How to define KPIs for an SME
Digital transformation has become even more important for businesses of all sizes since the Covid-19 epidemic – but successful transformations are easier said than done. Without defining clear key performance indicators, it is impossible to identify weaknesses in a plan; So, Consulthon co-founder Marieta Bencheva explained how to measure goals that will help a strategy succeed.
Once the goals for a business transformation have been established and a strategy decided upon, companies need to think about how they measure success along the way. Of course, key performance indicators (KPIs) vary from company to company, depending on their business goals, but here are some general steps to take in different cases.
First, companies need to select their goals. There shouldn’t be many – a maximum of three is recommended to be effective and efficient in measuring results. Next, companies need to prioritize these goals based on the critical success factor or critical success strategy. Then it is up to the organizations to determine what criteria can help illustrate progress towards that goal.
For example, if the goal was to reduce the infant mortality rate by 10% by 2018, under the supervision of the Minister of Health, they would first consider the input metric. This would include the size of the health budget, the number of doctors and nurses, and the amount of drugs like vaccines to which they had access. Then they would consider a process KPI; focusing on vaccine cost, vaccine uptake rate and resource cost. They would then assess the key performance indicator of result; see how many children have been vaccinated and to what extent the population of all ages has been involved in the vaccination program – before calculating a final result KPI. The percentage death rate could then indicate how successful their efforts have been.
For each KPI there should be a balancing indicator, that is, when we get the KPI result, we balance it with a counter. For the example above, the percent death rate would be balanced with the cost of resources. In other cases, it could see something like the number of sales being balanced against the cost of sales.
Organizations can select one KPI for each goal and two to three KPIs for balancing. Objectives must have a cause and effect relationship. It is recommended that you use a strategy map to illustrate this relationship.
Companies should not choose one and the same objective for all levels of management. What they should do instead is cascade their KPIs from the CEO level to the department and team level. Business unit goals, however, can be passed down to the department level because they have the same or different KPIs.
The same goals can be passed on to different departments, but each of them will have different KPIs to measure it. Organizational goals are usually high level goals and they need to be subdivided to suit the role of different departments in the business. They will also have different specific KPIs for the sales and marketing department for example. There should be certain goals and KPIs at the individual employee level. They can be removed from the job description.
It’s important to remember that for a successful and measurable strategy, leaders need to set a small number of strategic goals. When creating the strategy, they should use the Balanced Scorecard methodology, which will help you set goals from four different perspectives: Learning and Growth; Internal business process; Customer; Finances.
Organizations should put a maximum of three strategic goals in each of these categories. Each of them needs a different set of skills and resources and will have one to three KPIs to measure it. Ultimately there should be between 12 and 36 KPIs, which should be reviewed on a weekly or monthly basis. As soon as a KPI becomes obsolete, it should be abandoned. At the same time, as with the objectives, the indicators also require constant updating reflecting the changing needs of companies.
The SSMAAART approach
You’ve probably heard of the SMART Business Goal Structure that helps your business succeed. It is also clear to you that this is an abbreviation. It stands for specific measurable attainable relevant time-based.
These are the basic terms used in this structure for goal setting. However, there are additional aspects that are often overlooked or not well developed that can help set clear and well-defined strategic goals, making it more of a SSMAAART approach.
In addition to being “specific”, KPIs must remain “simple”. Employees need to understand what needs to be done, so it is essential to be concise and to the point. Remaining unchanged, âMeasurableâ reflects the need to define the right KPIs to be able to measure progress, letting companies know they are on the right track.
KPIs must be âachievableâ but also âambitiousâ. All goals should be set in such a way that managers and employees are confident that they can be achieved. At the same time, they shouldn’t be too shy. To be clear, imagining a goal is achievable, but not changing things that are done is not âambitiousâ. At the same time, the objectives must be âActionableâ. Performance indicators should include the different types of actions you need to take to achieve a goal.
âRelevantâ suggests that each objective and its respective KPIs should be relevant to the department / team / person to which they are assigned. They will not be the same for a business development team and for a marketing team. It is also very important that the achievement of the goal depends on the team to which it is assigned. Finally, “Based on time” reflects the fact that all goals must have a deadline. Time is that indicator that will tell you if any of the actions taken to reach the goal are good, average, or excellent.
With the SSMAAART approach, the choice and implementation of KPIs should be clearer. With a well-defined vision of what you’re trying to accomplish in place, identifying what data an organization has in place and what it needs to collect to measure KPIs is particularly easy.
Taking the time to collect statistics on industry trends, demographics, and competitors will help. Using this information can inform key performance indicators. However, companies should avoid simply measuring the exact same KPIs as their competitors. Every business is unique and what works for one business may not work for another. At the same time, determining how often to measure each KPI should be adapted in this way.
Next, organizations should set short and long term goals for the performance indicator. If a long-term goal is to sell 2,400 memberships to a service in a year, for example, companies will want to break it down into short-term goals to evaluate. In this scenario, try to reach at least 200 new subscriptions per month. Then use that rate to determine whether or not to change expectations or strategies.
At the same time, sharing KPIs with the business and stakeholders is vital. Be transparent when discussing performance. Contribute to the success of an organization by communicating strategies, progress and results. It is essential that all team members know the goals so that they can work on them and provide feedback as needed.