Why Key Performance Indicators Are Not Enough

Posted by Chuck Kocher
On September 9, 2013

When you’re building a house, a ruler is an indispensable tool. Without careful measurements, the chance of building anything of lasting quality is ridiculously low. No contractor worth his hammer and saw would dream of it. A home builder, however, also knows that you can’t build a home with a ruler. There’s something else that good builders know: There’s a big difference between measuring a house and actually building the house.

Measurements are important in business, too. Many businesses have faltered because they didn’t have an accurate picture of where they were in terms of production, profitability, cash, flow, etc. It’s important to measure. However, business leaders sometimes make the mistake of trying to build their businesses with these rulers.

The “rulers” they use are Key Performance Indicators (KPIs) that measure some of those important aspects of their businesses mentioned above. But sometimes business leaders confuse these KPIs (important though they are) with strategic business goals or priorities.

But recording a measurable target isn’t the same thing as establishing a plan. Increasing sales by $500,000 over the next quarter may be a great KPI. But how are you going to get there? What’s your strategic plan?  How will you execute that plan? When will it be accomplished? And who is going to actually do it?

A good KPI is driven by your company’s strategic goals and priorities. Those corporate goals and priorities drive personal goals, priorities, and plans. A corporate goal or priority might be to release a new product by March 1 that will result in $500,000 of revenue over the first quarter. That goal will drive personal goals/priorities for individual departments (i.e. development, engineering, manufacturing, marketing, and sales). And each goal or priority will have specific tasks, personnel, and delivery dates assigned.

By the way, a good KPI actually has two parts: A “results” indicator and a “leading” indicator. For the sales department in the example above, the results indicator is pretty simple: They need to sell $500,000 of the new product. Their leading indicator might be that they have $600,000 of pre-orders in the pipeline by January 15 as a good indicator that they are on track (knowing that they won’t close every sale).

You can’t build a house with just a ruler. You need blueprints, other tools, and skilled laborers performing specific tasks on schedule. And you need to keep measuring to make sure you’re staying true to the plan. It’s the same in business. You need strategic planning and execution to get things done. But you also need those key performance indicators to make sure you’re staying true to the goals and priorities. Just remember that determining what you need to measure isn’t the same thing as planning, executing, and then measuring your progress.