Peter Drucker once said, if you can’t measure it, you can’t manage it. Which is true - not to mention catchy - but it’s also an oversimplification. The reason we measure performance is to learn and improve, to report externally and demonstrate compliance, and to control and monitor people. The importance of selecting the right Key Performance Indicators (KPIs) cannot be underestimated. It is instrumental to a company’s success. CFOs who fail to determine the right KPIs will be overwhelmed by the volume of data, and senior management’s decision making will suffer.
Selecting the best metrics is, however, a difficult task. There are no hard and fast rules around which KPIs to look at. They vary from company to company depending on the needs of the business, and must be tailored accordingly.
The first questions you need to answer when deciding upon KPIs is where you are as a business, where you want to be, and by when. KPIs must actually drive growth - they should show you the factors you need to improve and the performance gaps that need to be closed to to get there. An effective set of KPIs must first of all indicate where the fundamental problem is. They must provide the answers to your most important questions, empower employees, and provide them with the relevant information to learn.
The key is to limit KPIs to a small number. Everything you measure can’t be considered a key metric. Having a surplus of KPIs with no apparent connection to a business’s overall objectives indicates a lack of strategic focus and will result in data overload. When everything is a priority, nothing is a priority. The most effective companies use between just 3 and 7 KPIs. They must, therefore, be focused on the root cause of performance. Ask yourself what are you actually trying to achieve by looking at the KPIs and what value you are getting? Do they really need to be embedded into your business? A good way of doing this is by making a list of your most successful projects and the factors behind that success. What differentiates them from the failures?
Simplicity is the key. People often waste time calculating and manipulating data, only to find that they do not reveal anything of value. KPIs should be simple, actionable, and easy to communicate so that everybody across the organization is working towards them. It is the responsibility of finance leaders to get teams to focus on the relevant KPIs, and nurture engagement and trust with those metrics in order for them to unlock actionable insights.
It is also important to keep the same KPIs for a number of years. There must be continuity so that comparisons can be drawn. Any new KPIs should be introduced slowly in order to ensure that your efforts are worthwhile. Equally, however, you should regularly question how relevant KPIs are for the executives looking at the data around them.
High data quality is also vital. Standardization must be enforced across the organization to ensure there is one source of truth. If the data is not trusted, identifying the right KPI will be more difficult, and actually benefiting from it impossible.
Once you have selected your KPIs, they must translate into action and decision makers must be open to the problems that they expose. Ignoring or rejecting trends revealed by KPIs because they do not fit managerial prejudices is a clear route to failure.