Finding Your Company's Right KPI
Posted on June 5, 2012 - 3:58pm in Blog
Let's face it, every company wants to be the best at something. Be it the most profitable, the lowest price, best market penetration, there is always a 'corporate' goal. In order to quantify how well/poorly your company is executing against these goals and find areas for improvement, you must translate performance into numbers. Simply put, you need KPIs.
Making and implementing KPIs isn’t as easy as it sounds…if it was, everyone would do it. And they don’t. To be successful, KPIs must focus on measuring what is really important to the company. If you want to boost volume, why compensate your sales team on $ sales? Focus on quantity! It is very difficult to follow several indicators simultaneously and make sense of what they are saying, so it is better to have a few indicators that are important and actually followed, than having a plethora that say nothing and no one trusts.
You also need to measure team results. From the second people know they are being evaluated by their work, it becomes clearer to them where they should focus and how they should improve, especially if the measures are linked to their compensation. For example, a delivery company's slogan is “fast and safe delivery.” Some drivers will hear “fast,” some will hear “safe” and others will be confused at which is more important – fast or safe – so will always balance the two but never excel at either. However, if you provide instruction that “fast and safe” means ‘at the speed limit, but not over,’ your employees know exactly what is expected and can deliver on each task.
Performance indicators and business objectives must always be aligned. This is arguably, the most important thing when defining KPIs for the teams - this drives your results. This helps focus every effort toward the same goals - the company goals. It's pointless to have the marketing team focus all of its efforts on product/service A, if the sales team performance indicators focus only on product/service B.
Choosing the right KPI and calculation method are essential to direct action.
To illustrate, it's important for the sales team to achieve the company's sales goals, but sales can be measured in different ways: Volume, Gross Sales and Net Sales. Unfortunately, there is not a perfect option for choosing the indicator:
- Volume: Usually, easy to measure, volume can be a good indicator to track sales and market share but it doesn’t necessarily reflect revenue or profitability. Perhaps the sales team gives too much discount in order to increase volume, or they choose to sell the easiest / cheapest product in the portfolio, even if it is unprofitable, to increase volume.
- Gross Sales: Easy to measure, even when a company’s portfolio has a variety of unsimilar products that can not be measured in the same volume measurement. It can be a good indicator to track sales and market share but, like volume, it can not be translated into profitability. Maybe the sales team gives too much of a discount and destroys the profitability of the company but yet, still reaches his/her goal.
- Net Sales: A sales indicator that takes discounts into consideration and communicates the actual amount of money from sales. Like the two before, it doesn’t reflect profitability. Different combinations of volume, price and discount can result in the same Net sales but in different levels of profitability.
As you can see, the best method for choosing a KPI is assessing your primary need and choose the indicator that best fits the profile and availability of that information.
Imagine a consumer goods company has chosen Net Sales as a KPI and this company has six different categories, which have different margins:
| Category | Margin |
| Category 1 | 21% |
| Category 2 | 16% |
| Category 3 | 63% |
| Category 4 | 57% |
| Category 5 | 37% |
| Category 6 | 11% |
To achieve revenue goals and market strategy, it is important that the company sells the full mix of products within the portfolio. If the KPI measures only the total amount of Net Sales, it might achieve the sales goal with category 6 only - which would be bad for both the company's profitability and visibility in the market. The consumer wouldn’t be fully informed on the company`s portfolio
That being said, the indicator also gives guidance to the team and encourages the company’s desired performance. For example, assigning different weights for different categories and giving each category a separate target.
| Category | Margin | Weight |
| Category 3 | 63% | 3 |
| Category 4 | 57% | 3 |
| Category 1 | 21% | 2 |
| Category 5 | 37% | 2 |
| Category 2 | 16% | 1 |
| Category 6 | 11% | 1 |
Another possibility is to create a new extraordinary KPI for multiple categories. Imagine that category two is a market launch, category 5 has a new strong competitor in the market, and category 3 is more difficult to sell, but is more profitable. The company could create a new indicator with a bonus for hitting the target in each category, plus an extra bonus for those who hit the target in all three categories.
It is important to notice that a defined, black and white, indicator does not exist but there is always a way to find the most suitable indicator for your company’s goals and market circumstances. And don`t forget the KPI must be simple to understand! If it`s too complicated, even if it`s well aligned with your strategies, it won`t convey the message if no one is able to understand it. Furthermore, the goals must eleveate team performance, but shouldn`t be unattainable, otherwise they will be discouraged.
If you would like more information about finding the right KPI for your company, please contact us!
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