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Why KPIs Need Context

Does it matter if you've hit your target if you don't know why you hit it?

11Jan

KPIs provide an objective, quantifiable tool for measuring business performance at all levels, all the way down to the individual employee. They are the basis from which performance of relevant business processes or assets devoted to them is reported, as well as future forecasting. However, the problem with KPIs is much the same as that of the finance function as a whole. Both are too focused on past results, they only look backwards and fail to address areas where they can really contribute in terms of value and strategic impetus. CFOs can no longer afford to simply focus exclusively on metrics like profitability - they need to understand the factors that have an impact on reaching such goals so that action can be taken to improve the situation.

Key Performance Drivers (KPDs) provide the context necessary to transform KPIs into forward-looking indicators. They are metrics that show why KPIs have been reached or not, and - when correctly identified - positive results in KPDs should result in positive KPIs. For example, if you say that sales figures are a KPI, you will likely get some idea as to whether they are on an upward or downward trajectory, but there is a good chance that you will fail to understand why. It may simply be that they are a consequence of one large order, some freak anomaly that’s unlikely to be repeated, which is obviously beneficial in terms of income, but doesn’t really let you know how well you are doing. By looking at KPDs, you are going to get a far better idea of where you are actually succeeding which will, in turn, lead to a more sustainable strategy. For example, a sales team could look at the number of follow up calls your team is making to prospects, which if not met, even with the increase in revenue brought about by the large order, will suggest that your team is actually underperforming. This is also easier to address than, say, simply as KPI not being met as it gives you a clear course to set in place.

KPDs are essentially anything that you have real control over. They are not, as KPIs are, impacted by external circumstances outside of the company’s control. But identifying the right KPDs is not easy, and it is important to ensure that you monitor the right ones or you could end up leading yourself down blind alleys. Most businesses will look to major cost-efficiency items such as direct labour costs and yield, ‘soft’ factors like effective networking to build new business relationships, and indirect drivers, for example, you can measure employee morale as a driver by tracking metrics that could suggests employees may be unhappy like voluntary overtime and absenteeism.

It is also necessary to appreciate that KPDs are likely to change over time, particularly in a fast growing business. More than this, action must be taken when they reveal something, and they must be regularly monitored so that deviations to the norm can be rectified in good time.

Ultimately, for CFOs looking to become more of a strategic partner to the CFO, they need to look at KPDs to ensure everything necessary is being done to meet your company’s goals. KPDs are a necessary part of managing proactively, rather than reactively, and CFOs who ignore them risk rendering themselves redundant.

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