What Are KPIs?

What are KPIs?

KPIs are Key Performance Indicators – that was a short paragraph.

But really, what are KPIs?

• They are the Indicators that work like the instruments and gauges in an airplane cockpit.

• They show how and where a company is “flying” (Performance).

• They need to be filtered to make sure that only important (Key) things are measured.

Why are KPIs Important?

That definition for KPIs sounds straightforward – as far as it goes.

Let’s follow the airplane cockpit analogy further because I think it can provide us more insight into why KPIs are important and what they need to measure.

A good KPI strategy is like a properly equipped airplane cockpit. Each of them has the following categories of gauges:

• Redundant and complementary instrumentation:

  • For example, an airplane has two compasses. One is a magnetic liquid compass. A second one is a gyroscopic compass. They indicate the same thing (direction) using two different data sources. Each has its strength and weakness, and, by times, each must be calibrated against a standard outside of itself.

  • Each effective KPI should have two or more metrics from different data sources to measure a key indicator. Divergences in these measurements will alert a company that one or more of the KPI metrics need to be recalibrated.

• A mix of modern and legacy instruments:

  • Aircraft can now be upgraded with computer-based flat panel display instrumentation. A wise manufacturer will keep older mechanical instruments in the cockpit with the new instrumentation for better redundancy and contingency in case of emergency.

  • New KPIs can be very appealing. Too often I have seen companies abandon “the old” KPIs for something new and trending. A wise company mixes old and new KPIs. This allows the new to be validated by the old and the old to be augmented by the new. As well, having this redundancy will provide a company with data contingency should one of the KPI metrics become defective.

• Data about Outside Influences from Outside Sources:

  • The flight crew regularly receives current information (i.e. barometric pressure, wind direction and speed, weather information) from sources outside the airplane to calibrate the cockpit instruments and to provide context for inaccuracies in the internal instrument readings. A quick example would be helpful. An airplane has no internal instrumentation to identify and quantify wind direction and wind speed. They must get this information from weather briefings from outside sources before and during the flight. If a plane is flying east as per the compass, but the crew doesn’t account for a steady north wind, the plane will actually be flying southeast of its intended destination. For the plane to navigate to its intended destination, a course correction needs to be done to point the plane slightly north of its charted course to compensate for the effects of the wind.

  • A company whose KPIs do not include information about economic, political, environmental, social, etc. influences outside of the company measured by sources outside the company should not be surprised that they regularly miss targets, blow budgets, and waste too much energy trying to figure out where they are. These outside factors not only impact the direction of a company, they also cannot be measured by internal corporate KPI mechanisms.

• Required instrumentation and support documentation to track the following:

  • The past:

    • The flight data recorder, the cockpit voice recorder, the maintenance record book, and other tracking applications keep a thorough record of where the plane has been and how it performed over that period.

    • Legacy KPIs and historical contextual data provide a record of how a company or team have performed over time and through different challenges. This data is a baseline for current performance and for future expectations.

  • The present:

    • An airplane cockpit has a plethora of instruments that are confusing to the uninitiated. However, to the pilots, these instruments give critical information on the health of the engines and supporting infrastructure in the airplane, as well as the direction, altitude, and attitude of the airplane.

    • KPIs measure a plethora of metrics within a company. Those who monitor these KPIs need to be knowledgeable of the pertinence of each KPI and how they work together to give a snapshot of a company’s current health and direction.

  • The Future: Navigation, when done well, tracks the following:

    • The intended destination:

      • A wise flight crew knows that the destination is “intended” and not guaranteed. Changing weather conditions, unexpected emergencies, and other factors can force a plane to redirect from its intended destination. A good navigator keeps an eye on suitable alternates and knows when to redirect to them.

      • A wise company management team knows that their strategy is “intended” and not guaranteed. Changing economic conditions, unexpected emergencies and other factors can force a company to redirect from its intended strategy. A good leadership team keeps an eye on suitable alternate strategies and knows when to redirect to them.

    • Current progress against intended direction and destination:

      • As mentioned previously, there are factors outside of the airplane that cannot be measured from inside the airplane. Therefore, a good navigator will track the current location against the navigated intended flight path. This allows a constant data input to inform course correction.

      • As mentioned previously, there are factors outside of a company that cannot be measured from inside the company. Therefore, a good leadership team will use internal and external data points to track the current corporate course against the intended strategy. This allows for a constant data input to inform course correction. How many companies have a navigator?

    • Expended and reserve resources against intended duration and destination:

      • At the beginning of a flight, an airplane is provided enough fuel and supplies for the duration of the flight plus a buffer. Good navigation discipline tracks the burn of these reserves against progress towards the goal. This allows the flight crew to be notified of any potential deficiencies long before they become an emergency.

      • A company needs to have enough resources and finances to reach its next strategic milestone – plus a buffer. Good corporate governance uses effective KPIs to track the burn of these reserves against progress towards that strategic milestone. This allows the leadership team to be notified of any potential deficiencies long before they become an emergency.
        
        

Conclusion

This brief article lightly covers the surface of KPIs and how to make them effective, efficient, and organic to a company’s welfare. Over my career I have seen and lived through many more badly implemented KPIs than good ones. I have rarely seen any great KPIs.

Though there are key parameters common to most companies, your KPIs need to be customized for your specific company – its strategy, the context surrounding it, and the team and resources that make it what it is.

Avoid consultants who try to squeeze you into an “off the shelf” KPI solution. Hire someone who will get inside your company: its heart, its engine, its mind. They will take that information and add critical contextual outside data points that impact your company. THEN they will assemble all of that into KPIs you can understand, own, and update effectively.