Speaker 1: How to define great KPIs. I've helped companies define and develop KPIs for the last 20 odd years and over those 20 odd years I have gathered quite a lot of experience of what makes good and not so good KPIs. So what I've done is I've developed a template that every organisation can use to develop really good indicators of performance. So there are 16 different elements of this template and let me just go through this step by step. The first one is that we need to define the strategic goal. So we need to make sure that every indicator is actually linked to a strategic goal that we have in our organisation. Because indicators are basically there to help you track how well you're delivering on your strategy, how well you're implementing and executing your strategy. So they have to be linked to a strategic goal. Let's say you want to look at financial performance, so your strategic goal could be to grow your profit margins. We then need to make sure that we are clear about the audience. So every indicator needs to have an audience and the clearer we are about who is receiving this information and why, the better your indicators will become. So again if we look at financial performance, maybe this is information going to the board, you can have secondary audiences like the finance team that might also want to look at this. So we define who is this information for. And the third thing we do is we define what question they want to have an answer to. So I call this a key performance question or KPQ. So we define a question, maybe something like to what extent are we delivering bottom line results. Again those questions are looking into the future, they are open questions that hopefully trigger some of the discussions that we want when people review performance. So they are the basics. Then we have another element, the fourth one, which is almost creating a little contract saying how will this indicator be used and how want it be used. So for example, I always recommend that you don't necessarily link indicators to bonus schemes for example, but lots of organisations link their financial indicators to bonus schemes. So if this is happening and you do this, we need to make this explicit. In other cases, you might say, okay, this is not being used to evaluate anyone's performance. This is purely an information source that you can use to make better decisions. So we won't link this to any bonuses. So once you're clear about the basics, you then look at the indicators. First is you need a name for this indicator. So if you wanted to measure profitability, you might want to look at net profits as your key indicator. The second thing we then need to look at is where is this data coming from? So what is the data collection methodology? And again, for finance indicators, you can say, okay, this is simply coming out of our accounting system. This is coming from my profit and loss account. Or if this was an HR indicator, you could say this is coming from a staff survey or in terms of customer satisfaction, you would say it's coming from a customer survey. So you know where this data is coming from. The next one then is that we need to be clear of how this indicator will be measured. So here we define the assessment criteria or the formula or scale that we're using. So we were talking about net profit. So you would look at your total sales and you would take away all your costs, which would then give you the net profit. So this is the formula you use. However, if you then use, if you want to look at staff engagement and you might want to measure the staff net promoter score, for example, you would then say, I use a 10 point scale. People can answer questions and then say, how likely would you be to recommend this company as an employer to a friend? And then so we basically make it very clear what formula you're using, how you then ending up with a score. Sometimes this means simply creating categories saying, OK, we want to simply rate a hotel into one, two, three, four, five stars, for example, and you have categories so you can use all of this. But we need to be clear of how we are arriving at a measure and a result at the end, which then links to the next one. Every indicator needs a target or a performance threshold. We're saying, OK, this is what good looks like. What is really important is that those indicators shouldn't just be targets. I've talked about this a lot, but we need some benchmarks. We need to say, OK, in terms of net profit, what does good look like? Where do we want to get to? So you come up saying, OK, we want to reach X thousand by the end of the quarter. Or you say, if you want to look at the staff engagement, you say, I want to move my employee net promoter score from six to eight, for example. So we are very clear of how we are measuring it and what good will look like. It can also mean defining thresholds. So saying if you want to look at a star rating in hotels, you say, OK, we want to have all our hotels as a four or five star. If they drop below four stars and go to a three star, this would be maybe four and five is green. Three is a yellow. And if they go to two or one, that would be red. And then you can try to create traffic lights around this. Number 10 on my template is looking at how often this data is being collected. And with lots of indicators, what I find is that organizations don't collect them frequently enough, especially when it comes to things like surveys. If you do an employee survey or customer survey, doing this once a year is not good enough because you can't see trends throughout the year. It also leaves you vulnerable to biases that something happened when you did the survey, which then skews the numbers. So what I help organizations do is to increase the frequency, to make them more meaningful. So they they might want to survey their customers or employees on a monthly basis, but then sample them. So throughout the year, you get everyone, but every every month or so, you sample a small proportion of their workforce and therefore you can look at trends. You can look at fluctuations much, much, much better. So we need to understand how often do we collect this. But this has to be aligned with the 11th part of my template, which is the reporting frequency. So what we want to make sure is that we are clear about when this data will be reported. So maybe you have dashboards in place. Maybe you have quarterly performance management packs in place. Maybe this data is going to the board for every December board meeting. What you then want to make sure is that your data collection and reporting frequency are aligned. So you don't collect the data in January and then present this in December when it's completely out of date. Or you don't want to collect this at the end of November, when you actually haven't got enough time to analyze it and extract meaningful insight. So those two need to align. The 12th point of my template is that we need someone responsible. A person is responsible for making sure this data is being collected and analyzed and used. So this could be a an individual in the finance team saying, your responsibility is now to make sure that the data around profitability is being taken out of the accounting system and put into our performance reporting system. Hopefully some of this will be done automatically. But again, someone needs to make sure that this actually goes into the report and is presented well. Point number 13 in my template is that we need an expiry date or revision date. What I find organizations do is they tend to add new indicators. So you might have a change in your leadership team and someone comes along and says, we want you now to measure these 10 different things. And then a year later, someone else comes along and says, we want you also to measure these 10 things. And what we over time do is we just add indicators, which then makes our whole performance management system bigger. Having an expiry date in there just means that after a few months or after a year or so, you just have to look at this again and say, is this still the right indicator? Is this still valid? Do we still need to track this? And if not, we get rid of this. The last three components of my template are sense checks. We say how good actually is this indicator and is it really worth collecting? So the first one is where we look at the costs and saying, how much is this costing me? If you look at your, for example, collecting financial information is something that you have to do anyway for financial and regulatory purposes, reporting purposes. So you have a finance system that is in place that generates this indicator anyway. So the costs are actually minimal. However, if you if you're thinking about doing a staff survey or an employee survey, those costs very quickly become big numbers when you think how much time you you spend in designing this, actually running the survey, analysing it, the time people spend completing it and so on. So we need to think, is this actually worth doing or are there maybe better, cheaper, more effective ways of collecting data that are not as expensive? The 15th one is where we look at how complete this indicator is. I've talked in other videos about the fact that a KPI is literally just an indicator. It indicates performance, but it doesn't measure it holistically. So your net profit will never give you the complete picture around financial health and and around profitability, because you might want to put this in context of your revenue. Maybe you want to look at profit margins, which compare things. You might want to look at your return on assets, your operating profits and so maybe cash flow. So some of the other indicators complete the picture. And it's important to understand that this indicator is obviously limited, which takes me to the last point, which is where you try to look at unintended consequences. So what behaviours could this indicator drive that I don't want? So, for example, if my focus is on improving profitability and net profits, it's very easy for a new CEO to come in and simply cut costs because sales might or might not grow up. If I cut costs, that will immediately drive my performance, will improve my profitability. But in the long term, the business might suffer because I haven't got the right business in place to drive future performance. I've taken out staff and resources to actually make the business function well. What I believe is you can't design a cheat proof measurement system. But again, by having thought about this, you can then control for some of these unintended consequences. So hopefully this 16 point framework will be useful for you. You can actually go to my website at bernardma.com where you can download the template and you can simply fill this out. The other thing I have on my website is a KPI library that gives you a good starting point for some of the most important, some of the most valuable KPIs that you can use in business today.