entity can be a company or a team or department for example. Project managers can also set KPIs to measure project performance. 

It is important to note that there are plenty of useful data metrics a company can measure. However, KPIs are the indicators which are the most important when analysing the outcome you have achieved. Above all, these are the figures you will base your most crucial strategic decisions on. Moreover, from your KPI results you should be able to tell how your company and your teams perform at any given time.

We can differentiate strategic and operational KPIs. Strategic KPIs measure progress on strategic objectives, while operational KPIs measure daily performance. Some of the operational KPIs can make it to the strategic level if they tell us important insights about our strategic performance.

There are various classifications of KPIs. To name a few, we can talk about leading vs lagging, objective vs subjective, effectiveness vs efficiency KPIs. It is important that when shortlisting key indicators, the different types of measures are used in a balanced manner. This helps with getting different angles of your company's or team's performance. For instance, while lagging indicators give us a good insight on past performance, leading indicators are important predictors of future success.  Thus, when only using lagging indicators, we can easily miss early signs of under-performance.

2. Why should all companies monitor their KPIs?

#1: Cuts through the feeling of having a data overload. Think of all the different data sources available for your company right now. Can you list them all? When was the last time you looked at all of them? Were you able to make a direct connection between the figures and how your company is doing?
  With having so much data freely available, it is a no-brainer that data needs to be used to make informed decisions. Due to the feeling of data overload companies tend to however make scattered efforts of looking into their business figures instead of regularly reviewing their key data. Selecting KPIs can cut through this overload and will make your data dashboard much more meaningful.

#2: Less time spent on data activities. Focusing your data collection, analysis, visualisation and reporting efforts on a limited set of KPIs as opposed to an unlimited number of data points will save you a significant amount of time. Data collection of data we don’t use is a waste of time. So is looking at way too many data points, losing sight of what matters most. The less is definitely more when it comes to KPIs.

#3: Focuses resources on what matters. Setting KPIs which are in line with your strategic goals can help focus attention and allocation of resources on the key aspects that drive results. The relevant KPIs are cascaded to all levels of the organisation to ensure this focus does not stop at the leadership level. By introducing and communicating KPIs, employees will be aware how they can contribute to the overall success.

#4: Improves reaction time. You only need to look at 15 well-selected numbers as opposed to 100. This means much more speed and agility when it comes to identifying issues. You will be able to much quicker identify any source of under-performance and react promptly. Did your online sales, market share or customer satisfaction suddenly go down since last month? Does this mean you need to accelerate the final stages of your new product development in order to reach the market quicker? By assessing your KPI results and the status of key projects implemented, you will be able to react to external changes more rapidly.
 
#5 Helps with better decisions. Regularly monitoring your KPIs as part of a well-defined business performance management process will also help reduce subjectivity in decision making. The leadership team will see the same set of results based on the KPIs they approved together. They then make decisions based on insights derived from the KPI results instead of wild guesses and feelings.

#6: Leads to a better understanding of your business. By assessing the change in your KPI results, you will be able to better understand cause and effect relationships, such as the impact of your decisions on business performance. You will have a clear view of how your organisation and your teams are performing by simply looking at your scorecard.

#7: Helps with pitching your company to potential investors and partners. Having a well-selected and visualised KPI list with up-to-date results not only demonstrates to your stakeholders that your company is performing well but also shows that you have focus and clarity in your data management and business systems. Moreover, having robust business systems can greatly increase how much a company is worth for potential buyers.
 
These are just some of the top reasons why KPIs are essential for every business. To get started on selecting your KPIs, check out our next section on the key questions you should ask yourself to begin with.

 

3. Key questions to ask yourself when selecting KPIs

Selecting the right KPIs from all the data available can be a daunting task. Data points are showing up in most of the tools we use, analytics surround us everywhere we look. How is it possible to narrow down the long list of data points to a selected list of key performance indicators (KPIs)? Answering some key questions can jump start you when planning on selecting the right KPIs for your business.

Q1: What am I aiming to achieve by defining and monitoring KPIs?

 Before getting into the actual selection process, it is best to start with establishing what you are trying to achieve by setting up your business KPIs. There can be different reasons for each company for wanting to focus measuring on what matters most. You might want to reduce your costs around data gathering or make your performance reviews more meaningful. By discussing internally why you want to have KPIs within your organisation, you will right away get the buy-in which you will need when actually selecting the KPIs. Remember, transparency is key when designing your KPI list. A KPI known only by the strategy or leadership team will never really be considered by any of the front-line employees. And they are the ones who can actually take actions to influence the results on that measure.

Q2: What sources do I have that can help?

 In order to get some inspiration, it is wise to start with sources you either already have available or you can research. You can consider for example the annual reports of other organisations and industry specific reports as well as input from your different stakeholders. You can also look into your company’s internal sources such as the strategic plan, previous annual reports, data dashboards, and get input from leadership and front-line employees. Once you have gathered input from the above sources, you will have a long list of best practice and internal measures you can choose from.

Q3: How can I best measure the progress towards each of my strategic objectives?

 Go one by one, objective by objective and assess which figures best reflect the achievement of each. Let’s say your strategic objective is to increase market share in Europe to 30% by 2022. You can first look at the list of KPIs you have gathered as part of answering Q1 above. You then need to narrow the list down to a small number of KPIs (2-3 per objective) that will surely tell you how you are performing on this objective.

This might result having the following three KPIs identified:

• % Market share in Europe (an obvious one of course as your lagging indicator)
• $ Marketing spend in Europe (a leading indicator)
• % Customer satisfaction of customers in Europe (as a subjective measure).

You need to do the same for all of your strategic objectives, one by one, asking yourself the same question.

Q4: What data will best inform decision making?

Apart from having KPIs to measure progress on each of your strategic objectives, it is important to make sure your data covers different angles of information you will need for an informed decision making. This step is also a good check to make sure your strategic objectives are covering all important goals of your business. Unfortunately, this is many times not the case which can result in some metrics important to your business success not being regularly monitored.

• This is where balancing different types of KPIs, e.g., leading and lagging or subjective and objective indicators can significantly help.
• The value flow analysis (also known as the logic model) is also a useful tool to make sure you consider measures at the different stages of value creation. This can help in particular in case of immature organisations or in case the outcomes are likely to take long to materialise.
• Another way to check whether you are covering all important metrics is by looking at value creation from the different perspectives. For example, when would your customers say that you are performing well and how about your employees? Read more about the Balanced Scorecard perspectives for a good way to start learning about these.
• Defining your value drivers is another powerful way of identifying the most important factors that lead to business value creation.

Depending on the expertise within your team, you can use one or multiple of these methods to decide on what sort of data you should keep track of to facilitate informed decision making in your company.

Q5: What should the process be for selecting our KPIs?

Companies approach KPI selections in very different ways. Some would involve the whole management team or even the actual staff into a big KPI selection meeting. Some would nominate a group representing a good mixture of the different teams and levels of the organisation. There are obvious pros and cons to each approach and there is no right and wrong. This largely depends on the size and maturity of your company, the number of founders / leaders in your company, the type of industry you are in, and many other factors. My recommendation would be to involve people from different levels of the organisation and let teams provide input into their own list of KPIs. This is not only important as they are the experts in their own areas, but this will also help you with getting their interest and buy-in in monitoring the KPIs. Selecting the KPIs is just the start of the process. For successful KPI management, you will need the people on the ground to collect the data you need to present the KPI results.

Answering questions such as who will be involved in the KPI selection process, what the ideal format of such process should be, and the actual process steps and timelines are crucial parts of establishing a good practice. Once established, you will be able to lean back to these steps each time you need to revisit your KPIs. Having a well-defined process will also help you with building trust and getting the buy-in of your employees.

In the next section we will explain the details and benefits of using one of the main strategy management tools, the Balanced Scorecard approach. 

 

4. What is a Balanced Scorecard and how to use it to manage your business performance?

The Balanced Scorecard (BSC) methodology is a powerful and logical strategy management tool. It provides a useful basis to set up any company's performance management framework. Although the BSC concept is almost 30 years old, it still teaches us directly applicable learnings that can drive continuous dialogue and improvements within organisations. It helps with communication across the different levels of the organisation. Besides, it translates the strategy into daily actions. In addition, it allows companies to measure their strategy execution in a systematic way. In this article, we cover what a Balanced Scorecard is and the benefits of implementing it. We will also discuss its key components and related definitions and how it can be used to manage business performance.

Balanced Scorecard - Definition and Origin

A Balanced Scorecard (BSC) is a strategy management and performance measurement framework, originated from the 1990's from Robert Kaplan and David Norton. It was developed to help companies measure business performance using both financial and non-financial data. The first time Kaplan and Norton disclosed this important new methodology was in 1992 in a Harvard Business Review article The Balanced Scorecard — Measures that Drive Performance. Since then, they have published a number of books related to the BSC topic.

These include The Balanced Scorecard: Translating Strategy Into Action (1996); The Strategy-Focused Organization: How Balanced Scorecard Companies Thrive in the New Business Environment (2001), Strategy Maps: Converting Intangible Assets into Tangible Outcomes (2004), and Alignment: Using the Balanced Scorecard to Create Corporate Synergies (2006). Their most recent book is Execution Premium: Linking Strategy to Operations for Competitive Advantage (2008).

Until today, these books are important sources of knowledge for companies that are looking to implement the Balanced Scorecard strategic management tool which links a company’s current actions with its long-term goals. 

The name "balanced" comes from the idea of looking at strategic measures in addition to traditional financial measures to get a more “balanced” view of performance.

"The balanced scorecard includes financial measures that tell the results of actions already taken. And it complements the financial measures with operational measures on customer satisfaction, internal processes, and the organisation’s innovation and improvement activities—operational measures that are the drivers of future financial performance." - HBR, 1992

The 4 perspectives

The Balanced Scorecard allows business owners and managers to look at business performance from 4 important perspectives. Each providing answers to 4 basic questions:

While giving senior managers information from 4 different perspectives, this concept also minimises information overload by limiting the number of measures used. Companies very rarely suffer from having too few measures. Much more often, they keep on adding new measures which results in spending way too long on collecting and monitoring data. To tackle this issue, the Balanced Scorecard approach forces business owners and managers to focus on a limited set of measures that are most critical.

 

Benefits of using a Balanced Scorecard

The aim of the Balanced Scorecard is "to align business activities to the vision and strategy of the business, improve internal and external communications, and monitor business performance against strategic goals." The Balanced Scorecard provides a relevant range of financial and non-financial measures that support effective business management.

By moving away from using only financial measures, the Balanced Scorecard helps managers understand many interrelationships. This understanding can help them break down traditional silos and functional barriers. In addition, it can ultimately lead to improved decision making and problem solving. "The Balanced Scorecard keeps companies looking— and moving — forward instead of backward."

The Balanced Scorecard has evolved beyond the simple use of 4 perspectives and has developed into a holistic system for managing strategy and strategic performance. A key benefit of using this framework is that it gives companies a way to link the various components of strategic planning and management. This means that there will be a visible connection between the projects (strategic initiatives) that people work on, the KPIs (key performance indicators) being used to track progress, the strategic objectives the organisation is aiming to accomplish, and the mission and vision of the company. In the next section, we will discuss these strategic components one by one.

 

Strategic Components of a Balanced Scorecard

 

 

Vision, Mission, and Strategic Objectives are part of an organisation's strategy. Strategy is "a general direction set for the company and its various components to achieve a desired state in the future." It provides a well-defined roadmap to an organisation. As part of the roadmap, it defines the overall mission, vision, and direction in the form of strategic objectives. The objective of a strategy is to maximise a company's strengths and to minimise the strengths of the competitors.

Strategy, in short, bridges the gap between “where we are” and “where we want to be”.

A vision is the desired future position of your business, what you want to become, while a mission is what your organisation does today to achieve its vision.

For some vision and mission examples from successful companies, see page 3 of the Strategic Direction Worksheet.

Strategic objectives describe performance goals the company needs to achieve to fulfil its mission. E.g. increase profit by 10%, or grow market share for the company's product by 5% in a certain market.

A Strategy Map provides the visual foundation of a business strategy. It provides the means by which a business can communicate its strategic plan to customers, employees, and stakeholders. It shows the direct connection between a company's strategic objectives across the 4 Balanced Scorecard perspectives. In other words, the Strategy Map shows how a strategic objective impacts another strategic objective. For example, a company has an objective to improve marketing competency levels of all employees to 3 (Learning & Growth perspective). The achievement of this objective will impact another strategic objective to increase marketing effectiveness by 10% (Internal Process). In addition, it will also influence achieving the strategic objective to enhance customer ratings of promotion materials to 85% (Customer perspective). Moreover, this might have a direct link to the strategic objective of increasing revenue to XXX USD (Financial perspective).

KPIs are selected indicators that best measure progress towards an entity's strategic objectives. An entity can be a company or a team or department for example. It is important to note that there are plenty of useful data metrics a company can measure. However, KPIs are the indicators which are the most important when analysing the outcome you have achieved. Above all, these are the figures you will base your most crucial strategic decisions on. In another article, we have discussed the key reasons why companies should implement KPIs.

Targets show the desired result level for KPIs. These should align with your long-term aspirations, considering internal and external factors and changes. Targets should be based on historical, internal, or external benchmark data, market analysis, and other sources. A good target is ambitious, yet should be achievable.

Strategic initiatives are projects or programs designed to move a KPI result from the current actual value to the targeted value. For example, a company has a strategic objective to increase its market presence in a new market. A KPI would be the % Market share in the given geographic area. Let's say the current value is 10% and the target by the end of 2021 is 20%. (By the way, the difference is called value gap but we are already covering many new definitions in this article.). In order to reach the 20% target, we need to introduce some strategic projects, initiatives which will ensure that we reach the desired market share. For instance, we might start a marketing campaign or issue a new product to the market. These would be the strategic initiatives.

 

How to use the Balanced Scorecard to manage business performance

The above strategic components are managed as part of a so-called strategic performance management cycle. In the planning phase, strategic objectives are set or reviewed, KPIs, targets, and strategic initiatives are defined. Once the corporate level is done, KPIs and targets need to be cascaded to the different levels of the organisation (to departments / teams and employees). This ensures alignment across the organisation, making sure everyone is aware of the strategic priorities. After the department level scorecards are developed, it is a good practice to check the corporate level scorecard once again to make sure all important measures and strategic initiatives are covered.

The next step in the cycle is the monitoring phase. In this phase, KPI results are regularly monitored in a scorecard or dashboard and reports are submitted to managers and employees (depending on the transparency level of each organisation). At some companies, an evaluation also happens to dive deeper into the impact the company has achieved during the evaluation period. This usually takes place less often as the monitoring which is a more regular (weekly, monthly, or quarterly) process. Evaluation might happen once in a year or once in 3 years, depending on the industry a company is in. Finally, in the learning phase companies learn from the results and identify corrective actions for under-performance. In case the performance is good, rewards are granted to the ones driving success. This whole cycle is sometimes referred to as the PMEL (planning, monitoring, evaluation, learning) cycle amongst monitoring & evaluation professionals. As a best practice, companies establish a strategic performance management process or system which should be communicated across the organisation. Transparency is key in performance management as the leadership themselves will not be sufficient for the actual implementation and operation of the system. They will need the people on the board to help with the KPI selection, collect the data and respond to under-performance with improvement ideas.

In conclusion, a Balanced Scorecard can be an excellent way to focus your resources on what matters for the organisation. This is ensured by setting KPIs, targets, and strategic initiatives that are aligned with your company's key priorities. In addition, these are cascaded to the different levels of the organisation.

The implementation has to start with a strategic planning process, followed by a KPI selection and definition process, and finally, a communication and launch phase. Once this is done, you are ready to step into the monitoring and learning phases.

In the next section, we will explain the key steps on how you can get started on your journey to effective KPI management.

5. How to get started on selecting and monitoring your KPIs

Let's summarise the key steps of the process of selecting and monitoring KPIs for your organisation.

1. Set your strategic direction

To set your strategic direction, you will need to conduct some strategic analysis and strategic planning. As an outcome, you will define your vision, mission, and strategic objectives.

Check out our free downloadable Strategic Direction Worksheet in the section below for some guidance on setting your strategic direction.

2. Answer the 5 key questions to support selecting the right KPIs for your business (as detailed above):

1. What am I aiming to achieve by defining and monitoring KPIs?

2. What resources do I have that can help?

3. How can I best measure the progress towards each of my strategic objectives?

4. What data will best inform decision making?

5. What should be the process for selecting out KPIs?

3. Select the most important KPIs / for larger organisations: organise KPI selection workshops with the relevant stakeholders in your company to:

A) First, list all relevant KPIs for each strategic objective (This is important also for the buy-in).

B) From the list of possible KPIs, select the most important indicators you will want and need to monitor on a regular basis.

As a rule of thumb, try to narrow down the number of KPIs to 2-3 per strategic objective. Make sure you use both leading and lagging indicators. Focus on indicators that measure important business outcomes in line with your strategic objectives.

For getting hands-on help on selecting the right KPIs for your business, check out our upcoming online courses. We would be happy to work with you to improve your business outcomes by strengthening your KPI & performance management.

4. Once you selected your top KPIs, document KPI details such as definition, reporting frequency, data source, baseline value. Having a well-structured KPI repository is a must for effective KPI management.

5. Gather your baseline data, data on competitors, benchmarks, future projections to inform your target setting process. Meet the relevant stakeholders to set targets for KPIs. Best to start with annual targets which you can break down to quarterly targets.

6. Cascade KPIs and targets to the relevant departments and teams in your organisation. In larger organisations, departments develop their own scorecards, with some organisational level KPIs included as well as their own departmental KPIs and targets.

7. Identify key projects / initiatives to make sure you will focus on activities that help you reach your targets. Identify quarterly deliverables for each of your projects.

7. Start monitoring KPI results and completion of key project deliverables from quarter to quarter:

A) Collect data and narratives on status from data owners

B) Aggregate data on organisational level strategic KPIs

C) Analyse & visualise KPI results (Use a BI tool such as Power BI, Tableau, or Google Data Studio where you can feed in your data analytics and calculate & visualise results of strategic KPIs for the overall organisation.)

D) Draw & share insights from the data with relevant stakeholders. Get their input on corrective actions & improvement as well as innovation ideas. Build a culture of learning where performance management is about organisational learning (and not about control).

8. Review results & key project delivery status, your strategic objectives, and KPIs on a regular basis and update as necessary. It is best to have a workshop with relevant stakeholders to discuss how useful each KPI is, including cost vs benefit of measuring each. Retire KPIs which do not provide information on performance against your strategic objectives. Introduce new KPIs if you find you don't have sufficient information on some of your objectives. Review future targets and update the list of projects. Then start the monitoring phase again.

How long your monitoring cycle is, should depend on your industry and the maturity of your company. 

As mentioned before, it is key to keep structure around KPIs. A central KPI repository and a scorecard are essential tools to systematically track all details and data on KPIs, as well as to keep an audit trail of past and new KPIs. 

6. Recommended KPI Scorecard Template to get your started

If you are looking for a simple spreadsheet to start with, check out our 2021 KPI Scorecard Template. This Excel spreadsheet was prepared based on our 15 years of corporate experience, supporting over 90 entities with setting up their strategic KPI scorecard and performance management framework. We have included the most important fields to track as well as detailed instructions for each of the worksheet.

Follow our guidance and set up your own business KPIs and performance monitoring process.

Worksheets included:

• Tab 1. KPI List Entry

• Tab 2. Target Data Entry

• Tab 3. Key Projects

• Tab 4. KPI Data Collection SAMPLE

• Tab 5. Actual Data Entry

• Tab 6: Quarterly Org. Scorecard

• Tab 7. Annual Organisational Scorecard

• Tab 8. HELP TAB for drop-downs

7. Online Balanced Scorecard and KPI Courses 

At Actionability, we offer practical online live and self-paced training courses to guide you through the process of building your balanced scorecard. Check out our upcoming courses and boost your KPI knowledge in no time. 

Good luck with setting meaningful KPIs, aligned with your business outcomes!