If you and your team are going to invest time and effort into measuring the performance of the things you do in your business to put your strategy into motion and move your company forward towards an ultimate success goal, you’ll need indicators/KPI’s.
Of course, choosing the right KPI’s is your first step. The next step is to set performance targets, or a “comparator”, for each KPI. Using performance targets is an essential part of the measurement process. In addition to providing insight into the adequacy of current business performance, targets help you use measurement to learn about your business and make pro-active adjustments when they’re required.
I have written in the past about the art (and science) of setting performance targets and, while that advice is solid, it’s pretty “textbook”. That is, it’s based on theory and best practice, however, my experience has been that conditions “on the ground” rarely lend themselves to the application of theory. In fact, the textbook approach to target setting (i.e. leveraging budget targets or benchmarking historical performance to set incremental targets) can often be impractical. This is particularly true when you’re trying to create a strategy-focused scorecard that extends past the usual financial and operations metrics.
When your company is making the leap to measuring strategy versus operational activities you often need to use “new” KPI’s that don’t have a convenient data trail. Problems also arise for companies when they try to add measurement discipline into their business management toolkit for the first time.
So, what are some practical options for setting reasonable performance targets when you’re in one of these situations? Here are the steps I take my clients through to set targets for first time KPI’s:
1 Establish what “success” looks like for your business at a defined point in the future
What is your business trying to achieve by a certain date in the future? What does “success” look like? What would we measure and how would you know that success has in fact been achieved?
Answering these questions requires some big picture thinking at the total business level. If you are lucky, you might even have some performance data to inform your discussions. Once you answer these questions, you’ll have a metric (or metrics) defined, a performance target, and a timetable for achieving that target.
EXAMPLE: Grow revenue from new products by 25% over the next 5 years.
2 Break down your vision for business success into measureable annual milestones
Now, looking at your business success metric, target and timeframe, think about where your company’s performance is today. Is there a gap and how big is it? If you have data to refer to that’s great! If you don’t, make a ballpark estimate on the size of the gap. Then, using this information, plot out a series of annual targets for your success metric that are realistic and will get your company from today’s performance to the level you defined for your future date.
EXAMPLE: % revenue growth from new products
Year 1: 0% Year 2: 3% Year 3: 8% Year 4: 17% Year 5: 25%
3 Determine how the business activities your KPI is measuring would be performing at each milestone to support the achievement of your measureable business success goals
Now that you’ve got the big picture defined and the progression from today to the future plotted out, take one of your KPI’s and think about the business process/work it represents/measures.
Think about how that business process contributes to the achievement of your business success goal. Don’t forget to also think about how it combines with other business processes or projects to achieve the success goal. Now, based on this thinking, describe how the process needs to perform over the next few years if it’s going to play its part in helping your company achieve each of the annual targets you’ve set for your success goal. These descriptions might include a number but it’s more likely that they’ll be a word description.
KPI: Product Idea Conversion Rate
Relevant Business Activity/Process – Product Idea Generation
Year 1: Get better insights into customer needs and the solutions they need/will buy – leverage technology and analytics; Develop processes and capabilities to clearly align product ideas with customer needs and solutions
Year 2: Demonstrate clear customer need alignment in 70% of new product ideas – Increase speed of new product ideas into the product development process
Year 3: Demonstrate clear customer need alignment in 100% of new product ideas – optimize speed of new product ideas into the product development process
Year 4: Achieve top 10 rating in the marketplace – customers rating our new products as products they want and need; Develop ability to anticipate emerging trends in customer needs and the solutions they need via advanced analytics
Year 5: Achieve top 3 rating in the marketplace – customers rating our new products as products they want and need
4 Set the target for the KPI at a level that aligns with/supports this year’s success goal
Now, leveraging the information you created in step 3, set a performance target for year 1 ONLY for the KPI in question. (there’s no point in setting targets beyond year 1 at this point because we’ve still got some learning to do)
KPI: Product Idea Conversion Rate (% of product ideas that get through our product development stage gates AND generate forecasted sales in the marketplace)
Year 1 Target: Maintain current performance (i.e. the same results) for Product Idea Conversion Rate
5 Begin collecting performance data and notice how actual results compare to target
Now it’s time to get busy collecting data for your KPI and comparing your actual results to the year 1 performance target. Collect actual results data using your year 1 target for 2 – 3 measurement periods and then pause to see what the data may be telling you.
6 Review and analyze
With some actual versus target data in hand, it’s time to look at what you’ve got. Asking and answering a few key questions will give you some valuable insights.
How are actuals doing against your year 1 target?
Is actual performance above, at, or below target on a consistent basis?
What kind of performance are you seeing on your success goal with this KPI performing at its current levels?
Are actual performance levels (success goal and KPI) moving us forward and is it at the right/expected pace?
With the answers to these questions in hand, move on to step 7.
7 Learn and adjust
Step 7 is all about learning (a) whether the targets you have set for your success goal and KPI are appropriate; and (b) where today’s business performance stands versus where you need to be on the journey to your ultimate success goal (i.e. is there a performance gap today and if there is, is it bigger than, smaller than, or as you expected when you were completing steps 2 – 4?), and then making some decisions about where to adjust (if needed).
What kinds of adjustments do I mean? Sometimes you decide that you need to change targets/the progression of targets because you discover that the performance gap is bigger than you thought it was. However, sometimes you discover that the performance gap is bigger than expected and you decide that, rather than adjusting targets, you’re going to invest in building capabilities to perform at higher levels. In other words, you decide to go after the performance gap issue itself. The adjustments you make will depend on what you learn and how you want to respond.
Taking this learning-based approach to setting targets for new KPI’s works in the real world and has lots of important benefits for you and your business that extend beyond successfully implementing measurement. Here are just a few:
- It gets you and your team thinking and talking about what you are trying to achieve in your business in both quantitative and qualitative ways – getting everyone clear about what success looks like for your company has a big impact on accelerating results;
- By helping you link KPI performance targets with desired business results, measurement feels less theoretical and more relevant to your business performance management efforts;
- You can get started with measurement sooner than later (no waiting to create a data trail before setting targets); and
- Because you have more insight into your business than you did before, you and our team can make the evidence-informed business decisions that drive greater business results and outcomes much faster.