The Ten Rules for Designing KPIs

There are a number of rules to follow when designing measures.

Source: Extracted from Key Performance Indicators – developing, implementing and using winning KPIs (4th Edition)

There are a number of rules to follow when designing measures.

1.     Understand the difference between Result and Performance Indicators If you can phone a manager and they accept the responsibility for a measure, it is a Performance Indicator. Where you have measures that summarize collective action, of several teams working together, then a phone call is of no benefit as no one will accept responsibility.  These I call result indicators. Each of these two categories have some exceptional measures and these are called key result indicators, or key performance indicators, as appropriate.
2.     Ensure that a measure is designed from or links to one of the organization’s CSFs I see the CSFs as the source of all performance measures. If you get the critical success factors right, it is very easy to find your winning KPIs.  In other words, by ascertaining the CSFs, first you have started with the end in mind.
3.     Timely measurement so you are measuring more at the “top of the cliff” rather than at the “bottom of the cliff”. It is clearly better to catch problems early on rather than measure their impact in the monthly report.   Monthly measures will never change performance as management are far too proficient in explaining away anomalies to be motivated to change behavior.  Where you need change to occur, daily or weekly measurement has a far better chance to prompt corrective action to take place.

I do not believe there is a monthly KPI on this planet.  If a performance indicator is key to the well-being of an organization, surely you would measure it as frequently as possible.
4.     Focusing measures on the exceptions Focusing on an exception is better than having to measure everything.  It is surely better to measure late planes in the sky over two hours late than the percentage of “on-time” flights in the month.
5.     Remove measures that will lead to damaging or dysfunctional behavior All measures will have a dark side.  The question is how big is the dark side?  Some will lead to damaging dysfunctional behavior e.g., the measuring of the number of calls made by staff in call centers, will lead staff to make more short calls to the same customers leading to the eventual loss of those customers.
6.     The wording of a measure should leave no doubt what is being measured Often the initial measure is a statement or even just a clue as to what is to be measured. E.g., “Number of successions plans in place”.  A better rewording is “Number of key positions with at least two potential replacements”, this should be measured quarterly.  It will promote managers to recruit and train staff who have the potential to be their successor. It also reminds management that one potential successor is not enough as the odds are that the staff member will leave before the promotion can occur.
7.     Ensure the benefit of measurement is much greater than the cost Many measures may appear useful but on reflection have a negative cost/benefit relationship.  E.g. Number of business opportunities in the pipeline. Whilst it would be great to have a central database of business opportunities, in reality such lists will be incomplete and take much time to maintain. Timesheets should not be introduced to support measurement. It is a far too onerous, error prone, and costly system.
8.     Design the measure around the action you want to stimulate When you have the results of a staff or employee satisfaction survey, the net score is interesting but not that important. The key is whether any of the survey recommendations has been implemented. If you do not implement these recommendations, the survey was a total waste of money and respondents’ time. Thus, the measure becomes the number of recommendations that have been implemented to date (and this is would need to be reviewed weekly by the executive team).
9.     Use your oracles when designing measures When looking at a CSFs, get your wise oracles to ask themselves “What has good performance looked like?” and then ask yourself “What has bad performance looked like?” Both views will shed light as to what should be measured. Then ask yourself, “What top of the cliff measures would give advance warnings of this negative performance?”
10.  Prioritize measures that you can compare to other organizations Relative performance measures are an important addition to KPIs; for example, you may focus 24/7 on all planes in the air that are flying more than two hours late, but in addition compare total late flights, average turnaround times, number of missing passengers, and so forth, to other airlines. Perhaps this could be carried out quarterly, using a benchmarking company.

Another benefit of relative measures is that they do not need constant alteration (e.g., if being in the top quartile or 2 percent above the norm is the relative measure, then this benchmark does not need changing).
11.  Have a mix of 60% Past, 20% Current and 20% Future orientated measures In many organisations over 90% of the measures are those looking back at historic events – past measures.

Any measures that relate to activities within the last 24 hours are considered current indicators. Future indicators are measurements you can do now that will encourage an action to take place, e.g., Number of innovations scheduled to be implemented in the next month.

This information has been extracted from David Parmenter’s Key Performance Indicators (4th Edition) which is the highest rated KPI book on Amazon.

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