Key Performance Indicators: Great Tools—When They’re Used Right

Posted by Chuck Kocher
On March 24, 2014

Have you ever found yourself in a situation where you’re trying to use a tool in a way it was never intended to be used? Maybe you’re up on a ladder fixing something and there’s a little nail in the way that you need to take care of. But all you have with you is a screwdriver. You really don’t want to climb back down the ladder and walk over to your toolbox to get a hammer, so you try to drive the nail in with the handle of the screwdriver. What usually happens is that you end up bending the nail and ruining the handle of the screwdriver.

Guess what? It’s not the screwdriver’s fault. It was never intended for hammering nails. It’s a perfectly good tool if it’s used for its designed purpose.

Key Performance Indicators (KPIs) are similar. They can be great tools to measure (indicate) how well your company is doing (performing) in critical (key) areas. Sometimes, however, businesses use them incorrectly. It’s a little more subtle than the screwdriver and hammer example I mentioned—but the results tend to be about the same. Here’s how it can happen.

A KPI is a tool to measure performance with respect to a specific goal. But it’s not the goal itself. Here’s an example of why that distinction is important. Let’s say you’re a manufacturing company and one of your goals for the year is to increase revenues by 10 percent. A logical KPI might be to increase production by 10 percent. Manufacturing is key to your goal. The 10 percent number is specific. And it’s very measurable. Seems like a great KPI, right?

The problem is, that increasing production isn’t the goal. The goal was to increase revenues. What if there’s no market for what you’re producing? Or what if you can sell what you’ve produced—but only at a lower price? Your Key Performance Indicator for production may look great—but you’ve missed your goal of increasing revenues.

A good KPI doesn’t exist in a vacuum. It’s not independent of other KPIs. And it’s always strategic. It exists to help you achieve your strategic goals. It’s important, but it’s one single point of measurement. It’s not enough by itself, and it’s not the goal itself.

Should you keep creating KPIs? Absolutely! They are extremely helpful tools. Just remember what they’re for—and that they don’t exist for their own purposes. Keep them in context and keep your strategic goals in sharp focus!